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In 1949 Diner’s Club launched the first charge-card company. Fifty-five years later, Americans spend more using credit cards than they spend with cash, according to a study by Dove Consulting. With more than $2 trillion worth of credit card transactions each year, the creditworthiness of card users is an increasingly important issue to creditors and consumers alike.

While most people realize that their personal creditworthiness is tracked on something called a credit report, few know much about it or their scoring. The score, known as a FICO score, was developed by Fair Isaac & Co. to evaluate the likelihood that consumers will pay their bills. FICO scores range from a low of 300 (highest risk) points to a high of 850 points (lowest risk) and are used as the deciding factor on more than 75% of credit applications, according to Equifax, one of the three major credit bureaus in the United States. In 2003, nearly 50% of Americans had a FICO score between 700 and 800. (See the article The Importance Of Your Credit Rating.)

In determining the FICO score, mathematical models are used to analyze the data on an applicant’s credit report, taking into consideration five factors: previous credit performance, current level of indebtedness, time credit has been in use, types of credit available and pursuit of new credit.
 
What's on The Report and Why Should I Care?
An in-depth look at a credit report provided by Equifax provides a good overview of the type of information that can be obtained from any of the major credit reporting bureaus. The Equifax report is divided into seven sections.

The first section contains personal data, such as current and previous addresses, social security number and employment history. This is crucial data to identity thieves, so be sure to protect it by making sure this information is correct and accurate, and if you discard it, shred thoroughly.

The second section of the Equifax report provides a summary of the applicant’s credit history. It includes the number of accounts (both open and closed) held by the applicant, the type of accounts (mortgage, installment, revolving, or others), the number of credit inquiries over the last 12 months, the number of accounts that are past due as well as those in good standing. Intuitively, it may seem like the more accounts you have open, the higher your credit score will be, but when it comes to credit, more is not necessarily better.

When financial institutions review your credit report prior to approving a loan, they often assume that you will use all of the available credit on your credit cards and factor-in the monthly payments that would be required to service that debt. If you have a dozen credit cards, all with zero balances, you might have no problem making a $2,000 mortgage payment each month, but the bank might look at the situation differently. If the bank factors in your ability to make monthly payments on a dozen credit cards in addition to a $2,000 mortgage, your creditworthiness may be diminished.

The third section provides detailed account information. It includes the name, account type, account number, date opened, balance and status of every account on the applicant’s record. A breakdown of each account provides payment history, date of last activity and contact information for the credit issuer. The section also includes a summary of past-due accounts and accounts with a negative credit history. If you disagree with any of this information, you have the right to challenge it. Under federal law, the credit reporting agency then has 30 days to respond to your challenge. If your challenge is successful, the offending information will be removed from your report.

The fourth section addresses inquiries into the applicant’s credit history. Inquiries are classified as "hard" or "soft". Hard inquiries are "generated when you authorized a company listed to request a copy of your credit report". The number of inquiries over a twelve-month period is tracked and taken into account when your FICO score is calculated. An excessive number of hard inquiries have a negative impact on your score. Soft inquiries are generated by your current creditors checking on your status, credit card issuers reviewing your file to see if they wish to extend an unsolicited offer and you personally checking your own credit. Potential lenders don’t see these inquirers when they review your credit report, and these inquiries do not impact your credit report.

The fifth section details any accounts that have been turned over to a credit agency. If you failed to make payments and any of your accounts were sent to collection, information about the delinquent accounts appears here. Similarly, the sixth section of the report provides information about liens, wage garnishments or other judgments that appear against you in federal, state or county court records.

The seventh section of the report provides information on how to dispute any of the information on your credit report. When it comes to delinquent accounts and other damaging information, the only way to repair your credit is to wait. Despite the claims of those late-night infomercials, once negative information appears on your credit report, there is little you can do to clear it up if the information is truthful and accurate. The Federal Trade Commission says such information remains on your report for seven years, with several exceptions. Bankruptcy remains on your report for ten years. Lawsuit-related information remains until the suit is settled. To avoid these problems, make all payments on time and don’t ignore any issues that arise with creditors.

How That Information Impacts Your Score
Factors such as payment history, the length of time an individual has had credit and the individual’s employment history all play a role in determining your FICO score. So, even though you may have an excellent source of income and pay all of your bills on time and in-full,  if you don’t have a mortgage, car payments or revolving debt of any kind, it is unlikely that your FICO score will be 850.

Equifax cites late payments, or lack thereof, length of credit history and the size of account balances in relation to your credit limits as major factors that impact your FICO score. Even if you pay off the full amount owed on your credit cards each month, the size of the bill has an impact on your score, as large balances are frowned upon.

Check Your Credit
If you are contemplating a significant purchase, such as a second home or a substantial piece of property, running a credit check on yourself is a good idea. If you run the check at least 90 days prior to your purchase, you should have plenty of time to address any discrepancies that appear on the report.

While credit reports can be obtained from a variety of sources, the three major credit bureaus in the United States are Equifax, Experian and Trans Union.

Credit reports can be ordered online and obtained instantly. The cost of obtaining a credit report is less than $50 per person. Keep in mind that each of these credit bureaus operates independently, so you may need to request a report from each of them to get a complete picture of your credit history.

Conclusion
Despite the many advertisements that promise to repair bad credit, prevention is the best way to avoid credit problems. Once negative information appears on your credit report, there is little you can do to clear it up if the information is truthful and accurate. However, over time – generally about seven to ten years – this information is removed from your credit report. To prevent this type of damaging information from getting onto your credit report in the first place, as well as to improve your chances of obtaining future financing, be sure to make all your payments on time and do not ignore issues that arise with creditors.

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