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Credit
If you have ever had a loan for
some money to buy something such as some furniture, then you were
given credit. In this situation, you are using someone else's
money to make the purchase with your promise to repay the money to the
person that loaned it to you.
A loan usually includes both
principal and interest. Principal is the money which goes toward
paying back the amount you borrowed. Interest is the amount of
money that goes to the person who loaned it to you. This is
based on the interest rate which represents the lender's cost
including your risk as a borrower. Your risk as a borrower is
based on your credit history as documented in your credit
report. Good credit means that you make your loan payments on
time and repay your debts as promised. Good credit is important
because it makes you a more desirable credit risk for future loans.
Good Credit
Good credit is needed to borrow a
large sum of money such as for the purchase of a home, but
"perfect" credit is NOT necessary. If you don't have
good credit right now, don't be discouraged. There are some
simple steps that can be done over a period of time that will leave
you in good credit standing. You will be better off if you
improve your credit before you apply for a home mortgage loan or other
large purchase. This is important because if you have a habit of
paying your bills late, or have a lot of debt, you may not qualify
for a mortgage loan. Or the lender may give you a loan, but with
a larger down payment requirement or at a higher interest rate.
Credit Report
A credit report is a record of how
you are paying or have paid back your loans or credit card debt.
It shows how much debt you have, how promptly you made your payments,
or if you haven't paid back some loans at all. Credit reports
are compiled by national credit-reporting agencies:
Typical credit reports contain four
different types of information:
- Identifying Information -
name, residential history, phone number, SSN, DOB, employment
history.
- Credit Information - Loan
dates, credit limits, loan amounts, balance, monthly payments,
several years worth of payment history, people responsible for
payment of loans, late payments, skipped payments, accounts turned
over to collection agencies, and repossessions.
- Public Record Information
- bankruptcy records, foreclosures, tax liens for unpaid taxes,
lawsuits, overdue child support in some states.
- Inquiries - names of
those who obtained a copy of your credit report and how often you
applied for credit in the last two years.
Lenders rely on this information
about your credit history to judge how you may handle your loan
repayment in the future. It is a good idea to order a copy of
your credit report each year and review it carefully. You can
order a copy of your credit report from any of the national
credit-reporting agencies listed earlier.
Credit Report Errors
Credit reports should be accurate,
but it is important to ensure accuracy once a year. These
inaccuracies may hurt your chances of obtaining credit in the
future. Fortunately, you have the right to have any errors
corrected at no charge to you. Here are some simple guidelines
to correct your credit report:
- Check the credit report for
instructions on how to correct errors.
- Call the credit reporting agency
to correct the error. This is sometimes all that is
necessary.
- If additional information is
required to correct the error, the credit reporting agency will
tell you what is needed.
- Explanation letters are often
used to document the problem. The credit reporting agency
MUST investigate your complaint within 30 days and report its
findings. If the error is validated, the credit reporting
agency must ensure that the new information is given to the other
credit reporting agencies to correct their information.
- Sometimes it may be necessary to
resolve the dispute directly with the creditor. You can then
ask the creditor to send a correction to your file with the credit
reporting agency.
- Finally, you have the right to
provide up to 100 words of explanation that will show up on your
credit report for unresolved disputes. The credit problem
will remain on your credit report, but so will your explanation.
Credit Scores
A credit score is used to predict
how likely an person is to repay a new loan based on overall
experience with many other consumers. This is a quick and
convenient way for creditors to look at all the information on your
credit report and make a fair decision about your credit.
A computer model is used to assign
positive and negative influences to your overall credit score.
On-time payments over time is a positive instance and charging the
maximum available credit is a negative instance. This instances
all add up to create your overall credit score.
A "good" credit score
depends on the credit scoring model and the preferences of the
lender. One particular computer credit scoring model might have
a range from 300 to 900; the higher the number the better.
Additionally, each lender can decide on the credit score range that
will be considered to be a good risk or a poor risk. Ask your
lender what your credit score means relative to the final decision.
Credit scoring provides a level of
protection for you. This automated method of reviewing and
judging your credit can be performed without regard to age, health,
race, religion, gender, national origin, marital status, income, and
employment.
Finally, your credit score can be
improved. If you are denied credit, you have the right to
receive a written explanation of the reason for denial. Then you
can make a plan to address these issues. As you improve your
credit over time, your credit score will also improve.
Take Control of Your Credit
Here are some steps you can take on
your own to improve and maintain good credit:
- Pay loans first
- Pay off credit cards each month
- Keep in mind that credit cards
are loans
- Don't charge the maximum on your
credit card
- Only apply for and keep the
credit cards you need
- Choose a credit card with a low
interest rate and no annual fees
- Pay more than the minimum each
month on your credit cards
- Close the accounts on credit
cards that you don't need
- Use your credit cards wisely to
establish credit
- Actively cut your expenses and
increase your income
- Track your bills
Getting Help With Your Credit
If you are starting to realize that
you may need help to get your credit under control, the following are
some suggestions:
- Call your creditors and keep
them informed
- Consider the help of nonprofit
credit-counseling organizations
- Avoid "credit-repair"
companies
Bankruptcy, Foreclosure,
Repossession
If you have not paid a loan and
have had a vehicle repossession, a home foreclosed on, or have
declared bankruptcy, it will have a huge effect on your ability to get
new credit. The information about a foreclosure or repossession
can stay on your credit report for seven years. A bankruptcy can
stay on your credit report for up to 10 years.
If you are in one of these
situations and want to apply for a new loan, there are several things
you can do. First, you might write a letter to the new lender
explaining why the problem occurred. For example, perhaps you
were seriously ill, recently divorced, or lost your job.
Another suggestion is to wait a few
years before you apply for a new loan. The length of time you
must wait will depend on the lender's rules and the size of the loan
for which you are applying. During that time, make a strong
effort to reduce your debt and pay your bills on time. When you
apply for a loan again, make sure the lender knows the steps you have
taken to improve your credit.
Create Credit Where There is
None
If you typically use cash to pay
your bills and haven't borrowed money on loan, you may have never made
a loan payment. This can be a problem when you get ready to buy
a home and apply for a mortgage loan. The lender will want some
evidence of your ability to repay the loan.
In the absence of a credit history,
you can still create a nontraditional credit history based on your own
report that shows a lender that you have paid your rent, telephone,
car insurance, medical, and utility bills on time each month.
Here are suggestions for building a
nontraditional credit history:
- Keep copies of bills you pay,
including your rent, telephone, electricity, cable television, gas
and insurance.
- Keep copies of the canceled
checks used to pay your bills
- Ask your landlord, the telephone
company, and the gas and electric company to write you a
letter. Ask them to include how long you have been a
customer and how well you have paid your bills every month
- Show two years of this
documentation to your lender
- Use credit cards wisely to help
establish credit
- When married, ensure that credit
cards are in both your names and that you are both responsible for
the payments
- Ask a nonprofit
credit-counseling service or housing-assistance agency for help in
preparing a nontraditional credit history