According to the Legal Intelligencer, a recent decision by the 3rd U.S. Circuit Court of Appeals will make it easier for consumers who have been denied credit based on inaccurate information to obtain restitution. The move will also hold credit bureaus to tighter standards in regards to ensuring the information they post is legitimate. The ruling comes after one consumer was confused with a known Colombian drug dealer who was featured on the U.S. Treasury Department’s watch list. The information eventually seeped onto her credit report.

Opponents of the ruling argued that information taken from the Office of Foreign Assets Control – a government watch list – was not expressly covered by the Fair Credit Reporting Act, which dictates how credit bureaus handle consumer data, the Intelligencer reports. But the court opinion disagreed with this argument.

“In order to conclude that the OFAC alert is not subject to that remedial statute even though the rest of the report clearly falls within the definition of ‘consumer report,’ we would have to conclude that Congress did not mean what it said when it unequivocally defined ‘consumer report’ to include ‘any … communication of any information by a consumer reporting agency,” Chief Judge Theodore McKee concluded in his opinion.

This case highlights the need for consumers to examine their credit reports regularly to ensure that all information listed is accurate. If an individual finds an error, they should dispute the negative information as soon as it is discovered to avoid a denial of credit or a lower score. Consumers should also consider signing up for a credit monitoring service, which will alert them to any alterations made to their file. This includes any new accounts being opened in their name.

                          

How can a single number be meaningful enough to determine whether you can buy a house or car? If you’ve read How Credit Reports Work, you know that your credit report contains a history of how you’ve paid your bills, how much open credit you have, and anything else that would affect your creditworthiness. Your credit score boils down all of that information into a three-digit number.

In this article, we’ll find out how this formerly secret number is used and how it affects how much you pay for credit, insurance and other life necessities.

A credit score is a number that is calculated based on your credit history to give lenders a simpler “lend/don’t lend” answer for people who are applying for credit or loans. This number helps the lender identify the level of risk they may be taking if they lend to someone. While the same end result can come through reviewing the actual credit report (which lenders usually do), the credit score is quicker and less subjective. The system awards points based on information in the credit report, and the resulting score is compared to that of other consumers with similar profiles. With this information, lenders can predict how likely someone is to repay a loan and make payments on time. It’s the credit score that makes it possible to get instant credit at places like electronics stores and department stores.

Although there are several scoring methods, the score most commonly used by lenders is known as a FICO because of its origins with Fair Isaac and Company. Fair Isaac is an independent company that came up with the scoring method and software used by banks and lenders, insurers and other businesses. Each of the three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac in the early 1980′s to come up with the scoring method.

The three national credit bureaus each have their own version of the FICO score with their own names. Equifax has the Beacon system, TransUnion has the Empirica system, and Experian has the Experian/Fair Isaac system. Each is based on the original Fair Isaac FICO scoring method and produces equivalent numerical results for any given credit report. Some lenders also have their own scoring methods. Other scoring methods may include information such as your income or how long you’ve been at the same job.

                          

Firstly, you need to clearly identify each item in your credit report that you dispute, state the facts and then request a correction. Secondly, send your letter by certified mail and request a return receipt to document that your complaint arrived at the credit bureau. It is wise to keep copies of your dispute letter and enclosures for yourself in case there are any questions or disputes.

Staff at the FTC, the government agency responsible for ensuring credit bureaus’ compliance with federal laws, suggest the following: Immediately tell the credit bureau, in writing, about information you believe is incomplete or inaccurate. Include copies, NOT originals, of any documents that support your position.  Also contact the company that provided the inaccurate or incomplete information to the credit bureau and request a correction of its records, too. If a credit bureau’s investigation does not resolve your concerns, the FCRA allows you to submit a brief statement about the matter, in 100 words or less, that must be attached to your credit report and provided to anyone that accesses your report in the future. This enables you to tell potential lenders or anyone else who sees your credit report your side of the story.

While there are many other credit bureaus around the country, there is little reason for consumers to review and correct these credit reports.  “Those smaller credit bureaus typically get most or all of their information from the big three,” he says. “If you obtain copies of your credit reports from  TransUnion,  Equifax and Experian on a regular basis and to make sure they are accurate, it’s likely you’ll be solving problems at other credit bureaus, too.”

                          

Who sees your credit scores?

Until a few years ago, the short answer was: “Not you.” Prior to 2001, FICO credit scores were not available to consumers at all. In fact, the credit bureaus contractually prohibited lenders from disclosing the scores to their applicants citing a potential lack of “context” behind any score disclosure. However, as consumers became more aware of the fact that someone other than their professors was grading them they pushed harder and harder for a peek behind the mysterious formula that was used to calculate their scores. So far, Fair Isaac has satisfied this demand to some degree by providing consumers with access to and an explanation of their scores for a fee.

Who influences your credit scores?

The simple answer is “you do.” The detailed answer, however, is much more complex and it’s important to realize that your credit scores are in constant flux. It changes each time your credit information changes, is added to and/or deleted from your credit reports. Making a mortgage payment, applying for a department store credit card and opening a new line of credit will all trigger changes in your credit report and, as such, a change in your credit score. A late payment or the closure of a credit card account will also have an immediate impact to your credit score.

The following categories drive your FICO credit score:

* Your payment performance history (35%)
* Your current level of indebtedness (30%)
* The age of your credit history (15%)
* Your pursuit of new credit (10%)
* The type of accounts in your credit report (10%)

As you can see, payment performance and level of debt account for 65% of the points in your FICO score. The remaining categories are worth fewer points but are still very important especially for those who are aiming to earn the highest scores.

Be aware that under the Equal Credit Opportunity Act, credit scoring may not factor in gender, martial status, national origin, race, or religion. And note that while credit scores are important, they’re just a measurement of your credit worthiness. Lenders will also consider your income or “capacity” as well as other factors when considering your application. For example, insurance companies will typically consider previous insurance claims when evaluating an applicant.

                          

YOUR CREDIT SCORE

It’s called a credit risk score — and if you have a credit rating you have one. The scores range from 300 to 850, with a higher score being better than a lower one. Fair Isaac, which is the country’s pre-eminent producer of credit scores, takes information from your credit report, gives different weights to different pieces of that information and how long ago those things occurred, and comes up with a number for you. Then when a lender is trying to decide whether or not to give you a mortgage, for example, or what rate of interest to charge on your loan, the score is one important factor they consider when making a decision.

DO MOST LENDERS USE THESE SCORES?

We know that over 75 percent of home loans are decided with help from — as they’re called in the industry — FICO (Fair Isaac and Co.) risk scores, and that if you take the 100 largest financial institutions in the country, 70 percent use FICO scores. So they’re definitely a big player in the marketplace.

HOW DO MOST PEOPLE DO?

Not as badly as you might think, considering that bankruptcies are in the headlines so often these days. With the scale ranging from 300 to 850, the average score is about 720.

Below that, you may have problems borrowing. Twenty percent of people score below 620, for example. Since that population includes about half of all people who default on their mortgages, lenders are very wary of extending them credit. The next 20 percent of people score between 620 and 690. A score in this range may not stop you from getting credit, but Fannie Mae and Freddie Mac (buyers of mortgages for the secondary market) suggest that lenders probe for more information to understand why there’s been a problem before they agree to make a loan. On the high end, anything above 780 is considered elite. Only about one to two percent of consumers score in the 800s.

There are a few factors that make a big difference in your score — let’s talk about them and how you can make changes in them to improve your score:

-Your bill-paying record (This accounts for 35 percent of your score). We all know to pay bills on time. If you always have, you’ve done well in this category. If you slip up here and there, it can hurt your score a fair amount. The more recent the slip up, the more it hurts your score.

And, as in all of these categories, a pattern of bad behavior is worse than one mistake. A string of 30-day late payments is worse than one 60-day late. (The way credit scoring works is to compare your habits to those other individuals who have proven to act in a positive or negative way overall. But there are different groups of patterns, so a seasoned user won’t be compared to a new user.)

-How much you owe now (30 percent). The scoring companies look at how much you owe relative to how much credit you have available on your credit cards. The closer you are to maxing-out your cards, the lower you’ll score in this area. But owing nothing doesn’t prove your ability to handle credit — owing a little bit is better. For example, being at 80 percent of your limit would be viewed as very high and a negative; 60 percent in most cases is detrimental enough. Having your balances at 20 to 30 percent of your maximum is just fine.

-How long you’ve managed credit (15 percent). This one is interesting. When people are trying to get their credit cards under control, one of the things they do — indeed that we advise them to do — is to make sure they don’t have too many tempting cards in their wallet. But when it comes to your credit score, you may not want to cut up that one card you’ve had the longest. Then the credit scoring companies lose the ability to see just how long you’ve been managing credit. It may be better to keep that old card even if it’s at a high interest rate, use it once a year and pay it off completely rather than cutting it up.

-Mix of credit (10 percent): It’s good to show that you can manage different kinds of credit. So having an installment loan (on a home or a car) as well as having a revolving credit account (credit card) is a positive.

-Pursuit of new credit (10 percent): The media often exaggerate how much searching for new credit can hurt you. That’s because, a few years ago, the scorer’s methodology was changed to reflect the idea that it was OK — indeed smart — to be shopping around for a loan. So all of your inquiries into a mortgage over a 30-day period now count as one. That said, if you have real credit problems and you’re constantly shopping around for new cards or loans, it’s going to hurt your score. Moderation is key. If you’re out looking for credit every month, it’s a minus. Less fre- quently than that, you’ll probably be okay.

Now that you have this information, you can use it to your benefit.

When you get your report, you can take it and use it to talk to lenders in a preliminary way. You could talk to a mortgage broker and say, “This is my score. How easy will it be for me to get a mortgage?” If you buy the FICO score, you’ll also get a guide explaining how the scores work and the top four factors that contributed to deciding your score. Then, if you need to, you can work on your score before you apply for credit. Give yourself a good six months to get it in shape.

If you go on the Web and search on “free credit score,” what you’ll come up with are a number of mortgage lenders and banks who are willing to give it to you. In some cases, you have to actually apply for a loan.

There are other scores that aren’t FICO scores (even the ones that are legitimate don’t have FICO’s database). In other cases, providing them with your e-mail address and phone number (so that they can market to you later, one assumes) seems to be sufficient. So if you’re willing to give up some personal information, you can get your score for no money. Or you can pay. (Even if you’re not up for checking your score, you probably should check your credit report about once a year. If there are problems, you should check all three of the credit bureaus.)

About The Author

John Prentice is a Credit Expert in the Mortgage Industry, he provides credit score repair information and a credit/finance newsletter at his web site: http://www.AccelerateMyCredit.com.