Credit Where It’s Due

When it comes to borrowing and lending, a little information goes a long way.

And few pieces of information are more crucial than a consumer’s personal credit score and report, which can be used by lenders to approve or deny a loan, as well as greatly affect what interest rates will be charged.

“The credit score is becoming very important,” said Becky Kozaczka, vice president of Westfield Bank. “When you take a mortgage, for instance, your loan is sent through automated underwritings, and your credit score is a very mportant part of that process. Many lenders also underwrite auto loans and consumer loans based on your credit score.”

A person’s credit score is calculated from his credit report, which is, at its heart, a record of how much debt a consumer has amassed and how responsibly he or she has made payments on those debts. It also tracks bankruptcies, actions brought by collection agencies, and other factors that paint a picture of how someone handles debt.

“Overall, it summarizes their credit worthiness,”said Doug Bowen, executive vice
president and chief lending officer for PeoplesBank. “The items in the report
include payment history, previous and present obligations, total outstanding debt, and the number and severity of late payments.”

There are two ways of looking at a credit report, depending on who’s doing the looking, Bowen said. For consumers, knowing one’s credit score gives some insight into how easy it will be to obtain future credit, and how favorable the rates and terms might be.

For a potential lender, meanwhile, the credit score simply indicates what kind of
gamble it might be taking on a potential borrower.That’s why Bowen called the credit score a ‘risk score.’

“It’s calculated according to a statistical model, evaluating many types of information in an individual’s credit file, and it uses variables from past credit history that are most likely to predict future behavior,”Bowen said. “It’s really a risk score, because it can predict the risk that the borrower will be unable to repay the loan.”

This issue, BusinessWest looks into credit reports, and why lenders say it’s important to know what’s in them.

Easy Access

The good news for consumers is that their credit report doesn’t have to be a mystery to wonder about. It’s free to access, and –thanks to the Internet – as easy as a few mouse clicks.

As part of the Fair and Accurate Credit Transactions (FACT) Act signed into law in 2003, consumers are now able to receive free credit reports yearly from each of three major companies that track the information:Equifax (www.equifax.com), Experian (www.experian.com), and TransUnion (www.transunion.com).

These three sites are accessible throughwww.freecreditreport.com, where consumers may request reports from all three companies at once or spread them out over the year.In addition, anyone turned down for a loan is entitled to a free report even if they have used up their annual allotment.

“Each credit agency has its own way of calculating the credit score, so there’s no one set model,” Bowen said. “but there’s enough consistency today that the numbers come out more or less the same.”

Obtaining one’s actual credit score generally costs a small fee, but the entire contents of the credit report – open and closed accounts, payment history, who has recently made inquiries into the report, etc. – are free,and provide a thorough snapshot of what factors are considered in compiling a credit score.

“When it comes to your credit report, it’s what you don’t know that can hurt you,”said David Rubinger, media relations director for Equifax. “Credit card companies,mortgage loan companies, auto loan and “When it comes to your credit report, it’s what you don’t know that can hurt you.”insurance companies, even landlords and employers check credit reports to find out about your credit past. They figure that if you were responsible in the past, you will most likely be responsible in the future.”

Bowen said there are plenty of reasons why consumers should take advantage of this right on a regular basis, considering all the negatives of a poor credit score.

“People should check their report to make sure there are no discrepancies, no inaccurate loan information, and no erroneous reporting of late payments. You want to make sure it’s current and up to date, and that it represents you best.”

Battling the Thieves

Although it certainly helps consumers understand their own credit history – and requires lenders to be more open about thereasons for their credit decisions – the FACT Act of 2003 was aimed largely at stemming the problem of identity theft, which has gone high-tech in the past decade. Once a conartist uncovers someone’s personal account information – often over the Internet – he can wreak havoc with the victim’s accounts.

Repairing the financial damage can take years, at significant cost.Not only does the FACT Act streamline national fraud detection services, it allows consumers to place fraud alerts on their credit files that make it more difficult for identity thieves to access them. The act’s other requirements affect several groups:merchants, who must now leave most digits of Social Security numbers off sales receipts;financial regulators, who must make sure lending institutions track red-flag indicators of identity theft; and lenders and credit agencies, which are mandated to take action against suspected identity theft even before the victim is aware of it. That doesn’t lessen the importance of checking one’s own report regularly, as that is often the quickest way to be tipped off to fraudulent account activity, Kozaczka said. “Identity theft has become a hot issue, so you want to be sure there aren’t any discrepancies in your accounts.”

If a consumer disputes information on the credit report – or sees an unpaid bill he
simply forgot about – he should act right away to resolve the debt, then ask the creditor to notify the credit reporting agencies that the matter has been resolved, Rubinger said.

If a credit report uncovers accounts the consumer didn’t open or other evidence of fraud, he added, the credit agencies should be contacted directly – as well as the police.

“It’s important that people obtain their credit report at least once a year to see
what’s in there and whether they’re keeping old accounts open, Kozaczka said.

“There are many things that can adversely affect their credit score, and they need to be aware of them.”

Making Judgments

Most people are aware that potential lenders check their credit reports, but fewer know that it can impact other areas of their lives – such as landing a job.

“Employers in some cases are starting to run credit reports on applicants, and if their credit history is less than favorable, that may play a part in a hiring decision,” Kozaczka said – another example of the report being used as a sort of “risk score.”Some may dispute whether this report is a fair judge of character for that particular use, but there’s no debate on the report’s financial impact on borrowers – even if a loan is approved.

“The better the score is, the faster credit approval is, the better the rates are,” Bowen said. “A higher score indicates probable reduced costs and losses for the lender. Even with a few slips along the way, you may still have access to credit, but you might not get the best rates available – and getting the best terms on, say, a mortgage can be worth many thousands over the life of the loan.”For lenders, he reiterated, it all comes down to risk. “That’s the reason we use these credit scores – they help us decide how likely it is that we’ll be paid back on time.”That’s why, for consumers, a positive credit report is money in the bank – in more ways than one..