CREDIT SCORE POWER

iUniverse, Inc.

Contents

CHAPTER ONE Who Are the Credit Bureaus, and What Do They Do?.....................1CHAPTER TWO Credit Scores and the Credit-Scoring Systems.........................15CHAPTER THREE Shopping for a Mortgage or Loan....................................37CHAPTER FOUR Having the Best Credit..............................................56CHAPTER FIVE Negative Information................................................71CHAPTER SIX Examples of Financial Stress.........................................101CHAPTER SEVEN Credit Monitoring and Identity Protection..........................111

Chapter One

Credit-reporting agencies were created in the 1900s, when people started moving across the country. At this time, it was difficult to track consumer credit histories, since they could default on loans, move easily from place to place, and just begin again in a new area. Within the United States, there began to be many more banks and lenders, so payment histories were harder to track for each individual. In the past, there would be a local lender who could see each individual's full credit history, since they had control of all the lending. That lender being the only available choice for borrowing money made it easy to regulate payment patterns. Because of these growth changes, the need for an entity that could provide all of an individual's or business' credit history, no matter where they were located at any given time, was paramount.

Credit bureaus, also known as credit-reporting agencies (CRAs), are nongovernmental agencies that collect and sell information. There is more than one agency because, like most businesses, they compete for profits. Two of them are public, and one is a private company. For the most part, the information they provide includes histories of creditworthiness, showing how business and consumers rate in terms of their ability to meet debt obligations. The CRAs provide many other services related to gathering information, statistics, and selling information to companies for marketing purposes.

Personal credit profiles provide creditors, collectors, and solicitors with a view of a consumer's history for a period of seven to twenty years. Generally, positive information can remain for the period it is open and active and can be removed after two years of inactivity (closing of account). Although information does not have to be reported for longer than this period, many creditors will leave it on the report indefinitely. Negative information generally remains for seven to ten years, depending on what it is. I speak more about this and the exceptions in later chapters. The three major consumer credit bureaus that supply the majority of consumer credit are TransUnion, Equifax, and Experian.

TransUnion

TransUnion has been in business since 1968, with headquarters in Chicago. It is a private company that recently sold more than half of its shares. The Pritzker family, who owns Trans Union and much more, reported that they sold 51 percent of their stake to a private equity firm, Madison Dearborn, in 2010. This sale was the result of many disputes within the family, after which they agreed their $15 billion empire, which included TransUnion, would be divided by 2011. TransUnion is the smallest of the three reporting bureaus, supporting more than fifty thousand customers on five continents and more than five hundred million consumers across the globe.

Equifax

Equifax was founded in 1898 by two brothers—Cator and Guy Woolford, a bank employee and an attorney, respectively— who started compiling information reported by creditors on the history of payment patterns of their shoppers. They published their findings in the form of a guide, which they sold to merchants for twenty-five dollars. They also sold credit reports on individual consumers. It was such a success that it has grown to be the business it is today.

Equifax is a public company that has been gathering information for consumers and businesses for over one hundred years. It employs over seven thousand people in fifteen countries. Equifax focuses on solutions for business and provides consumers with credit reports as well. The business solutions Equifax provides include information and lists to help a business market to the right consumer. Since information is power, the recording of individuals' credit histories and personal information makes the bureau a valuable resource for business.

Experian

In 1996, the old Experian (which was called TRW) was combined with the CCN Group by GUS plc, the British conglomerate. The CCN Group was Europe's largest information bureau. Everyone recognizes the name TRW, and some consumers still use the name, not realizing the company is no longer TRW but Experian. Over the ten-year period after the two companies merged, GUS developed and strengthened Experian. Then, in 2006, GUS demerged the two, and Experian became an independent company. Experian is a public company that employs about fifteen thousand people and provides data and services to clients in more than sixty-five countries.

On a consumer level, the three CRAs serve as a library of information about how patterns of payments reflect individual credit histories. Creditors constantly provide updated and new information changes in credit history, whether positive, negative, accurate, or in many cases, inaccurate. This information is compiled and resold to members who make decisions about approving credit applications. There are hundreds if not thousands of regional bureaus across the United States under contract or owned by one of the three bureaus mentioned.

Credit Information Uses

Credit bureaus also offer services to businesses, helping companies across the globe manage risks and rewards related to lending to consumers and other businesses. These services include:

• Credit Services: They maintain databases that· hold information about all consumers on a national, and in many cases, global level.

• Decision Analytics: They offer analytical tools· and skills that help give organizations support to make better decisions.

• Marketing Services: Through their marketing· services, they help clients find and keep customers.

• Interactive: They open communications between· consumers and businesses by providing many services, including e-mail, telephone, direct-response mail, and text. This enables businesses to develop a larger client base.

• Protection Products: The bureaus also sell products· that allow consumers to manage and protect their personal credit profiles and to view a variety of credit score models.

Many businesses use lists of specific types of consumers who fit into their desired category of clients. For example, Capital One offers a 0 percent interest rate credit card to a consumer who lives in an area where the average income is over $90,000. They are looking for a consumer with five other lines of credit with at least 40 percent of balance to limit ratio on credit card debt, a mortgage, a student loan, and an automobile loan or lease. This type of consumer may be the best choice for the creditor issuing this card, since this consumer...