Why Credit Matters
Everyone needs to borrow money at some time, and it’s especially critical when buying property. Your ability to borrow, and do so at a competitive interest rate, depends on your credit history. Your financial transactions are constantly being monitored by credit bureaus who maintain your credit report. Do you pay your bills on time? What are your credit card balances? Answers to these questions are summed up in reports that lenders use to decide whether to loan you money. Lenders need these tools to predict how risky you are as a borrower. For the convenience of lenders, your creditworthiness is often boiled down to a three-digit number! Awareness of your credit history, understanding how it’s created, who maintains it, and how your actions influence it, all of this is vital to your financial well-being.
So before applying for a mortgage, find out what others are saying about you. They’ve got your number and you should too! Take control of your finances and make sure your credit history is accurate and not standing in the way of your goals.
Your Credit Report
Your credit report summarizes your creditworthiness by listing your debts and payment history. Three consumer credit bureaus independently maintain your credit history by collecting data from banks and creditors. Each bureau creates its own report, so unfortunately, you need to monitor all three. The bureaus are TransUnion, Experian and Equifax. You can visit their websites for more information:
Obtain Your Free Credit Reports
Because monitoring your credit is so important, the government passed a law enabling you to access free copies of your credit reports from all three bureaus once every twelve months. Just go to www.annualcreditreport.com and rest assured that the site is secure and confidential. Print copies of your reports and review them for accuracy.
Answers to frequently asked questions about credit reports are available from the government at http://www.ftc.gov/bcp/conline/pubs/credit/freereports.htm.
Beware of ads offering free credit reports. There are usually strings attached or hidden fees. Use the government-sponsored website and you’ll be assured that it’s truly free.
As you review each report, pay attention to the following:
- Check for errors in name, address, Social Security Number, zip code, all the small details
- Accounts should not appear twice, even in separate sections
- Which accounts are marked "Open" versus "Closed"? Accounts you closed should be marked "Closed By Consumer." Otherwise, it might be assumed that the account was closed by a creditor, and that’s a mark against you
- Highlight any data marked “past due” and verify its accuracy
- Check all data regarding debt balances, late payments, joint versus single accounts, credit limits, etc.
- Question any items that you don’t recognize
- Negative information more than 7 years old (or a bankruptcy more than 10 years old) should generally not appear on the report
- Is there information missing that would help your credit history?
The "Account Profile" section on the report contains a summary rating for each account: "Positive," "Negative" and "Non-rated." "Non-rated" means that you’ve had a few late payments. Make sure all these ratings are accurate.
If You Discover Errors
Under the Fair Credit Reporting Act (FCRA), you have the right to challenge all inaccurate, misleading or incomplete items on your credit report.
You must put your disputes in writing and the credit bureau must investigate each one, usually within 30 days. In your letter, be sure to state that you are disputing your data, and mail it to the correct address, since some bureaus have specific address for disputes. You’ll find various dispute letter templates on the Internet, which can save you time.
Information found to be inaccurate, incomplete or unverifiable must be removed by the credit bureau. When the investigation is done, the bureau must give you the written results and a free copy of your credit report, if the dispute results in a change on your report.
Your Credit Score
Your score is a number, and a higher score means better credit. The number is derived using a complex mathematical model. It summarizes in three digits your credit risk – that is, the likelihood that you will make timely payments to repay what you borrowed. Each of the three credit bureaus scores credit differently. Equifax, for example, provides what they call a "FICO" score ranging from 300-850. (For more information, go to www.myfico.com.) The median FICO score in the US is 723 (as of April 2005). There is no single "cut-off" score used by lenders to deny credit. Each lender uses the score differently in its decision making, taking many factors into account.
Generally, you can’t get your credit score for free, although some mortgage lenders will provide it to you during the financing process. You can purchase it from one of the three credit bureaus (even at the same time you download your reports from www.annualcreditreport.com). Expect to pay about fifteen dollars.
- Payment History – Weight: 35% — To boost score: pay bills on time
- Amounts Owed – Weight: 30% — To boost score: pay down revolving credit (e.g. credit cards)
- Length Of History – Weight: 15% — To boost score: maintain accounts for a long time (your average is what counts). If you need to close an account, close the newest accounts first
- New Credit – Weight: 10% — To boost score: don’t open several new credit accounts in a short time period
- Types of Credit (Credit Mix) – Weight: 10% — To boost score: maintain a variety of types of accounts (retail accounts, installment loans, mortgages)
Repairing Your Credit
First of all, beware of companies claiming they can repair your credit for you, for a fee. These "credit clinics" generally can’t do anything for you that you can’t do yourself.
You have various options depending on the circumstance, but generally you’ll need to send certified letters and call creditors to persuade them to modify or delete the information they’ve submitted (or will submit) to the credit bureaus. For late payment history, write to the creditor and give specific reasons why payments were late. Wait 30 days for a response, and follow up with a phone call if there’s been no response or no change to your credit report.
For current bad debts, contact your creditors directly (as opposed to a collection agency) and negotiate repayment plans. Suggest a payment plan in exchange for a corrected entry on your credit report. Explain the payment plan in a letter and be sure to make good on your promises.
Lastly, if your overall credit is poor or you’ve had a bankruptcy, write a statement (100 words or fewer) to the credit bureaus stating the reasons. Provide specific, understandable reasons, not excuses. Demand that your statement will be included in any credit report provided to potential lenders, since that is your legal right.
Identity theft is one of the fastest-growing crimes in America. To avoid being a victim, monitor your credit reports as frequently as possible. For a small fee, you can buy identity theft safeguard services from one of the three credit bureaus. Mark your calendar to obtain your free reports every twelve months, and make a habit of reviewing them. Your financial future may depend on it.
Tips to Remember
Here are some final words to the credit wise:
- Pay bills on time, because late payments can have long-lasting consequences
- If you’ve missed payments, get current and stay current
- Apply for and open new credit accounts only when necessary
- Keep balances low on credit cards
- Pay off debt rather than moving it between credit cards