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Credit 101: The Building Blocks of Credit

If you've ever applied for a job, rented an apartment, bought or leased a car, opened a bank account, applied for a mortgage or been issued a credit card, you've participated in the world of credit. At, we believe credit can be a positive force in every aspect of your life. To put this power to work for you, however, it's essential that you understand your own credit — and what your credit information says about you to the growing number of companies that use credit information to make life impacting decisions about you. These companies include lenders, insurance companies, employers and utility companies.
Credit 101 is a series of articles covering the fundamentals of credit. The objective is to help you better understand and, therefore, leverage your credit history in order to get the most out of this essential force throughout your life. The fact is that each of us has a relationship — good or bad — with our credit. Our hope is that these articles will assist you in improving that relationship — and, in the end, make credit your friend and ally.
Our introductory article begins the series by addressing four questions — basic, but still mysterious to many of us:

  • What is a credit report and what does it include?
  • Who gets to see my credit report?
  • Who decides what goes in my credit report?
  • What is a credit score and how is it calculated? .0
Credit reports

Think of your credit report as your “credit worthiness” report card: unique, personal, and — for those with both access and expertise — revealing. Your credit report (a.k.a. credit file, credit profile, or credit history) is a record of your past and current credit obligations including your debts and payment history. In addition, it contains personal data such as where you’ve lived, any former names you’ve gone by, and your employers.
Your credit reports — widely recognized as the official record of how you shop for and manage credit obligations — are maintained by three national credit reporting agencies, or credit bureaus: TransUnion, Equifax, and Experian. They include:
Your personal data — This includes your name (including previous names and any variations of your name that are reported by your lenders), telephone number, address, Social Security Number, birth date, and current employer. Typically, previous addresses and employers are noted as well. This information, for the most part, is used for nothing more than identification.
Your creditor history — Your credit reports contain a detailed record of your accounts and payments to banks, credit unions, finance companies, mortgage companies, credit card companies, retail stores, and a variety of other creditors. These “trade lines” detail your account and payment history, balances, credit limits, debt burden, and the age of your accounts.
Inquiries or authorized credit checks — An “inquiry” is a posting on your credit report that occurs whenever it has been accessed. Each credit reporting agency is legally obligated to maintain a complete record of all inquiries for, in most cases, 24 months. This record can be as simple as who pulled your credit report and on what date.
Relevant public records and collections — Your credit report also includes credit related public records including bankruptcies, judgments and tax liens. It also includes any collection agency debts that you may have.
Your credit report does not include:

  • Your level of education
  • Your medical history
  • Purchases paid by cash or check
  • Your gender, national origin, race, or religion
  • Your investments or brokerage accounts
  • Your income
  • Alimony commitments
Who sees your credit report?

Are your credit reports available to anyone who asks? Certainly they are not. Under section 604 of the Fair Credit Reporting Act (FCRA), access to your credit reports is limited to specific situations, which are referred to as "permissible purposes." They are:

  • In response to a court order
  • For the purposes of disclosure to the consumer
  • As part of a legitimate business transaction which includes extending credit, reviewing the credit report of an existing customer, and collecting a debt
  • For employment screening purposes
  • As part of the insurance underwriting process
  • In connection with screening requirements of a consumer’s eligibility for a license granted by the government
  • In response to a request by state or local child support enforcement authorities to determine an individual’s capacity to pay child support
  • To determine the risk and valuation of loans for the purposes of investing or servicing
Who decides what goes in your credit reports?

Many people are surprised to discover that the information on your credit reports doesn't actually originate with the credit bureaus at all. In reality, the credit bureaus function more like warehouses: they store data, which is reported to them from a variety of sources including your mortgage and auto lenders, credit card issuers, student loan companies, public record vendors, retail stores and finance companies. Each of these “reporters” has either extended credit to you or has been hired by the credit bureaus to collect and report any derogatory public record information that is in your name. Consumers even have the ability to update their own credit reports by furnishing change of employment or address information. 
It's important to realize that having negative information on your credit reports doesn't mean you're doomed forever. Despite late payments — or even bankruptcy — you can still make credit your friend.
In general, account information, including late payments and other adverse information, is kept on your credit reports for no longer than seven years. However, there are certain exceptions to this rule:

  • Chapter 7 bankruptcy information will remain on your credit reports for 10 years.
  • Unpaid tax liens might, depending on where you live, remain on your credit reports indefinitely.
  • Certain states require that adverse credit information remain on your credit reports no longer than 5 years.
What is a credit score and how is it calculated?

Credit scores are generated from models that read the data from your credit reports to generate a three digit number ranging from 300 to 850. The resulting credit score is designed to assess your level of credit risk by predicting whether or not you will pay back credit obligations in a timely manner. Despite the fact that anyone can build a credit scoring model, the industry standard is the “FICO?” credit score named after the company that invented it, The Fair I Corporation. Every consumer who has a credit report most likely has three FICO credit scores, one per each credit bureau report.
The FICO scoring systems are installed at each of the three major credit reporting agencies making it efficient for them to score their credit reports while they are being sold and delivered to the entities requesting them. Creditors then use these scores to determine whether or not they are going to grant credit and at what interest rates. Insurance companies use these scores to determine whether or not they are going to write homeowner and automobile policies for the applicant.
Note also that at any specific moment, the information at each of the three credit bureaus is likely to differ, due to different reporting schedules. As a result, the FICO scores generated from the three credit bureaus will also differ. Since lenders may review your FICO score and credit report from any one or all three credit bureaus, it's a good idea to verify that the information in all three credit reports is accurate so to ensure a valid score.
If you find this topic confusing, frustrating, or just plain nuts, you're not alone. But you can always take comfort in the knowledge that things are getting better. Consumers now have better access to their own credit reports and their FICO scores. In fact, on December 1, 2004 the Fair and Accurate Credit Transactions Act went into effect. This act calls for free disclosure of your credit report once per year from each of the three credit reporting agencies.

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. It's important to realize that your credit scores are in constant flux, changing each time information changes, is added to 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.

Making friends with your credit

For decades, credit has been portrayed as a mysterious and frightening cloud hovering above us all. One of the worst things about this malefic vision is that it seemed to leave us powerless to shape our own futures and to attain our financial goals. By understanding your credit — what it is, how it works, and who knows about and influences it — you can get comfortable, even friendly with it. To be sure, friendship requires time and effort as well as understanding. But you'll find that this relationship is worth every bit of energy you invest in it. Nurture, respect, and protect your credit — and, like a good friend, it will be there for you when you need it most.