1. What role do credit bureaus play in an individual receiving credit?

As we Americans sink further into debt and rely on lines of credit for our very livelihood, we become increasingly at the mercy of the gatekeepers of credit: the credit bureaus.

The American economy is highly dependant on credit and the ability to purchase goods that are otherwise unavailable to consumers on a cash basis (e.g., car and house). Presently, the average consumer has three credit cards and has about $4,000 worth of debt. In total, Americans are three trillion dollars in debt. There are thousands of credit bureaus in the United States, but the following three are by far the most prolific in reporting our credit worthiness: 1) TransUnion; 2) Equifax; and 3) Experian (formerly known as TRW).

Each of these credit bureaus has in its databases credit histories for tens of millions of Americans. The information is gathered and given to the credit bureaus from creditors that have extended you credit in the past, such as landlords, credit card companies, the IRS, department stores, and banks. These histories contain information that creditors use to evaluate and make a determination of your ability and willingness to repay the credit. When a subscriber asks for your credit report, it receives information such as your open accounts, credit limits, and present balance. Also included is information on the number of delinquent payments, collection actions, tax liens, and whether you own your home.

2. What are the various negative marks that can appear on my credit and how bad are they?

The following is a list of most of the negative items that could appear on your credit report. They are listed in order of what many creditors would consider as best to worst.

1. Credit inquiries
2. Credit rejections
3. Late payments
4. Past due and unpaid payments
5. Court judgments
6. Collections
7. Loan defaults
8. Repossession
9. Foreclosure
10. Bankruptcy

3. How long does information stay on my credit report?

Delinquent payments: Even if you later pay off the account in full, payments to your creditors that are made over 30 days past due will remain on your credit report for three to seven years from the date you first missed your payment.

Collection accounts: After three months of payment delinquency, a creditor can turn your account over for "collections." Your credit report will reflect the collection activity for seven years from the time the first payment you missed was due that led to the collection. Even if you pay off the account after collection activity has commenced, your credit report will still be marked for seven years, but may say "paid collection."

Inquiries: Inquiries are notations in your credit report marking a request by an entity to view your credit report. For example, when you fill out an application for a credit card, the credit card company asks the credit bureau for a copy of your credit report, creating an inquiry notation on your credit report. Most inquiries remain for two years. Note that too many inquires on your credit report can reduce your credit rating.

Charge-offs: These occur when a creditor decides that for whatever reason it would rather write off your debt as a loss than attempt to collect it from you. Such charge-offs remain on your credit for seven years from the time of the first missed payment that led to the charge-off.

Bankruptcy: Chapter 7, 11, and 12 bankruptcies stay on credit for 10 years from the date of filing. Chapter 13 bankruptcy stays on your credit for seven years after the discharge, which is usually three to five years after filing.

Exception: Note that there is a major exception to the above time frame. If you're applying for life insurance for over $50,000 or for a job that pays over $20,000, a credit bureau may provide information that is over 10 years old.

4. I have bad credit, do I have to wait 7-10 years before I can get a loan?

Although negative information stays on your credit for up to 10 years (for exception see #3 above), by following the principles and techniques provided by this web site you can have an "A rated" credit report within 2 years of even a bankruptcy. Creditors are much more interested in your present circumstances than what happened to you 4-10 years ago. Therefore, rebuilding your credit can be done relatively quickly through a systematic plan and a little perseverance. Also, keep in mind that positive credit information stays on your credit report indefinitely.

5. How does a creditor decide if you're "creditworthy?"

By knowing how a creditor will evaluate you, not only is the mystery removed from the process, but more importantly you can take affirmative steps toward improving your "credit profile" and increasing your chances of getting your credit approved.

When you apply for credit by filling out an application, normally the application provides the creditor with permission to retrieve your credit report from a credit bureau. Once your credit report is retrieved, the creditor assesses your credit worthiness based on both objective and subjective criteria.

Many lending institutions will employ a short-term debt-to-income ratio where they calculate your present short-term debt payments (i.e., excluding long-term debt such as a mortgage) and divide it by your total annual income. Generally, creditors will not lend to you if your short-term debt is more than 20 percent of your annual income.

Similarly, a potential creditor will add up all your monthly bills not including rent/mortgage and utilities and divide by your gross income (before taxes). When using this analysis, creditors are looking for a ratio of under 35%. By consolidating your debt you can usually lower the amount of your monthly payment (even though your debt doesn’t change). This way you can decrease your ratio and increase your chances of procuring credit.

6. What are common objective criteria creditors use to qualify me for credit?

In addition to these common ratios, most lending institutions employ their own version of a credit worthiness scoring system where they assign your credit information points based on objective criteria. Common criteria include the following:

1. Number of years at your present job: creditors believe consistency makes you a better credit risk (this also applies to numbers 6 and 7 below).
2. The kind of work you do with the following from least to most desirable: 1) manual work, 2) clerical, 3) self-employed, 4) managerial, 5) professional.
3. The number and nature of the "blotches" on your credit history. The following are the worst blotches to have roughly in this order: 1) bankruptcy, 2) charge-offs, 3) collections, 4) court judgments, 5) IRS liens, 6) 120 days late payment, 7) 90 days late payment.
4. The amount of credit you presently have. Here, they are concerned about how much debt you could go into if you maxed out your present cards. Many times, creditors will judge you as if you had already maxed out your available credit cards. It is a good idea to look through your credit report and find the credit card accounts that you no longer want (e.g., department store cards) and cancel them.
5. Savings and/or checking account with lender.
6. Telephone in own name.
7. Length of time at present address.
8. Own your home.

7. When trying to get approved, should I apply for as many credit cards as possible?

Although this practice may be tempting, avoid it, as it decreases your chances of getting approved. For one thing, many creditors will look at your total unused credit line on all of your cards. For example, if you have the ability to charge $40,000 on your credit cards, but in fact only owe around $1,000, a potential creditor may look to the $40,000 spending power as if you already owed that money in deciding whether to give you additional credit.

Also, when you apply for credit, the card issuer requests a copy of your credit report. These requests show up as inquiries on your report. Since creditors assume that many of the inquiries on your report have resulted in credit being extended to you, they may refuse to grant you more credit based on this assumption. Alternatively, they may assume that since there was an inquiry and no new account was issued that a creditor must have turned you down for credit. Thus, based on this inference, subsequent creditors are more likely to turn you down.

Tip: Before applying for credit to several different creditors within a short period of time, find out the  credit bureaus to which each one subscribes. This way you can spread out your inquiries and avoid having too many on one report for it to be a basis for denial. Remember that the credit bureaus don’t normally share information with each other.

8. What if I’m turned down for credit?

By law the creditor must do two things along with your rejection letter: 1) provide you the specific reasons why you were rejected; and 2) provide the name and address of the credit bureau used to make the decision.

If the reason the creditor gives for your rejection sounds inaccurate, immediately get a copy of your credit report from the same bureau that the creditor used and closely scrutinize it for errors. If you find an error, follow the steps below to have the erroneous information removed or explained. Next, reapply to the same creditor attaching an explanation and an updated/corrected copy of your credit report.

If you were rejected based on accurate data, you may still appeal the rejection by sending a letter to the creditor explaining why you are a better credit risk than your credit report may indicate. However, most likely you will have to follow certain steps to rebuild your credit before they will approve your application. The good news here is that if you follow the steps outlined by us, creditors will be begging you rather than vice versa.

9. Can I get a free copy of my credit report?

If you have been turned down for credit within the last 30 days based on a report issued by a credit bureau, that creditor must inform you of that fact and provide you with the name and address of the credit bureau. By law you can get a free copy of your credit report if a potential creditor used that credit bureau's report to turn you down for credit, employment, or insurance within the last 30 days.

Experian seems to extend this period to 60 days. I personally received all three credit bureau reports just by writing in (without being denied credit within the last 30 days). It seems that if you write in to all three credit bureaus, there is a very good chance that at least one credit bureau will provide you with a free report, but they are under no legal obligation do so.

The following are the addresses and phone numbers of the major nationwide credit bureaus:

Trans Union
Customer Disclosure Center
P.O. Box 390
Springfield, PA 19064-0390
(800) 851-2674

Experian
P.O. Box 2104
Allen, TX 75013-2104
(800) 392-1122

Equifax
P.O. Box 105252
Atlanta, GA 30348
(800) 997-2493

If you have been turned down for credit within the last 60 days, call the phone numbers provided and order that way. Otherwise, you can see if they will send you a report simply by writing.

10. When writing in for a credit report, what information should I include?

If you're writing in you must provide the following information:

Full name
Current address
Previous address if moved in the last 5 years
Social Security number
Date of birth
Copy of your valid drivers license, billing
statement, OR utility bill with your current
address clearly marked
Signature

If you have a letter turning you down for credit within the last 30 days, include it. Within 10-30 days of writing in, you should receive your report(s).