When you ask your bank for a loan, it pulls your credit report as part of its decision-making process. While federal law restricts the length of time that negative information can appear on your credit report, there are exceptions to these rules, especially if you apply for a large loan.
Credit Reporting
Your credit reports are your personal history of applying for and using credit. Creditors use your credit report to make decisions about offering you credit or lending you money. While the credit bureaus that publish your credit reports are private businesses, federal law governs credit bureau business practices. Under the federal Fair Credit Reporting Act (FCRA), you have significant rights regarding your credit report, including the removal of old and inaccurate credit information.
Time Frame
While positive information about your credit history can remain on your report forever, negative information can appear only for a specific period of time. Credit bureaus must remove most types of negative information, such as late payments or a charged-off account, from your report after seven years. Some exceptions to this rule include bankruptcies, which can stay on your report for up to 10 years; unpaid judgments, which can remain until the statute of limitations on collecting unpaid judgments runs out in your state; and tax liens, which are reported for seven years after the lien is paid off. Another exception is a credit report that's pulled because you're applying for a loan of more than $150,000 or an employer is considering you for a job that pays more than $75,000 per year, as of November 2010. There's no time limit on including negative information in these reports.
Other Credit Considerations
Most banks don't rely entirely on your credit history when making a loan decision. Your bank probably looks at the stability of your employment, your housing and whether you have other assets. Having a good, longstanding relationship with your bank can also help you get the money you need. The loan officer at your bank may also pay more attention to your credit behavior over the past year or two rather than focusing on charged-off accounts from six years ago.
Your Rights
If your bank does turn you down for a loan because of something on your credit report, it has to tell you why. It also has to give you the name of the credit bureau that produced your report. You then have 60 days to request a free copy of your credit report from that credit bureau. If there are any errors on the report, you have a right to dispute them. The credit bureau must then investigate your disputes and remove any information that it cannot validate.
Prevention/Solution
Get your credit in shape before applying for a loan. Review your reports and dispute any errors. If you have old accounts that still have a balance, get those paid off, preferably in full. If you've had a clean credit record for the past two years, your banker may not care so much about a charged-off account from several years ago, but he will want to see that you took care of the debt.
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