There are many misconceptions about credit reports. The best way to understand the function of a credit report is to think of it as your own financial library or timeline. Information about your financial life is stored in a credit report and this history serves as the basis for companies (read: lenders) to make decisions about the likelihood that you will be a responsible money manager (read: you will pay them back fully and on time.)
To dispel some of the most common myths, misconceptions & misunderstandings about credit reporting, the credit reporting agency, Experian, has identified six common myths, as well as the reasons behind why they are inaccurate. (Good for those of us who always need to know why…)
1. Once Paid, Bad Debt Goes Away
A credit report is a history. Consumers often pay a neglected debt and then demand that it is removed entirely. However, the non-payment is still part of the consumer’s history.
2. The Credit Reporting Company Denied You Credit
Adverse action letters are now required to tell consumers that the credit reporting company did not make the decision. Instead, it was the lender who made the assessment and extended or denied credit to the consumer.
3. I’m Not Responsible For Those Charges on “Our” Account
College students are often dinged for joint accounts with roommates, such as phone, cable and other utility bills. For example, one roommate moves out and doesn’t pay a specific bill. The other roommate is then stuck with the bill. If your name is on a joint account, it is your debt no matter what.
4. Consumers Must Give Their Permission For a Credit Report To Be Issued
Written permission is required only for reports requested for employment purposes. Otherwise, lenders can check your report at will. But, be aware credit reports can and will be seen by potential employers. Some employers use credit histories as a way to judge a potential hire’s projected performance. If they have good credit, they will likely be a good, reliable employee. Whereas, if they have bad credit, they may not be seen as someone who could be a trust-worthy employee.
5. Requesting Your Own Report and/or a Pre-approved Offer(s) Harms Your Credit History
Inquiries have minimal impact in all cases, but inquiries resulting from accessing your own report or from pre-approved offers are shown only to you and cannot be viewed or scored by others.
6. There is Only One Credit Score and It is on Each and Every Report
There are many different models that are used by different companies. Generally a higher score results in lower risk, but in some models a low score represents low risk. For example, FICO is just one scoring model and not the generic word for all credit scores. Know how each company scores your credit and which lenders rely on which reports to judge your credit-worthiness.
To obtain free copies of your credit reports from the 3 major credit bureaus, go to AnnualCreditReport.com.
Are any of these misconceptions a surprise to you? What things have you learned about your credit and credit reports along the way?