Chapter 2
How did all of this get started? In the very early days, when people bought things on credit at the general store, the store clerk wrote the purchase amount on a piece of paper that was then put into a "cuff." A cuff was a paper tube that merchants wore on their wrists. (This is also the origin of the term "buying on the arm"-another way to say buying on credit.)
Ironically, the newer system took on some of the traits of the original mutual protection societies. For one thing, a consumer couldn't access his/her own credit history. Only lenders, credit card providers and other businesses had access to credit reports.
Modern credit bureaus were created to service lenders, not borrowers. Lenders want to be repaid, and the credit bureaus help them figure out which consumers are most likely to do so on a timely basis.
According to the FTC, the FCRA-which went into effect in 1971-was designed to ensure that consumer reporting agencies, or CRAs, "furnish correct and complete information to businesses to use when evaluating your application."
To help ensure the information is correct and complete, the Act ensures that consumers can check their own reports and make changes to them, if necessary.
The first thing you should know is that your three credit reports probably are not the same. Lenders, credit card companies and other businesses supply information to the credit bureaus on a voluntary basis. So they may only provide your information to only one agency, or to two or three or none. That’s why it is so important to check all three of your credit reports.
In each case, you’ll find that the credit report is divided into four sections:
identifying information;
credit history;
inquiries; and
public records.
We’ll go through each section and let you know what to look for.
The identifying information section on your credit report is straightforward. It is compiled using the information you provide when you apply for credit.
This section lists the accounts that you have with different lenders, retail stores, credit card companies and other businesses, including accounts on which you are listed as an authorized user (such as your spouse's credit card) and which will not be counted in your credit score.
It includes the account numbers for each account, although these may be scrambled for security reasons. Sometimes, you'll find more than one account number for the same creditor. This could be because you moved or because the creditor assigned more than one account number to you. This isn't necessarily a cause for concern.
Credit bureaus keep a record whenever someone views your credit history. These inquiries are made by lenders, landlords, credit card providers, service providers and insurance companies. A record of these inquiries will remain on your credit report for one to two years.
There are actually two kinds of inquiries: hard and soft. The consumer version of a credit report includes both kinds, but the version that is provided to businesses shows only hard inquiries.
Many types of events are a matter of public record—that is, the kind of information you can find out if you pay a visit to your local courthouse.
These types of events may appear in this section of your credit report. They can include:
bankruptcy or bankruptcies;
tax liens;
foreclosures;
court judgments; and
overdue child support.
This information usually will remain on your credit report for seven years.
As surprising as it can be to learn just how much detail about your life is available to creditors and even to companies in search of potential customers, it may be even more surprising to learn what’s not in your credit file.
Your credit report does not contain information on:
savings or checking accounts;
bankruptcies that are more than 10 years old;
charge-offs or debts that have been sent to collections that are more than seven years old;
driving records;
medical history (although medical bills may appear on your report as debts); or
criminal records.
For privacy and fair lending reasons, the credit report also cannot include your:
gender;
ethnicity;
religion; or
political affiliation.
Credit reports can be several pages long, so it's not surprising that credit scores were developed as a sort of shorthand-and as a more objective way to evaluate consumers.
In order to determine your credit score, some of the information in your credit report is fed into a mathematical formula, which spits out the three-digit number that lenders use to predict whether you are likely to pay back a loan (or a credit card debt) in full and on time.
As we've noted, supporters of credit scoring point out that it has created more uniformity in lending, in part by removing the subjective human factor. Instead of having loan officers look over your credit report and application-filtered through their own judgments, experiences and biases-the process is now largely automated.
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