by Jennifer Wallis
If a stranger approached you on the street and asked you to borrow $5.00, would you give it to him? What if he asked you to borrow $10,000.00 but promised to pay you back over the next several years? Would you give it to him then?
* * *
Most of us may cough up the $5.00 but the idea of giving the stranger $10,000.00 would be pretty hard to swallow. How would we know if he’d really pay us back? Does he have a history of paying back other people he may have borrowed money from or has he broken his promise to pay?
Unless you live in a small town where everyone knows the local banker, you are a stranger to lending institutions. To a lender, your credit report says much more about you than your winning smile and honest eyes. Looks can be deceiving. For this reason, lenders use credit reports to get a glimpse of your history. Credit reports tell lenders how you have paid other loans and how likely you are to repay the loan they may give you.
Based largely on the information in your credit report, lenders may approve you for a loan with a great interest rate, approve you for a loan with a not-so-great interest rate if you are a “high-risk” borrower, or deny the loan altogether. While there may be circumstances to explain any periods of slow payment, it’s important to keep your credit report in great shape. Here is some information to help you understand what you credit report says about you:
Credit Reports
Your credit report is a glimpse of how you have handled credit in the past. It’s important to know what your report says about you and work to correct any past mistakes. Even though you can’t erase any accurate past information, you can begin paying your bills on-time and demonstrate that you have learned to handle credit more responsibly.
What’s in your report? A credit report contains identifying information about you such as your Social Security number and past addresses, the creditors and amounts that you owe, how you have paid your bills (on-time, 30, 60, 90 days or more past due), charged off accounts, bankruptcies, judgments, settlements, liens, and inquiries (number of times you have applied for credit).
What if I don’t have a credit history? If lenders have no example of how you repay your loans, it can be an obstacle just like a bad credit history can be. In order to build a good credit history, you will need to obtain credit or a loan and repay it on-time over a period of time. If you pay cash for everything or pay things off right away, it may be good for you financially but it won’t do much to build your credit history. If you don’t need credit, you may be in good shape but most of us need it to obtain larger purchases such as cars or homes.
Credit Scores
A credit score is a measure of how likely you are to repay your debts. The higher the score, the more likely you are to repay your loans, therefore a lower risk to a lender. The lower the score, the higher the risk. All three credit bureaus use credit scores to measure your creditworthiness. Scores range from around 500 to more than 800. Mortgage lenders typically look for a score of 650 or above for the best interest rates.
What’s in a score? Your credit score consists on 5 parts: 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% types of credit in use.
What’s NOT in a score? Credit scores do NOT consider race, religion, sex, marital status, age, salary, employment history, child support obligations, or any affiliation with a credit counseling agency.
How do I improve it? In addition to your score, credit reports may offer explanations as to why your score isn’t higher. You can work to correct these issues in order to improve your score. Some include: past delinquencies, balances too close to credit limit, not enough credit history, etc. You can improve your credit score by paying your bills on-time, paying down your credit cards, applying for new credit only as needed, and checking your credit report for accuracy.
Review Your Credit Report
It’s very important to review your credit report on a regular basis. Creditors are not always diligent about updating your report so it’s possible for your report to show that you owe more than you do. If the balance is out of date, have it updated. Also, there may be accounts that don’t even belong to you. I helped a client once whose credit report showed she owed $70,000.00 in student loans when she had never even gone to college!
Dispute any inaccurate information: According to the Fair Credit Reporting Act (FCRA) you have a right to dispute any inaccurate information in your credit report. The credit bureau has 30 days to investigate and must either confirm, update or remove the information. It’s important to preserve your rights under the FCRA by disputing the information through the credit bureau, instead of just directly with the creditor.
Update any old information: Aside from Chapter 7 bankruptcy and student loans, information may only be reported for 7 years from the date of last activity. If you notice accounts that have been inactive for more than 7 years, dispute this information to have it removed.
Enter a statement: You may enter a statement on your credit report that explains any problems with your payment history. It may or may not make a difference to a lender but it will at least give you a chance to explain any extenuating circumstances that may have affected your payment history. Also, if you have completed any financial literacy training, you may also want to report this to lenders through the statement.
Check for fraud: If you notice accounts that you never opened or don’t recognize, have them investigated. If you suspect that someone has been obtaining credit in your name, alert the credit bureaus to a possible fraud alert. They can increase the security level associated with obtaining credit. Also, be sure that you report any fraud to the local police or FBI.
To those good people who have had bad things happen that prevented you from paying your bills on-time, credit reports and scores can seem unfair. It may seem like a few mistakes will haunt you forever. This isn’t true and there are things you can do to improve it.
Your credit is important and it’s critical to get your credit in the best shape possible. Over a lifetime, a person with a “bad” credit score will pay $250,000.00 more in interest than a person with a “good” credit score. There’s no secret which one I’d rather be. It shouldn’t be too hard for you to decide for yourself.
It’s time to take charge of your credit.
* * *
Return to Credit Cards and Debt
Copyright © 2005 by Jennifer Wallis. All rights reserved.
