What is credit?

Kim Melin    April 16, 2018    No Comments on What is credit?

 

What is credit?
Credit is what you use to buy products or services today and pay for them at a later date. Some
common examples of credit are auto loans, credit cards, and mortgages. When an individual
applies for a line of credit or loan, the creditor or lender determines how much the individual will be permitted to borrow, for how long, and at what interest rates.

What is a credit report?
A credit report is an accumulation of information about how you pay your bills and repay loans,
how much credit you have available, what your monthly debts are, and other types of
information that can help a potential lender decide whether you are a good credit risk or a bad
credit risk.

Where does my credit information come from?
Credit information comes from the three credit bureaus – Equifax, Trans Union and Experian.
Not all three bureaus have the same information about you.
How do the credit bureaus obtain my credit information?
All of your financial transactions that involve credit are reported to the bureaus by the Merchants Creditors and Lenders with whom you have dealings. Most large creditors report this information to all three national credit bureaus. Some smaller lenders or merchants, however, may only report the information to one. For this reason, your credit report and credit scores from each bureau may not be the same. The credit bureaus also access information about you from public record information such as court records.

What information is on a credit report?
A credit report is a snapshot of your financial history and will contain the following information:
 Your full name
 Social Security Number
 Nicknames or alias
 Current and previous addresses and employers
 Birth Date
Credit History – Lists all loans and credit lines in your name for the last 7 years
Derogatory Credit – Creditors with whom you have had late payments, collections, charge offs,
repossessions or foreclosures.
 Public Record Information
 Legal Judgments
 Tax Liens
 Bankruptcy
 Overdue child support
Inquiries
A list of those who have obtained a copy of your credit report within the past two years.
List of Creditors
All creditors you have ever done business with including their name, address and phone number.
This is especially helpful if you need to contact any of your creditors to correct or delete
information off of your report.
Credit Bureau information
Equifax Information Service Center – www.equifax.com
800-685-1111
P.O. Box 740241, Atlanta, GA 30374-0241
Trans Union Corporation – www.tuc.com
800-888-4213
Post Office Box 1000, Chester, PA 19022
Experian Information Solutions, Inc. – www.experian.com
888-397-3742
P.O. Box 2002, Allen, TX, 75013

What is a credit score?
A credit score is a number lenders use to predict how likely someone will repay a loan or make
credit payments on time. The score is a result of a complex mathematical algorithm that
evaluates the data on a credit report. It takes into account patterns of hundreds of thousands past credit reports and their respective loan performances and credit histories. A credit score
ultimately determine someone’s ranking associated with credit risk.
The Fair Isaac credit bureau score (FICO® Scores) was designed to measure the relative degree
of risk a potential borrower represents to a lender, based on extensive research into credit use
patterns and actual credit data. A credit score is a number between 300 and 850 generated by a
formula based on your credit history.
Lenders use your credit report and credit score to determine the overall risk they will assume if
they lend you money. The lower your credit score, the higher the risk. In order to cover
themselves against this risk, lenders will charge a higher interest rate on loans to those with bad credit. They will also require additional fees upfront in order to cover costs that can usually be rolled into a loan. Higher interest rates result in substantially higher costs over the life of a
mortgage.
Your score is not physically stored as part of your credit history on the credit file. Rather, it is
generated at the time a lender requests your credit report, and is then included with the report
viewed by the creditors.

How do inquiries affect my FICO Score?
The number of inquires may or may not be a factor in a score, and when it is a factor, it is
typically not a strong one. However, if inquiries have a stronger-than-the-norm influence, the
“number of inquires” reason code will appear as one of the four reason codes delivered with the score. Since the law requires a record of all inquires into the file to be kept, inquires can not be removed from the credit report unless they are erroneously reported.
Rate Shopping
All three credit bureaus allow consumers to “rate shop” for mortgages, autos and student loans
without experiencing an impact to their FICO scores. In other words, all mortgage, auto and
student loan inquiries that occur within 30 days of the time of scoring have no impact to the
score. As they age and fall into a 14-day time period following the 30 day “buffer”, they are
grouped and treated as a single inquiry.
**According to MyFico.com, people with 6 or more inquiries in one year are eight times more
likely to declare bankruptcy than people with no inquiries.

Establishing Good Credit
In order to qualify for a good loan you will need to prove to the lender that you are a good risk.
The best way to prove this is to pay your bills on time and keep your debt under control.
Following the steps below will help set you on the right path:
 Review your free credit report every year. www.annualcreditreport.com
 Dispute any errors or out-of-date information. Up to 25% of credit reports have errors
– yours may too. Disputing negative errors can help your score!
 Pay your bills on time. The largest part of your credit score is based on your credit
history. Establish a system that works for you. Contact your creditors and lenders to
change your monthly due dates.
 Keep balances below 50% of your credit limits. This is the second biggest factor in
your score. High balances mean higher risk and maybe higher interest rates.
 Keep your accounts open longer. Length of credit history is another important factor.
Keep your older accounts open; close newer accounts if you must, but be aware of your
overall credit utilization ratio factor if doing so.
 New credit can lower your score. In the short run, the combination of more available
credit and more inquiries on your account can increase your risk profile and lower your
score. If you’re in the process of buying a home, refrain from opening any new store
credit cards! Only add credit cards to your portfolio when it makes sense. Beware of
those incentive gifts!
 Use more than one type of credit. To show you can manage credit cards, retail
accounts, installment loans, and other types of credit, make sure your credit portfolio
contains a variety of account types.
 Secured cards can help establish or reestablish credit. These cards are backed by
your savings and build a positive payment history with the bureaus, which improves your
score.

The benefits of having good credit:
The interest rate you receive on a home loan is directly tied to your credit history. The better you are at paying your bills, the lower the interest rate you will receive. If you have late payments, have been sent to collections, filed for bankruptcy, or defaulted on a loan, your interest rate will be substantially higher. Take a look at the example below: (Based on multi-lender average APRs on a $300,000 loan)
FICO® Scores APR Monthly Payment
760-850 4.571% $1,533
700-759 4.793% $1,573
680-699 4.970% $1,605
660-679 5.184% $1,644
640-659 5.614% $1,725
620-639 6.160% $1,830
How long do the below items stay on my credit report:
 Bankruptcies – 10 years from the date of entry of the order for relief
 Suits and Judgments – 7 years from the date of entry
 Tax Liens – Paid – 7 years from date of payment
 Tax Liens – Unpaid – No limitation
 Collections – 7 years
 Other lates and adverse information – 7 years
Credit Repair Companies:
Beware of Credit Repair! The Website www.FTC.gov is a good source for detailed information
about the dangers associated with some credit repair companies

Improving your Credit
The loss of a job, a divorce, and unexpected medical expenses can happen to anyone, and they
can put an extremely large hardship on your finances. As a result, you may be stuck with a
number of unpaid bills, and high interest rates on existing loans. All of these things will affect
your credit and make it difficult to obtain a loan at a decent interest rate. With a little bit of hard
work and diligence, you can improve your credit file and get the loan that you want. Below are
some tips to help get you started:
Stop the bleeding
If you have credit card debt spiraling out of control, the first thing you need to do is stop using
the cards. If you have high interest rates on these cards that make it difficult to make payments,
call your credit card companies. They want you to keep making payments, so you can usually
negotiate lower interest rates and better payment plans. Ask about low-interest balance transfer options, so you can move debt from a high-interest card to one with a lower rate. Lower interest means lower payments.
Budget
Put together a budget with your monthly expenses. Look for places to eliminate or reduce
spending. Most importantly – stick to your budget. If you can’t afford to buy something that you
don’t need, don’t buy it!
Seek Credit Counseling
If you feel that your debt is so far out of control that you’ll never improve it, consider enlisting
the aid of a non-profit credit counseling agency. There are three organizations that can provide
you with the name of a reputable counselor in your area:
 National Foundation for Credit Counseling (NFCC)
 The Department of Housing and Urban Development (HUD)
 Association of Independent Consumer Credit Counseling Agencies (AICCCA)
These groups can help you regain control of your financial life by setting up payment plans,
negotiating with your credit card companies, and offering advice and training on how to avoid
situations such as this in the future.

Divorce: Things to keep in mind
Going through a divorce is one of the most painful experiences a person can have. Not only does it completely turn your personal life upside down, it also affects your financial life. Just because you are getting a divorce does not free you from the financial obligations you had while you were married. The good, bad and ugly details of the credit history you and your spouse compiled while together stays with you after a divorce. Any debt entered into jointly while married is still the responsibility of both parties regardless of who is actually paying the debt. So, if your exspouse fails to make a mortgage payment on a house in both your names, it will affect your credit rating. Before your divorce is finalized, look at all of the debts you and your spouse have. Try to come to an equitable solution to getting these paid off since it is one thing that you may always share even if you are no longer together.

Identity Theft
With the ever-increasing advancements in technology, it has become easier than ever for thieves to steal someone’s identity. By getting a credit card, social security or driver’s license number, a person can create a full set of false documents and use them to purchase anything from a watch to a home. The victim usually ends up with a ruined credit rating and horrible financial obligations that may take years to clear up. While this sounds scary, there are several easy steps you can take to prevent potential identity theft from happening to you:
Keep your personal information secure. Never give out personal information on unsolicited
phone calls or unsecured Web sites. Never click on unsolicited e-mails.
Check your credit report once a year, and check your accounts to make sure everything is
correct. If you have accounts on your report that are unknown, you can file a dispute with the
bureaus to get them removed.
Check your credit card statements every month. If there are any unfamiliar charges on the
account, contact the card company for more information. If you believe your information has
been stolen, contact each of the three credit bureaus and put a fraud watch on your reports. This will make it much more difficult for a fraudulent person to get cards in your name.

Obtaining your credit report
Under federal law, every person is entitled to one free credit report from each of the three major credit bureaus every year. A resource has been created to allow access to this information for everyone. Go to www.annualcreditreport.com, select your state, complete the form and you will have access to all of the reports online. Note that your FICO score is not included with this information Disputing inaccurate information – working directly with the credit bureaus Advise the bureau(s), in writing, what information you think is inaccurate. Include copies (NOT originals) of any documents that support your position. In addition to providing your complete name and address, your letter should clearly identify each item in your report you dispute, state the facts and explain why you dispute the information, and request that it be removed or corrected. You may want to enclose a copy of your report with the items in question circled. Send your letter by certified mail, “return receipt requested,” so you can document what the credit reporting company received. Keep copies of your dispute letter and enclosures. The bureau(s) must investigate the items in question — usually within 30 days. They also must forward all the relevant data you provide about the inaccuracy to the creditor or lender that provided the information. After the information provider receives notice of a dispute from the bureau(s), it must investigate, review the relevant information, and report the results back to the credit reporting company. If the information provider finds the disputed information is inaccurate, it must correct the information and notify the bureau(s) so they can correct the information in your credit file.
When the investigation is complete, the bureau(s) must give you the results in writing and a free
copy of your report if the dispute results in a change. This free report does not count as your
annual free report