What is Credit and How does Credit Repair Work

One's credit history and credit score is reflected, in many countries, as a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy. The term "credit reputation" can either be used synonymous to credit history or to credit score.

In the U.S., when a customer fills out an application for credit from a bank, store or credit card company their information is forwarded to a credit bureau. The credit bureau matches the name, address, and other identifying information on the credit applicant with information retained by the bureau in its files.

This information is used by lenders such as credit card companies to determine an individual's credit worthiness; that is, determining an individual's willingness to repay a debt. The willingness to repay a debt is indicated by how timely past payments have been made to other lenders. Lenders like to see consumer debt obligations paid on a monthly basis.

The other factor in determining whether a lender will provide a consumer credit or a loan is dependent on income. The higher the income, all other things being equal and the more credit the consumer can access. However, lenders make credit granting decisions based on both ability to repay a debt (income) and willingness (the credit report) as indicated in the past payment history.

These factors help lenders determine whether to extend credit, and on what terms. With the adoption of risk based pricing on almost all lending in the financial services industry, this report has become even more important since it is usually the sole element used to choose the annual percentage rate (APR), grace period, and other contractual obligations of the credit card or loan.

How is Credit Determined?

Credit ratings are determine d differently in each country, but the factors are similar, and may include:

• Payment history - a record of delinquent payments, generally being more than 30 days late, will lower the credit rating.

• Control of debt - Lenders wants to see that borrowers are not living beyond their means. Experts estimate that non-mortgage credit payments each month should not exceed more than 15 percent of the borrower's after-tax income.

• Signs of responsibility and stability - Lenders perceive things such as longevity in the borrower's home and job (at least two years) as signs of stability.

• Re-Aging - Through re-aging, the date of last action on the account is changed.

• This can dramatically alter the credit score. In 2000, the Federal Financial

• Institutions Examination Council (FFEIC) clarified guidelines on re-aging accounts for delinquent borrowers. [1] (PDF)

• Utilization - Lenders ascribe increased risk to accounts with balances near their limits.

• Credit inquiries - An inquiry is noted every time a company requests some information from a consumer's credit file. There are several kinds of inquiries that may or may not affect one's credit score. Inquiries that have no effect on the creditworthiness of a consumer (also known as "soft inquiries") are:

Prescreening inquiries where a credit bureau may sell a person's contact information to an institution that issues credit cards, loans and insurance based on certain criteria that the lender has established.

• A creditor also checks its customers' credit files periodically.

• A credit counseling agency, with the client's permission, can obtain a client's credit report with no adverse action.

• A consumer can check his or her own credit report without impacting creditworthiness.

• Inquiries that do have an effect on the creditworthiness of a consumer (also known as "hard inquiries") are made by lenders when consumers are seeking credit or a loan, in connection with permissible purpose. Lenders, when granted a permissible purpose, as defined by the Fair Credit Reporting Act, can "pull" a consumer file for the purposes of extending credit to a consumer. Hard inquiries from lenders directly affect the borrower's credit score. Keeping credit inquiries to a minimum can help a person's credit rating. A lender may perceive many inquiries over a short period of time on a person's report as a signal that the person is in financial difficulty, and may consider that person a poor credit risk.

• Credit cards that are not used - Although it is believed that having too many credit cards can have an adverse effect on a credit score, closing these lines of credit will not necessarily improve your score. Many risk models consider the difference between the amount of credit a person has and the amount being used: closing one or more accounts will reduce your total available credit, lower the percentage of available credit, and possibly lower your credit score. Risk models also factor in account age: closing an account with several years of history that is in good standing will most likely negatively affect your score.

 

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FTC and Credit Education

Fraudulent credit repair companies have long been the target of FTC investigations, culminating most recently in Project Credit Despair which snared 20 credit repair companies in February 2006.

The Federal Trade Commission

The Federal Trade Commission (FTC) is responsible for enforcing consumer protection laws in the United States. In its capacity, the FTC offers a number of suggestions and warnings to consumers regarding credit repair organizations.

Beware of credit repair services that don't disclose your rights

Consumers have the right to attempt credit repair on their own. DSI offers affordable credit restoration services to those clients who prefer having experienced professionals managing their credit disputes and creditor interventions.

Beware of credit repair services that advocate "new" identities

It is unlawful to create a "new" identity by applying for an Employer Identification Number (EIN) to replace one's Social Security Number. File segregation is a serious crime that can result in fines or imprisonment.

Beware of companies that imply FTC endorsement

The FTC does not endorse any business. If a credit repair organization implies FTC endorsement, you would do well to proceed with caution.

 

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Mistakes Do Happen

A Look At Errors In Consumer Credit Reports
Executive Summary, 6-14-2004

The most valuable thing we have is our good name. The most common reflection of our reputation as a trustworthy consumer is our credit report. Unfortunately, the information contained in our credit reports, which are bought and sold daily to nearly anyone who requests and pays for them, does not always tell a true story.

Credit bureaus collect and compile information about consumer creditworthiness from banks and other creditors and from public record sources such as lawsuits, bankruptcy filings, tax liens and legal judgments. The three major credit bureaus--Experian, Equifax, and Trans Union-- maintain files on nearly 90 percent of all American adults.[1] Those files are routinely sold to credit grantors, landlords, employers, insurance companies, and many others interested in the credit record of a consumer, often without the consumer's knowledge or permission.

Several studies since the early 1990s have documented sloppy credit bureau practices that lead to mistakes on credit reports--for which consumers pay the price. Consumers with serious errors in their credit reports can be denied credit, home loans, apartment rentals, auto insurance, or even medical coverage and the right to open a bank account or use a debit card. Consumers with serious errors in their reports who do obtain credit or a loan may have to pay higher interest rates because the mistakes falsely place them in the sub-prime, high-cost lending pool.

We asked adults in 30 states to order their credit reports and complete a survey on the reports' accuracy. Key findings include:

Twenty-five percent (25%) of the credit reports surveyed contained serious errors that could result in the denial of credit, such as false delinquencies or accounts that did not belong to the consumer;

Fifty-four percent (54%) of the credit reports contained personal demographic information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect;

Twenty-two percent (22%) of the credit reports listed the same mortgage or loan twice;

Almost eight percent (8%) of the credit reports were missing major credit, loan, mortgage, or other consumer accounts that demonstrate the creditworthiness of the consumer;

Thirty percent (30%)%