All About Credit
Your credit history is important to a lot of people: mortgage lenders, banks, utility companies, prospective employers, and more. It is important that you understand your credit report, credit score, and the companies that compile that information.
Overview of Credit Reports and Scores
All three credit reports should be obtained
FICO score is retrieved
Credit report is regularly reviewed
Clean Up the Credit Report
Credit report is then checked for errors
Removal of errors and negative information on credit report should be requested
Addition of indicators of financial stability to credit report is requested
Personal statement to be added to credit report requested
How to Boost the Credit Score
Credit score improved
Improve payment history
Reduce amount owed
Add information about credit history
Avoid new credit
Vary types of credit
Soft inquiries stopped with opt-out
Credit history established
Requested changes made by CRAs
REFERRAL TO PROFESSIONALS
Advocacy with creditors, collection agencies, or CRAs pursued
Formal representation by an Attorney
Litigation against creditors, collection agencies, or CRAs pursued
GLOSSARY OF CREDIT TERMS
“Big Three” – the most well-known credit reporting agencies (i.e. TransUnion, Experain, and Equifax)
Consumer Credit Reports – A file or current snapshot of personal credit history that includes (a) personal information; (b) accounts; (c) public records; (d) inquiries.
Credit Reporting Agencies (CRAs) - For-profits that gather and sell your financial information; they work for creditors not consumers.
“Creditworthiness” – Purpose of credit reports and scores is to assess your ability to carry debt, not play off debt.
Drop-off-date – The length of time until information ceases to appear on a credit report.
Fair Credit Reporting Act (FCRA) – Federal law that governs the relationship between CRAs and consumers.
Specialty reports – Credit reports outside of the big three, usually sought by landlords, employers, and insurers.
OVERVIEW OF CREDIT REPORTS AND SCORES
Credit reports are important but they are not set in stone.
Credit reports are used not only for large purchases (like mortgages and cars), but also for employment, housing, cell phone contracts.
The credit files and scores are fluid; the recent past weighs more heavily than the distant past.
There are benefits of correcting errors with CRAs & there are many ways to go about correcting errors.
FYI 79% of consumer credit reports contains errors, so there’s a good chance that your credit report will have an error in it.
Indicators of stability are the employer, address history, checking/savings account, on-time utility payments. They matter because they can help qualify for credit in the absence of credit history
REVIEWING CREDIT REPORTS REGULARLY helps keep you “tuned up” and prevents identity theft.
FYI More than 10 million Americans have been victims of identity theft and the rate of identity theft continues to increase each year.
CLEAN UP THE CREDIT REPORT
Next, the CREDIT REPORT is checked for errors when reviewing each tradeline (or account) of all three credit reports. All the tradelines that contain errors are listed on a DEBT MANAGEMENT WORKSHEET. By listing the errors, you can organize correspondence with the credit reporting agencies.
REQUEST removal of errors and negative information on credit report by sending letters (as descriptive as possible) to CRAs about:
Incomplete or incorrect personal information (commingled accounts; Jr/Sr; ex-spouse; “J” or “I” for joint/indiv accounts)
Incomplete or incorrect account histories; lawsuits and judgments (7 year drop-off date) bankruptcies (10 year drop=off date)
Student loans and child support (indefinite, until paid)
Student loans: only one entry should appear for academic year, not for each semester
If accounts are already closed, have CRAs note it “closed by customer
Send letters certified mail, return receipt requested to prove the date the letter was mailed. CRAs are required by law to respond to your letter within 30 days.
Maintain a file with all correspondence (sent and received)
NOTIFY CRAs of INDICATORS OF FINANCIAL STABILITY: employment history, bank accounts, overdraft protection, address history, and accounts in good standing (utilities, overdraft protection, cell phones, etc)
CRAs are not required to add this information to the credit report because the industry works for creditors not consumers. As a matter of economic justice, ask anyway! The CRAs may even add it.
ADD A PERSONAL STATEMENT to the credit report. If you still have a dispute with a CRA after sending letters, the FCRA gives you the right to add a 100-word statement to explain negative parts of their reports.
Examples: (I’m not employed; I’m a freelance artist and I made $30,000 last”. “My Visa payment in Sept. 2002 was not late; I mailed the payment on time, but Visa address changed.”)
Adding the statement may not be a good idea if the statute of limitations on the negative almost information has almost run. Weigh the purpose too: if a private landlord is reading your credit report, explanatory statements may help, if it is a bank, it much less likely a statement will be read by a person.
AVOID credit repair scams: “credit watch”; any type of credit insurance; “freecreditreport.net”; and generally anything that costs any more money than listed in THE BIG THREE, AND MORE.
Be very wary of claims, such as “We can erase bad credit 100% guaranteed”, and “Create a new credit identity - legally”. These are probably illegal scams. If it sounds too good to be true, it probably is. Repairing your credit takes a while. There are no quick fixes.
BOOSTING THE CREDIT SCORE
INFORMATION BACKGROUND
Credit score range is 300 to 850; scores below 620 “poor risk”; above 680 “acceptable risk”; US median is 723.
If your score is above 780, the focus should be on maintaining that score, not raising it.
The credit score is comprised of:
Payment history: history of paying bills on time is the most important thing (35%).
Amount owed: Balances near credit limit hurt credit score (30%).
Credit history: Long credit track record is better than a short one (15%).
New credit: Opening up many accounts in a short period of time is bad (10%).
Types of credit: Having a healthy mix of different kinds of credit is good (installment and revolving) (10%)
Getting a credit score from the Fair Issac Corporation – also known as a FICO score – is preferable to getting a score from one of the Big Three CRAs. A FICO score is used by most financial institutions and is considered the industry’s standard.
Ways of IMPROVING each component on his or her CREDIT SCORE:
Improve Payment History:
Be on top of due dates and don’t take on new debt
Negotiate repayment plans with creditors before payments are late if possible
Add delinquency dates (get the statute of limitations rolling)
Deal with damageby (a) Remove judgments; (b) dealing with charge offs, and (c) weighing the drop-off date of defaults vs. payment
Reduce Amount Owed:
Lower debt and aim to use only 30% of available credit (maxing out, that is, using all available credit on any card is always a bad idea)
Add ceilings (credit limits) so that your accounts don’t look maxed out
Lower ceilings
Debt consolidation is not always good because it may result in using up most of your available credit on the account you consolidate to
Add information about credit history:
Add dates account were opened
Add good accounts
If accounts are closed, have the CRA note that it was “closed by customer”
Avoid new credit
Apply only for the credit that you need (don’t apply for a card just to get a free gift)
Applying for credit cards sparks a credit inquiry. Too many credit inquiries lower credit score, especially when they are grouped together over a short period of time. Checking your own credit report has no effect on your score.
Resist the temptation of new credit: opt out of the list for unsolicited credit offers
Call 1-888-5OPTOUT: Choose to opt out forever, not just for five years. This puts an end to “soft inquiries”, which can lower your credit score.
Recent payment problems bring down your score more than ld payment problems. For example, one late payment in the last six months is more demanding than bankruptcy five years ago.
Having a long and good credit record with a particular card or lender can improve your score (the older the account the better)
Moving debt to zero-percent credit cards is not always a good idea, especially if you have recently applied for other credit cards.
If you’re shopping for a mortgage or a car, you don’t have to worry that it will count as a new credit application each time you apply for credit as long as all the inquires are within the same 30-day period. This means you can go to multiple dealers and shop around for the best financing deal without having to worry about the effect on your credit score. The same rule applies for purchasing major appliances, but it’s a two-week window of a 30-day period.
INFORMATION BACKGROUND
Vary Types of Credit
Diversify your credit thoughtfully. Close department store accounts if possible because having bank credit cards is better for your credit score. But if one of your store credit cards has a long history and is one of your few cards, you may want to hold onto it.
Having some debt is better for your credit score than having none.
It is best to have a mix of installment credit (mortgage, student loan, car payments, etc) and revolving credit (credit cards)
Reestablish YOUR Credit history
If you don’t have a file with a CRA, send a letter toCRAs and have them open a file with your personal information (address and employment history; bank accounts);
Obtain one or more of the following if you have no credit history: (a) secured credit cards; (b) local retailer credit card that reports to the Big 3; (c) a goal-saver or secured loan with a community development credit union; (d) cosign with someone who has positive credit; and (e) open savings and checking accounts.
Short credit history (“thin file”) is usually a drag on a credit score (no credit history = no credit score).
Secured credit cards are a great way for someone with no or bad credit to start(re)building a credit history with little risk. The card is secured by money the cardholder puts down in advance. It’s important to shop around for the best deal because some secured credit cards charge heavy fees.
5 steps to a better “report card”
A credit report is like a “report card” of your financial health. It contains a lot of personal information about you and how you’ve managed your bills in the past. Not only do creditors look at it when you apply for a loan or buy a car: more and more often employers, insurance agents, and landlords use your credit report too. Make sure your credit report is the best reflection of your financial health with the checklist for a better report card:
Free credit reports. Everyone can now obtain their credit report once a year for FREE. Go to www.annualcreditreport.com or call 1-877-322-8228. First, check that all information about you is correct, like your Social Security number, address and employment history. Then, verify accounts, like making sure all the accounts are yours.
Eliminate errors. Some estimate that more than half of all credit reports contain errors, and may can hurt you. Correct errors by contacting the credit reporting agency in writing; they must fix errors without cost to you within 30 days. If in 30 days the agency can’t figure whether there is an error, the disputed information must be removed from your report.
ADD GOOD ACCOUNTS. If your credit report is missing any of your accounts that are in good standing, add them to boost your credit score. While they are more likely to add your mortgage than your utilities, getting any of them on your report can make a big difference, so make a list of all your good accounts and request that they add them to your report.
FOCUS ON STUDENT LOAN. Student loans are frequently a source of problems. Take extra care to make sure that each semester’s loan doesn’t show up as a different account.
CREDITORS ARE HUMAN TOO. If you have a dispute or your credit report isn’t perfect, you have the right to include a short personal statement about why. Humanize your report by explaining a family tragedy or health matter; it can make the difference between getting approved or not. And if you are back on track because you’ve taken a financial education class, by all means, let them know!
6 steps to earning an “a”
If your credit report is like a “report card” of your financial health, your credit score is your grade that shows how you are doing. Different creditors use different formulas to determine what kind of risk you will be as a borrower based on the information in your credit reports.
If you don’t know your score or if you are preparing for a major purchase, you can pay about $15 for your score from myfico.com. Good credit scores are established through careful use of credit over many years, but there are several things you can do right away to get an “A”:
Don’t fill out a credit application just for a free cell phone. They are at the malls and movie theatres, hawking “free” gifts like cell phones. In exchange, they want you to fill out a credit card application. But allowing lots of inquiries into your credit history can bring down your score, damage that is not worth the gift. In the future, limit the inquiries you authorize.
And not for a 10% discount either. Retail and department stores will often try to get you to sign up for their credit card by offering a discount. But when creditors calculate your score, they favor older accounts from major banks rather than newer accounts with department stores or gas stations, so close them in favor of your bank credit cards. EXTRA CREDIT: Tell the credit reporting agency to list your account “closed by customer”.
OPEN SAVINGS AND CHECKING ACCOUNTS. Having checking and saving accounts can increase your credit score. Savings accounts are better than checking, but you’ll get the biggest boost by having both.
CHECK THE CEILING. When you get your credit report, check and make sure they list the available credit for each loan or credit card. A missing credit limit can lower a score by as much as 50 points.
STRIKE THE RIGHT BALANCE. You can improve your score by striking the right balance between how much you owe and your available credit. Aim to only use about 30% of your available credit by paying down high balances. EXTRA CREDIT: Extremely high credit limits can hurt too- even if you don’t use it – so when credit card companies give you automatic increases, say no thanks.
Above all, be extra careful about due dates. Paying your bills on time counts more than anything else. In fact, a late payment in the last six months is worse than a bankruptcy five years ago. Improve your score by keeping on top of due dates ad don’t take on debt you can’t pay.
4 ways to protect yourself against identity theft
The though of someone buying expensive jewelry, renting an apartment or running up your credit cards – all while pretending to be you – is a frightening idea. But there are several things you can do right now to minimize the risk of identity theft and give you peace of mind:
STOP CREDIT CARD OFFERS. “Soft” credit report inquiries- when credit card companies check your report to send you an offer – is the #1 cause of identity theft. Thieves pretend to have a legitimate business reason to check your report, but what they really want is your personal and financial information. Contact www.optoutprescreen.com or 1-888-5OPT-OUT to stop this type of inquiry, and the chance for identity theft
GET YOUR FREE CREDIT REPORT. Checking your credit report regularly for unauthorized accounts is the best way to make sure no one is pretending to be you. Access your free credit report from www.annualcreditreport.com or 1-877-322-8228 and make sure all the account are yours.
KEEP FINANCIAL INFORMATION OUT OF SIGHT. While we may worry about strangers lurking on the Internet, identity theft is more likely to happen by someone you know, like relatives, roommates or ex-spouses. Keep passwords, checkbooks, and account numbers in a safe place. Take extra precaution by blacking out account numbers, or using a shredder, before you throw things away.
GUARD YOUR DIGITS. Be very careful about whom you give your Social Security number to. There are only a few reasons to share it, like with your employer, tax preparer, your bank or to access your credit report. Private businesses – including credit card companies – shouldn’t need it; offer them last four digits instead. Better yet, have them use an alternate way to identify you, like your driver license number. Also, when you pay your bills, don’t write your entire account number on to memo line; just use the last set of digits.
CREDIT “TUNE UPS”
A credit report is like a “report card” of your financial health. It contains a lot of personal information about you and how you’ve managed your bills in the past. Your credit score is like a grade that shows how you are doing.
Half of all credit reports contain errors! So make sure your credit report is the best reflection of your financial health with this checklist for a better report card:
“TUNE UP” TIP
Correct and complete info
Check your name, address, SSN & employment history
Verify accounts. Are all the accounts yours? Co-mingled? Missing good accounts, like cell phones and bank accounts?
STUDENT LOANS. Make sure that each semester’s loan doesn’t show up as a different account
Statue of limitations. Late payments; charge offs and other negative accounts – 7 years; Student loans, child support, and bankruptcies – 10 years.
PERSONAL STATEMENT. Weigh whether you should add an explanation about a recent set-back.
EXTRA CREDIT. Adding a missing ceiling can add 50 points! Also, stop “soft” credit inquiries; note closed accounts as “closed by customer”; and make corrections by mail, not website.
TIME HEALS. A late payment in the last six months is worse than a bankruptcy five years ago. So remember: get religion on due dates; pay down high balances; limit the new inquiries you authorize.
9 Cosigning risks
Your relative or friend is borrowing money for a major purchase (a car, house, etc…) and has asked you to cosign (sign your name along with theirs) on the loan. Should you do it? Before you sign anything, make sure you know exactly what you’re getting into. Cosigning a loan is just as risky as being a co applicant on a credit card.
1. You’re taking a big risk. When you cosign a loan, you are saying that you will pay the loan in full if the borrower fails to ma payments. The lender can start coming after you for money if the borrower misses even one payment. A professional lender was unwilling to take the risk to loan money to your friend or relative. Should you? Think carefully.
2. Your credit is at stake. When you cosign a loan you are putting your credit score in the hands of the borrower. If the borrower misses a payment, the missed payment will show up on your credit report. You may not find out about the borrower’s missed payments until serious damage has already been done to your credit. Cosigning for a loan will also limit the amount of credit available to you.
3. Keep it within the family. Cosigning a loan for a friend or girl/boyfriend is a lot more risky than cosigning a loan for child or spouse. The legal relationships that exist between close family members make cosigning somewhat more secure. Cosigning for a girl/boyfriend could turn into a huge mess if the relationship goes sour.
If you decide to cosign, protect yourself:
4. make sure you can pay. If you’re asked to pay off the loan and can’t, you could be sued and your credit will be damaged.
5. Be careful with collateral. Collateral is property that you and/or borrower put up to ensure that the creditor has some way to get money if you and/or the borrower default (fail to make payments). Before you pledge property as collateral, such as your car or furniture, to secure a loan make sure you understand the consequences. If the borrower defaults, you could lose these items.
6. Work with the lender. Ask the lender to agree, in writing, to notify you if the borrower misses a payment. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.
7. Limit your liability. Ask the lender if you can limit your liability. Fr example, you may want to limit your liability to the principal on the loan, and not include late charges, court costs, or attorneys’ fees. In this case, ask the lender to include a statement in contract similar to: “The cosigner will be responsible only for the principal balance on this loan at the time of default”.
8. Obtain and keep important documents. Make sure you get copies of all important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and warranties. You may need these documents if there’s a dispute between the borrower and the seller. The lender is nor required to give you these papers; you may have to get copies from the borrower.
9. Special car loan advice. If you’re cosigning a car loan, ask to have your name listed with the borrower’s on the car title and keep a set of keys to the car.
DEALING WITH JUDGMENTS ON YOUR CREDIT REPORT
When you examine your credit report, look carefully at the public records section and see if you have any judgments listed. A judgment is an official decision by a court that you owe a debt. Judgments can seriously damage your credit. But you can get this negative information off your credit report without too much difficulty.
1. COPE WITH DEFAULT JUDGMENTS. A default judgment happens when you are sued for a debt and fall to show up in court on the day of your case to defend yourself. In this case, the court will enter a judgment against you even if you may have had a good defense and even if you never received a notice of the court case. In order to get rid of the default judgment, you will need to have it “vacated”. Ask your coach for help with this problem. Once a judgment is vacated, it is null and void and cannot be reported on your credit report. In the future, if you receive documents letting you know that you’ve been sued, don’t ignore them and make sure you show up in court to defend yourself.
2. REMOVE JUDGMENTS THAT YOU’VE PAID OFF. If there’s a judgment listed on your credit report that you’ve paid, you should get it removed. Ask the judge to vacate the judgment. Contact your creditor as well and get their consent to vacate the judgment. A vacated judgment will disappear from your credit report. If you pay the judgment amount, it may be reported as “Satisfaction of Judgment”, which will still remain on your report for seven years. Even If you can’t get the judgment vacated make sure your credit report at least says that the judgment was “satisfied”. This problem often arises when you are sued by your landlord and reach a settlement in court. The settlement will be listed as a judgment on your credit report and will often remain even after you’ve paid off the judgment unless you do something about it.
3. AVOID JUDGMENTS FROM YOUR LANDLORD. If your landlord has just sued you and you know you owe the money but don’t want to have a judgment listed on your credit report, when you reach an agreement, make sure your landlord agrees to “vacate the judgment” and “discontinue the petition” in exchange for your payment, which will prevent a judgment from being entered against you. If you are confused, ask the judge or the court attorney for help.
4. DEMYSTIFY UNKNOWN JUDGMENTS. If there’s a judgment on your credit report and you don’t know what it’s about look carefully. Your credit report will list the plaintiff (the person who sued you for the debt), the court in which the judgment was entered, and usually an account number. First contact the plaintiff to see if they can give you any information about judgment. If that doesn’t work, contact the court. If it turns out that the judgment is wrong, you will have to get that judgment vacated.
5. CAUSE VACATED JUDGMENTS TO DISAPPEAR. If you’ve had vacated, but it’s still showing up on your credit report , write a letter to the credit reporting agency disputing the judgment and include copies of court documentsvacating the judgment.
HOW TO WRITE A CREDIT REPORT DISPUTE LETTER
Studies have shown that the vast majority of credit reports contain errors. Many of those errors are not harmless and can lower your credit score. Any negative information on your credit report will stay there for seven years unless you do something about. To get your credit report corrected, send a credit report dispute letter to each credit reporting agency 9CRA) that lists incorrect information in your credit report. Send your letter using a Certificate of Mailing (costs $1.05) and enclose a copy of your credit report with the errors circled.
Your name
Your address
Date
Dispute Department
Name of CRA
Address of CRA
Re: Report Number:______________
Dear [name of CRA],
I’m writing to dispute the following incorrect information on my credit report. The items I dispute are also circled on the attached copy of my credit report.
Incorrect Credit Accounts
Account name, account number
Reason for dispute:
Action requested:
Incorrect Public Records
Source of public record, record number
Reason for dispute:
Action requested:
Incorrect Personal Information
Incorrect Information
Reason for dispute:
Action requested:
Please investigate these items immediately and send me a corrected copy of my credit report.
Sincerely yours,
[your name]
Enclosure: Credit Report
CREDIT REPORTS AND SCORES THE BIG THREE, AND MORE
Equifax
P.O. Box 740241, Atlanta, GA 30374
800-525-6285
www.equifax.com
one report: $10 with FICO: $15.50
Experian
National Consumers Assistance Center
P.O. Box 2104 Allen, TX 75013-2104
888-397-3742
www.experian.com
one report: $10 all three: $34.95
Trans Union
Consumer Disclosure Center
P.O. Box 2000
Chester, PA 19022
800-916-8800
www.tuc.com
one report: $14.95
Annual Credit Report Service
P.O. Box 105281
Atlanta, GA 30348-5281
877-322-8228
www.annualcreditreport.com
free
Fair Isaac Corporation
www.myfico.com
one report and score: $15.95 all three plus score: $47.85
OPT-OUT
1-888-567-8688
www.optoutprescreen.com
Do Not Call Registry
1-888-382-1222