Credit Check

by Gail Osten

How many times have you caught that humorous late-night commercial or viewed an offer on the Internet to get a free credit report? Were you tempted to take advantage of this “free” service? If you actually go to the site, you’ll find that as part of the deal you also need to enroll in a credit-monitoring service with a monthly fee. OK, there’s no such thing as a free lunch; it’s the American way.

So it’s good to know that as of April 2010, a new law requires any company offering these reports to inform you right up front: during any 12-month period you are entitled to one free credit report from each of the three nationwide consumer reporting companies— Experian, Equifax, and TransUnion— from www.annualcreditreport.com. You can also request this credit report by phone or email.

You can choose whether you want all three credit reports simultaneously, or you can order one now and others later. The advantage of ordering all three at the same time is that you can compare the information contained in them, as they can differ. Conversely, if you order one now and the other two at varying intervals (e.g., one every four months), you can track new information that may appear on your credit report.

So, do it. But don’t expect to see your credit score, another key component
in your quest for credit worthiness. A credit report and a credit score are
two different animals.

Credit Score
A credit score emanates from a mathematical model that evaluates many types of information in a credit file and is used by lenders to help determine whether you qualify for a particular credit card, loan, or service. Most credit scores estimate the risk a company incurs by lending you money—-specifically, they want to know the likelihood of you making on-time payments.

Fair Isaac Corporation (FICO®) created the best-known and most widely used credit score model in the U.S. Here is how your FICO credit score is assigned:
• Payment history accounts for 35 percent of your score.
• Amounts owed constitute another 30 percent.
• Length of credit history is another 15 percent.
• Numbers of new accounts and types of credit used each make up 10 percent of your score.

MyFICO.com, where you can pay a modest fee to get your FICO score, recently offered a table (source: Informa Research Services) that outlines the difference in monthly payments for a $300,000 loan as of May 28, 2010. FICO scores figured prominently into the equation—the monthly payment for someone with a 620-639 score was almost $300 higher than someone with the top-level FICO score of 760-850. According to the site, a 100-point difference in your FICO score could mean over $40,000 in extra interest payments over the life of a 30-year mortgage on a $300,000 home loan. Even a 20-point uptick in your credit score can mean a lot in the conservative-lending atmosphere in which we live today.

In a nutshell, you’ll want to see both your credit reports and your credit scores three to six months before seeking financing to avoid any last-minute “surprises.” Plan ahead to check your credit so you can fix an errant report before putting in credit applications.

Fixing Errors
Now let’s fast forward … you receive your three credit reports, and you find an error. Can you fix it? Mistakes do happen, so perhaps you can if you have a record of payments.

The Federal Trade Commission has a two-step process to help you in such situations. Log on to www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.shtm for a very useful section that tells “How to Dispute Credit Report Errors;” a sample dispute letter is included.  

Hopefully, all is well and you won’t have to bother, but at some point most everyone needs to repair something. Your credit score is one of those areas where it’s worth the bottom-line effort.