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Understanding Your Credit Report
Recent studies have shown that ninety percent of Americans have at
least one credit card – and they are using that card – A LOT!
The average family carries a balance of between $7,000 and $10,000
on all their credit cards. Over $1,000 per family goes on interest
every year. And that’s just the average – some people owe much more!
Overall, Americans spend over $1 trillion every year on their credit
cards, and owe more than $500 billion of it. If debt continues at
the current rate, then one family in a hundred will be forced into
bankruptcy. Over 90% of Americans’ disposable incomes are spent
paying back debts.
When you add credit card debt to the regular bills we have to pay
each month, which can tax anyone’s budget. As a result, some bills
go unpaid and others are paid late.
Both of these instances can damage your credit sometimes so much
that you think there’s no way you’ll ever be able to get out of debt
and get credit for something important like a home or a car.
The truth is that you can get out of debt and repair your credit
nearly to what it was before you had credit problems. It takes some
time and a little work on your part, but it IS possible.
Loan approvals and such depend on your credit score. That number is
what determines if you can get credit, what your interest rate will
be, and how much money potential lenders will give you. A good
median score is 750, but the higher your score is, the more
financially sound you are.
While it’s always a good idea to try and stay away from credit, not
everyone has a hundred thousand dollars lying around to buy a home
or twenty thousand to buy a car. Heck, for some people, scraping
together five thousand dollars for a good used car is difficult.
That’s why we need credit. So we can buy that which we cannot
afford.
Where the trouble comes in is when people begin to buy everyday
items such as groceries and clothing on credit cards. Then those
bills begin to get bigger and bigger until pretty soon, they’re
paying the minimum amount due which will take forever to pay off.
Plus, a lot of people just continue charging things even when they
have a large balance on their account.
Your credit score defines who you are to businesses and you want it
to be as high as it can be. It doesn’t matter how bad your credit
is now. There are ways that you can raise your credit score no
matter how low it is now. Don’t despair; just get started – right
away!
The very first
step you need to take when trying to raise your credit score is to
find out what your score is and what it means. Legislation called
the FACT Act was passed that allows all Americans to get one free
copy of their credit report every year. This report lists all of
your debts you’ve had and your payment history on those debts.
It will tell you
where you owe money, how much you owe, and how you pay (on time, 30
days late, etc.). All of that information is compiled together and
then analyzed.
After the
analysis, a number is assigned to you as to what your credit fitness
level is. Potential creditors then look at your credit score and
decide if you are going to be able to pay back the amount of money
you are requesting to borrow.
That’s the short
version. Actually, there is much, much more involved in determining
your credit score. However, what should be important to you knows
how to read your credit report and how to raise that score so that
you are able to get the things you need. Remember that – the things
you NEED, not the things you WANT!
Let’s start with
how to get your credit report in the first place. There are three
major credit reporting agencies that will offer you the one free
credit report you get each year. They are Experian, TransUnion, and
Equifax. You can contact each of them directly in the following
ways:
-
Equifax
– Online,
you can find them at www.equifax.com. You can also order your
free credit report by mail. However, they only offer this
option for free to residents in the states of Colorado, Georgia,
Maine, Maryland, Massachusetts, New Jersey, and Vermont. All
other states are required to pay a $10 fee.
If you do want
to do this by mail, send your request to Equifax Information
Services, LLC; Disclosure Department; P.O. Box 740241; Atlanta, GA
30374. You can also call them at 1-800-685-1111.
There are also a
myriad of websites who will also allow you to download your free
credit report from their websites, but they ultimately will just be
forwarding you to one of the above websites anyway. However, they
are worth checking out for the information that you can find on
them. Here are a few:
The main thing
is that you will want to get your free credit report in order to
find out where you stand and how far you have to go to repair your
credit. Most of the time when you download your credit report, you
will be able to view and save it instantly. Save it to your
computer’s “My Documents” file if you can. That way you’ll be able
to print it out and refer to it as much as you need.
Also, some of
these sites offer low-cost memberships that will alert you if a new
item comes onto your credit report. Their services will offer many
different things, but purchasing a membership is strictly voluntary
and probably not necessary if you want the straight truth.
Once you get a
copy of your credit report, it’s important to know how to read it.
There are going to be an awful lot of numbers, abbreviations and
terms you've never seen before. Trade lines, charge-offs, account
review inquiries -- how do you read this thing?
Even though you
get one free credit report each year, experts suggest that if you
are serious about improving your credit score, you need to examine a
report from each of the three major credit reporting agencies. This
will, however cost you a small fee from the other two, so keep that
in mind.
Why do they
suggest you have all three? Creditors can pick and choose which
credit reporting agency they want to report to. Some will report to
all three, but many won’t. You may find that what is included on
one report isn’t on another. The reports will have different
information because it's a voluntary system, and creditors subscribe
to whichever agency they want -- if any at all.
A credit report
is basically divided into four sections: identifying information,
credit history, public records and inquiries.
Identifying
information is just that -- information to identify you. Look at it
closely to make sure it's accurate. It's not unusual for there to be
two or three spellings of your name or more than one Social Security
number. That's usually because someone reported the information that
way. The variations will stay on your credit report. If it's
reported wrong, leave it because it might mess up the link. Don't be
concerned about variations.
Other
information in this section might include your current and previous
addresses, your date of birth, telephone numbers, driver's license
numbers, your employer and your spouse's name. The data in this
section is often used to verify your identity or to confirm that the
information you provided for an application is accurate. Small
variations in this data between the three bureaus are normal as each
agency may have their own recording procedures.
The personal
information section of your credit report may also include a
"consumer statement." This is a statement that you asked the credit
reporting agencies to add to your report. Commonly, this statement
is used to explain a record on your report.
For example,
"The Smith Bank account from 2004 was a shared account with my
ex-husband." This statement does not impact your credit score but
may help you clarify a situation to a potential creditor or lender
and improve your chances to obtain credit.
The next section
is your credit history. Sometimes, the individual accounts are
called trade lines. Each account will include the name of the
creditor and the account number, which may be scrambled for security
purposes.
You may have
more than one account from a creditor. Many creditors have more than
one kind of account, or if you move, they transfer your account to a
new location and assign a new number. The entry will also include:
-
When you
opened the account
-
The kind of
credit (installment, such as a mortgage or car loan, or
revolving, such as a department store credit card)
-
Whether the
account is in your name alone or with another person
-
Total amount
of the loan, high credit limit or highest balance on the card
-
How much you
still owe
-
Fixed
monthly payments or minimum monthly amount
-
Status of
the account (open, inactive, closed, paid, etc.)
-
How well
you've paid the account
On Experian's
report, your payment history is written in plain English -- never
pays late, typically pays 30 days late, etc. Other comments might
include internal collection and charged off or default. Charged off
means the creditor has given up, thrown in the towel. Basically,
the company has made efforts to collect the debt, realized that it’s
not going to be paid, and subsequently wrote it off.
Other reports
use payment codes ranging from 1 to 9; an R1 or I1 on a report is an
indication of a good payment history on a revolving or installment
account. Often, the code key will be listed on the report so you
can better understand what the codes mean, but they may not.
Credit accounts
are divided into five categories: real estate, installment,
revolving, collection and other. Here is a better description of
each category:
Real
Estate:
First and second mortgage loans on your home.
Installment:
Accounts comprised of fixed terms with regular payments, such as a
car loan.
Revolving:
Accounts with opened terms with varying payments, such as a credit
card account.
Collection:
Accounts seriously past due that have been assigned to an attorney
or collection agency.
Other:
Accounts where the exact category is unknown. This could include
30-day accounts, such as an American Express card.
Your credit
report lists a summary of the details and terms for each account.
This summary includes information about the account number,
condition, balance, type and pay status for each account. The
summary for collection records is slightly different.
The following
information is for real estate, installment, revolving and other
type records:
A portion of the
number is hidden for security reasons. A partial account number is
all that is needed to file a dispute about the record.
For each
account, the report also displays an illustrated payment history
over the last 24 months. There will be a key at the top of this
section describes each payment history symbol and what it indicates
for your account. Green boxes marked "OK" show that your payment was
made on time.
Most credit
reports also give you more in-depth information about specific
accounts. This is also an important part of the credit report
you’ll want to review for accuracy.
The following
information may be reported for your account in this section:
-
Reported:
The last date when any activity for this account was shown.
Activities include payments, credit card billings and changes in
your terms. Very recent activity may not yet show on your
account, since it takes time for it to appear in the credit
reporting agency's system.
Collection
accounts are accounts that are seriously past due and have been
transferred to an attorney, collection agency or creditor's internal
collection agency. As your debt is transferred between different
agencies, you may see several records on your report for the same
debt.
Only one record
should be marked as open at a time. All the collection records and
the original debt record will expire from your credit report at the
same time. Collection records use a unique summary format on your
credit report:
-
Original
Creditor:
The name of the original creditor where you accumulated your
debt. This could be an account that is listed on your credit
report (such as a credit card) or an account that is not listed
on your report (such as a library, video rental or cell phone
company). If this creditor was a medical office, the name may be
masked for your privacy.
The next section
is the part you want to be absolutely blank. The public records
section is never a good story. If you have a public record on
there, you've had a problem that has required litigation. It
doesn't list arrests and criminal activities; just financial-related
data, such as bankruptcies, judgments and tax liens. Those are the
monsters that will trash your credit faster than anything else.
Here are
definitions of the eight types of public records you could see
listed on your credit report:
The summary
information listed for each of these types of public records can
vary. Here are some definitions of common record categories:
If the public
record is a bankruptcy, three other fields will be visible.
The final
section is the inquiries. That's a list of everyone who asked to see
your credit report. Any time anyone gets into the report, it'll post
an inquiry. That means if you try to apply for a credit card, it’s
listed as an inquiry. Have you been shopping for a car? Every time
a dealership runs a credit report, it shows. If you call the credit
bureau and ask for a copy, it will be on there. It's a very detailed
entry record. Generally, this is great for the consumer.
Inquiries are
divided into two sections. "Hard" inquiries are ones you initiate by
filling out a credit application or taking your child to the
orthodontist. "Soft" inquiries are from companies that want to send
out promotional information to a pre-qualified group or current
creditors who are monitoring your account.
You may have
heard that a large number of inquiries can have a negative impact on
your credit score, but you're probably OK. The vast majority of
inquiries are ignored by the FICO scoring models. They're not the
steak in the steak dinner, so to speak.
For instance,
the model has a buffer period that ignores inquiries within 30 days
of getting a mortgage or a car loan. It also counts two or more
"hard" inquiries in the same 14-day period as just one inquiry. You
could have 30 in two weeks and it only counts as one.
However, on the
other hand, having a lot of credit inquiries on your account could
also show potential creditors that you are trying to live your life
on credit which means you might not have the means to pay back the
debt. This is especially true if you’ve been applying for a lot of
credit cards. And there are always many opportunities to apply for
a credit card.
Of course, you
know about all of the offers that come in the mail. They usually
read “You’ve Been Approved!” as an enticement for filling out the
application. This is not always true with pre-approval offers, so
proceed carefully. I usually shred them up and forget them.
Another time
that you will be asked to apply for credit occurs in public places
and the companies are offering products for free in exchange for a
credit application. I was at a baseball game recently and one
credit card company was offering free team T-shirts and all I had to
do was fill out their credit card application. I didn’t do it, but
what an enticement – especially for a fan!
Watch out, too,
when you are shopping at your favorite department stores. They also
have store credit cards and may offer you a percentage off your
purchase in exchange for a credit application. In general, this is
not a bad idea – which we will talk about a little later in
rebuilding your credit – because store credit cards are great when
helping rebuilding your credit.
The bottom line
is that if you don’t need another credit card, don’t apply for one.
It’s always good to have one on hand for emergencies, but having
five or six can just be a temptation to spend beyond your means.
There may also
be a section on your credit report that lists creditor information.
The creditor contact section lists the name and contact information
for each creditor that appears on your credit report. This can also
include the contact information for creditors that have made
inquiries.
Each creditor's
address is listed to the right of the creditor's name. When
available, a phone number is listed for the creditor. Creditors
without listed numbers should be contacted by mail.
So that’s the
first step – getting your credit report and going over it with a
fine tooth comb. But where’s that magic number – your credit
score? Let’s begin with a short section on the credit score itself
and where it comes from.
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