Making Sense of Your Credit Report
A Credit Article Contributed by Brook Yu
What is a Credit Report?
A credit report collects an individual's financial history and summarizes it into a report used to determine one's credit worthiness. This credit report is indicative of how willing or likely a person is to repay debt, and whether or not it is paid back in a responsible and timely manner.
The information enclosed in a credit report is especially important to financial institutions because it allows them to determine whether or not to extend credit to an individual, and if so, how much credit they are willing to extend. As more and more financial services providers are moving to a risk based pricing system, the credit report becomes even more important as it is the primary element that is looked at when choosing an interest rate for the credit extended.
How is a Credit Report Analyzed?
The way a credit report is analyzed is by looking at the overall credit score included in the credit report. The credit score is a numerical index that follows a formula looking at such things as punctuality of payment, current debt, the types of credits that have been used or extended in the past, the amount of outstanding balances on debt, and what kinds of credit has been applied for in the past.
There are three major credit reporting agencies in the United States that use slightly varying formulas to calculate credit scores, but they are all based upon the FICO score calculated by mathematical formulae. The primary aim of these formulae is to access risk of defaulting on the part of the individual.
How Can a Credit Report Be Obtained?
Credit reports are available to the individual to look at so one can check one's credit score. There are many resources that provide this service to customers. There are three major credit reporting agencies in the United States, and based upon the Freedom of Information Act, a credit report must be presented to an inquiring individual to provide protection against erroneous information as well as to prevent fraudulent overcharging of interest by financial institutions. There are many resources on the internet that help people gain access to their credit reports.
How Accurate are Credit Reports?
Sometimes, there will be erroneous details on the credit report that may harm the overall credit score. Studies have found that there are erroneous information in 46% of credit reports, and while not all of these mistakes greatly influence the credit score, it is worthwhile to check to make sure that wrong information is taken out of the report.
These details can be disputed by the individual formally by writing to the credit agency providing the credit rating or through credit repair agencies that can assist with the removal of incorrect information for a fee to help navigate the sometimes complex procedures that can be involved. Although there are companies that offer schemes that will "wipe clean" bad credit history, these are either fraudulent or involve illegal activity and are not advised.
