Free Credit Reports — Separating Facts from Marketing

by Brandon Cornett, Home Buying Institute

This tutorial will help you understand the world of credit reporting in general, and free credit reports in particular. This is a topic that confuses a lot of consumers, and you'll soon understand why. But after reading the information below, you'll never be confused about credit reports again.

I've made this lesson as short as possible, while including everything you need to know. I strongly recommend reading the entire article, but especially Part 7 about credit report marketing. If you only read one part of this lesson, make it the part about marketing and product pitches.

Part 1 - Credit Reports Defined

Let's start with a basic definition, just so we're on the same page. A credit report is a document that shows how you have managed your finances in the past. In particular, it shows how you have managed your credit accounts, including all of your credit cards, bank loans, and other financial obligations. In other words, it shows how you have borrowed and repaid money in the past. You can see an example through the link below.

If you have used any form of credit in the past, it's safe to assume you have a credit report. In fact, you probably have three different reports, because there are three different companies that maintain credit reports in the United States. We'll talk more about these three companies in the next section.

Part 2 - The Reporting Industry

The credit-reporting industry is built to serve lenders and other financial institutions. It is not designed to serve consumers — not primarily, at least. There are three credit-reporting companies in the United States: Experian, Equifax and TransUnion. Sometimes you'll hear these companies referred to as reporting bureaus or agencies, but the important thing to remember is that they are not part of the government in any way. This is a common misconception. They are private-sector companies that make money by selling consumer data, mostly to the financial sector.

As you might imagine, these three companies are closely monitored and regulated by the federal government. The Federal Trade Commission, or FTC, is the branch of government that is charged with this duty. There is also a set of laws that regulate the credit-reporting industry. Collectively, these laws are known as the Fair Credit Reporting Act, or FCRA. This act provides specific guidelines on how these companies can use and distribute the data they collect. It also requires them to give consumers one free credit report per year, which we will talk about in greater detail below.

So, there are three companies that monitor your credit activity, and each of these companies produces a credit report about you. They sell these reports to financial companies, such as mortgage lenders, car dealerships, etc. When you apply for some kind of financing, and they tell you they'll need to run a "credit check," it means they're going to pull your credit reports and scores. We will talk about your scores in Part 5 of this lesson. But one thing at a time.

Part 3 - Why It Matters to You

Okay. Now you know what a credit report is. But why should you care? How does this whole reporting system affect you, as a consumer? Well, if you can afford to pay cash for everything you ever buy, it doesn't matter much. But if you're like most people, and you have to use loans and credit to make certain kinds of purchases, then your credit report matters a lot.

Your credit report shows how you have managed your credit in the past, and this becomes important when you apply for financing in the future. For example, if you have a history of missing your credit card payments, ignoring your debts, and other financial mishaps, it will show up in your credit report. When a lender reviews these documents to see how you have managed your financial obligations in the past, they will see this pattern of irresponsible financial behavior. As a result, you'll have a harder time getting approved for financing (mortgage loan, car loan, student loan, etc.).

So, having negative information in your credit report can hurt your chances for getting a loan. But that's not the only reason your credit reports are important to you. They also influence the type of interest rate you get on mortgage loans, car loans, credit cards, etc. Negative information within your credit report leads to a bad credit score, and this means banks will charge you a higher interest rate on loans.

Part 4 - How to Get Free Credit Reports Online

Let's back up briefly to look at what we've covered so far. We talked about what a credit report is, where it comes from, and why it's important to you as a consumer. We also talked about federal laws that require the three reporting companies to offer free reports to consumers. Now we're getting to the heart of the matter. You are entitled to receive one free credit report each year, from all three of the reporting companies.

Let me say that again, because it's a key principle for this entire lesson. According to the Fair Credit Reporting Act, you're entitled to receive free credit reports once per year, from Experian, TransUnion and Equifax.

Want to hear it in government speak? Here's the relevant passage of the Fair Credit Reporting Act, quoted directly from the Federal Trade Commission website:

"All consumer reporting agencies described in subsections (p) and (w) of section 1681a of this title shall make all disclosures pursuant to section 1681g of this title once during any 12-month period upon request of the consumer and without charge to the consumer."

It says pretty much what I said, but in a more convoluted way. You get one free report per year, from all of the reporting agencies. Pretty straightforward, right? Moving right along.

The law goes even further to help you obtain your free reports. These companies are also required to grant you access to your reports through a jointly owned website, which you can find at AnnualCreditReport.com. This is the only official website for obtaining your free credit reports from all three companies. It is the only website that is monitored and regulated by the Federal Trade Commission. And it's the only website I recommend using to obtain your free credit reports online.

Part 5 - Credit Scores and FICO

Your credit report is a documented history of your current and past credit accounts. It shows how you have borrowed and repaid money over the years. We have covered that much already. Now let's take it a step further. The information from your reports is put through a scoring system to produce a credit score. There are many types of credit scores, but for the purposes of this discussion we only need to talk about one — your FICO score. You've probably heard this term before. FICO stands for the Fair Isaac Corporation. This is the company that created the scoring system.

So the information from your credit report is put through the FICO scoring model, and you end up with a FICO credit score. This is a number between 300 and 850, where higher is better. This is the score that most lenders and creditors will review when considering you for a loan. For example, if you want to qualify for a mortgage loan in the current economy, you would probably need a FICO score of 650 or above.

What does this have to do with free credit reports, you ask? Well, there's really no way to get your credit score for free — not without any strings attached, at least. For a small fee, you can buy your score directly from one of the reporting companies (Equifax, Experian, or TransUnion). Or you can get access to your scores through one of the so-called free credit report offers you see all over the place. Aha! Now we are getting to the source of the confusion. It has to do with terminology and marketing.

If you want access to all three of your scores, you'll have to do one of two things:

• You can purchase the score by itself, by visiting a website like MyFICO.com. Or...
• You can get access to one or more of your scores by signing up for some kind of bundled service (more on this below).

Most of the time, these bundled offers come with some form of credit-report monitoring (also known as identity theft protection). So let's talk briefly about those services, and then we will come back to the marketing pitches that create such confusion.

Part 6 - Credit Monitoring Services

So now we have a third piece of the puzzle. Your credit report is the document that contains information about your financial activity. These documents are used to create your FICO credit score, which is a number between 300 and 850. There are also monitoring services available that will keep an eye on your credit reports, with the goal of identifying suspicious activity (such as identity theft). Reports ... scores ... monitoring. Keep these three things in mind as we proceed to the next section. These items are often bundled together and sold to consumers, which leads to a lot of confusion.

The question many people ask is, "Do I really need a credit-monitoring service?" Many experts say no. From what I've gathered, these services do what they claim to do. But that doesn't mean you need to pay for them. This is a personal choice, and it's not really the subject of this lesson. So let's move on to the most important topic and talk about marketing.

Part 7 - How Marketing Creates Confusion

Are you still with me? Is everything clear up to this point? Good. Because I'm about to tie all of this together for you. After you read the following paragraphs, you will never be confused by this subject again. More importantly, you'll never be misled by tricky advertising!

Here's how the product pitch usually works. The website offers you your free credit reports and provides a big button / link for you to click on. The button says "Get Your Free Report" or something similar. They might even offer your FICO credit score as well. But somewhere beside or below the main offer, you'll see a disclaimer that says something like this:

"When you order your free credit report from this website, you will be automatically enrolled into CreditWatch 3000 monitoring service. If you do not cancel your CreditWatch membership before the 7-day trial period ends, you will be billed $21.95 per month until you cancel your membership. This website is not affiliated with the annual free credit report program. According to federal law, you are entitled to receive a free copy of your credit report once a year from all three of the consumer reporting companies. To request your free annual report under that law, you must go to www.annualcreditreport.com."

In short, when you get your report and/or score through one of these websites, you'll be signed up for some kind of monthly monitoring service (and billed accordingly). But, as the disclaimer says, you can get your reports for free by visiting the FTC-regulated website.

This is all perfectly legal, as long as they (A) include the disclaimer and (B) disclose the full price of their service. But it does generate some confusion among consumers, especially those who do not read the fine print.

Just remember the three pieces of the puzzle we talked about. Reports ... scores ... monitoring services. They are three different things, but they are often bundled and sold together. Or rather, the free credit report is used to entice people to sign up for the monitoring service. But if you simply want your credit report and nothing more, you can get it for free with no strings attached through AnnualCreditReport.com.

Part 8 - Lesson Summary

So what have we learned here today? A lot, actually. But let's take a look back at some of the key points covered in this lesson:

• We learned there are federal laws that govern the credit-reporting industry. One of those laws entitles you to a free credit report every year, from all three companies (Experian, TransUnion and Equifax).
• We learned that your credit score is different from your report, and that there is no federal law that requires scores to be given for free. The reporting companies are allowed to charge a small fee for scores, and they do exactly that. Free report, yes. Free scores, not usually.
• We learned that reports and scores are often bundled together with some form of credit-monitoring service, and marketed together. The website will entice you with an offer for free reports and scores, but it will require you to sign up for some kind of monthly service.
• Lastly, we learned that this kind of marketing strategy is legal, as long as the website provides the required disclaimers and disclosures (like the sample I've included above).

© 2009, Cornett Communications. All rights reserved.

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