Oh the Wild, Wonderful (scary) World of Credit.

Albert Einstein sums up my thoughts on credit (and actually all personal finance matters) in one quote,  “You have to learn the rules of the game. And then you have to play better than anyone else.” We have to know how credit works and use it to our advantage; it’s too expensive not to. Like it or not, our credit score affects us consistently. We know that lenders access our credit report and score to extend offers of credit. But did you know collection agencies can access your credit report to collect a debt? Or insurance companies can access your credit report to provide terms of insurance? Or with your express written permission, employers can access your credit report for employment?  Or interestingly, certain social organizations are accessing credit to extend invitations of membership?

Under the Equal Credit Opportunity Act, you have the right to know why you were denied credit or offered less favorable terms than what you applied for within 60 days of the denial.  You also have the right to request a credit report based on any lender’s adverse action towards you because of your credit.

My biggest concern is that people learn about credit problems or address them too late in the game. They begin to address issues when they decide to buy a house or after they were denied credit. Unfortunately, it’s too late then. It can take up to two years to sufficiently address poor credit to put you in a position for good terms with a mortgage. Your credit determines IF you will get a loan and what cost you will pay for that loan (interest rate). Even if you can have credit extended, bad credit will cost more…  If “no credit, bad credit, no problem,” means driving around a car with a 16% interest rate, there is a BIG problem. I’ve been there, done that!

If you use the debt management program from last week’s blog, then with hard work you should be able to get on top of your financial issues and control them in the future. It’s about changing your mind about money. Although I tell people to put their credit cards away during debt management, I still believe in the use of credit. We must begin using credit as a tool, such as bonus points for flying or coupons at your favorite stores, not a crutch. I’ve had bad credit in the past, not only was it not fun, but it was VERY expensive. Knowing what credit is and how it works, should help you manage it in a way that is beneficial, not detrimental, to you.

First, What is your credit report? 

Your credit report contains your history and the current status of your accounts. Generally, it includes:

• Payment history and the length of time you have had credit
• How much credit you have, and of your available credit, how much of it is in use
• Whether you have any delinquent debts.

Generally, delinquent debts such as collection accounts can stay on a credit report for 7 and a half years. Credit reports may also include judgments, liens, or bankruptcies. Depending on the type of bankruptcy filed, the bankruptcy can stay on a credit report for up to ten years.

However, usually when people talk about credit, they are actually referring to their FICO score. The word FICO stands for “Fair, Isaac and Company.” It is the number lenders use to determine whether to: (1) give you credit; and (2) if so, how much; and (3) at what cost to you (the interest rate). Scores range from 300-850. A score in the 700s is considered a “good” score. Unlike your FREE credit report, you have to purchase your FICO score.  But it can be done when you purchase your free annual credit report. However, there are a scoring models used beyond FICO, these scores may vary depending on which of the three major credit bureaus the lender is using and the scoring model they employ, if they are not using the score provided by the credit bureau.

Second, how often should you check your credit report?

As I said in last week’s post, you should check your credit report at least once a year at Annual Credit Report.com.  As a side note, if you check your credit, it is considered a “soft inquiry” and will not affect your credit score. However, a lender checking your credit score for the purpose of extending credit is considered a “hard inquiry” and will affect your credit score.

Third, what should you look for?

It is so important that you thoroughly examine each of your credit reports. You will find that each agency’s report looks different, but also that the information on the report might be different. On each of your three credit reports from Experian, Transunion, and Equifax, you should check the following things:

(1) The credit accounts reported are yours.

• Look for loans or credit cards listed that you never opened, addresses of places where you never lived, or names of  employers you never worked for. (Any of these issues could be a sign of Identity theft)

(2) That the accounts reported are complete and accurate.

• Look to see that your accounts are reporting correctly
• Look for collection accounts that were not updated after a settlement was reached and satisfied. I suggest that you also look for duplicates of the same debt appearing on your report. There should only be one listing of any debt you owe.

(3) That the information reported still belongs there.

•  Look out for old collection accounts (over 7 years), bankruptcies over 10 years, etc.

Fourth, what if you find a problem?

DISPUTE! DISPUTE! DISPUTE!

All three of the major credit bureaus allow you to dispute online.  I suggest the online method. Over the years, I have done disputes online and through USPS (United States Postal Mail), and I like the experience online better for ease and cost.  If you are disputing by mail, it is best to do certified mail so you know what date the bureau received your letter.