Enough About FICO: How About Four Credit Report Myths?

(photo: amboo who?)

No, no, I’m not done writing about FICO score myths but I figured it was time to focus on the basis of those scores, which is the credit data.  And when we talk about credit data we have to focus on the credit reporting agencies — and these guys are not exempt from the world of wacky wild mythical information.  Here are four of the most commonly misrepresented “facts” about credit reporting. 

1. The Credit Reporting Agencies Share Information

The credit reporting agencies are competitors, which means they are trying to steal business from each other.  They all maintain independent databases full of credit, collection and public record information.  The databases are not linked to each other, meaning they do not share information about your loans, collections, credit scores, or public records with each other. 

They do, however, share fraud alerts, so if you add one to one of your credit reports then they will share it with the two other reporting agencies.  Of course, they’re forced to do this by Federal law.

2. Your Credit Reports are Updated in Real Time

Your credit reports are not updated as you make payments and charge items.  The lenders whom you do business with only update your account with the credit bureaus once per month, not multiple times per month.  This means when you swipe your card at a gas station or grocery store, the merchant and the card issuer know about it because they had to approve the transaction.  But it can take the credit bureaus up to a month to know about it. 

If you look at your credit reports, the data, at any given time, is about 30 days old.  What this means is, any credit scores are going to be calculated based on data that isn’t real time.  We are almost in 2011, aren’t we? 

3. The Credit Reporting Agencies Determine What Counts in Your FICO Score

Despite the fact that the credit reporting agencies do calculate and then sell your FICO scores to lenders, they do not control what is considered and they do not control how much certain things count.  The only influence over your score is the data they have in their system connected to you, and that’s where it ends.  FICO is fully responsible for the design and development of their own scoring system.  This means the inner workings of the model, including what counts and how much, is proprietary.  Not only do consumers not know exactly how the scoring system works, but also neither do the credit bureaus.

4. The Credit Report Agencies Can Never Report Negative Items Longer Than 7-10 Years

There is actually a little known exclusion to the “7 to 10 year” rule for reporting negative credit information.  The Fair Credit Reporting Act allows the credit bureaus to report negative information longer than 7 to 10 years under the following application conditions.

A)    If it’s for a credit transaction that involves an amount greater than $150,000

B)   If it’s for a life insurance policy with a face value greater than $150,000

C)   If it’s for employment purposes and the salary is going to be greater than $75,000

So while some of you may not like the credit reporting agencies, I think we have to be honest about the fact that they are actually taking it easy on many of us.  How many mortgage loans exceed $150,000 and how many of your jobs pay more than $75,000?  In every single one of those cases they could have gotten an exemption to the 7-10 year rule when compiling your credit report.  That means your mortgage lender and your employer could have seen some negative information that is older than 7 to 10 years. 

Should we be thankful?   

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.