Give Yourself Some Credit!

As I do every year, I was checking my credit report to make sure I was keeping tabs on my financial world and it made me think that it might be appropriate to share a little credit advice with any of you that might be interested.

Checking credit reports seems to be a big marketing hub lately and a lot of people seem to get confused about what to do. It doesn't help that advertisers seem to be purposely convoluting the system by making you think you're getting hooked up to your legally mandated annual credit review. You know the ads I'm talking about. . . there's the annoyingly catchy jingles from the freecreditreport.com people that get stuck in your head for hours and then there's good old Ben Stein whose reputation on and off-screen as a no-nonsense, economically savvy intelligence icon almost makes you believe that you couldn't be steered wrong by his credit advice. Both ads claim their services are free . . . which, they are . . . at first. The second half of the scheme comes a month later when you have to remember to track down a cancellation number, navigate through a murky automated customer service line and cancel the month-to-month services to which you subscribed . . . and hopefully it's all resolved before your first payment kicks in.

Maybe you know what I'm talking about because you got sucked in at some point. No big deal; life goes on. Maybe this post will help clear a little bit of the fog and start things off in a better direction.

What types of credit are there?

-Mortgages – Loans for a house or property. The loan amount is specified at the time of sale. Property usually becomes more valuable over time and the loan decreases as you make payments so the owner often ends up with more value in the property than what is owed in the loan; this is called equity.

-Auto Loans – Loan for a vehicle. The loan amount is specified at the time of sale. Vehicles often decrease in value as the loan is paid off, so it is important to be aware of the value of the car versus the amount of the loan.

-Installment Loans - A loan for one specific sale such as a computer, furniture, tires, etc. The loan amount is specified at the time of sale. Many of these sales come with an offer of zero interest for months or even years at a time. If you are considering this type of loan, be sure to read the fine print – often if the item is not paid off by the zero interest time limit, the interest from the entire loan amount and over the entire loan period will be added to the principle balance of the loan.

-Revolving Accounts – these are credit cards such as VISA, MasterCard, Amex, etc, as well as store credit cards or lines of credit like a card at Nordstrom, Sears, Old Navy, Kohls, Lane Bryant, etc. These accounts are set up with a credit limit. Some cards like VISA and MasterCard are accepted based on whether the retailer will accept this form of payment, whereas store cards such as Kohls or Lane Bryant can only be used for payment within that chain of retailers.

What is a credit report?

A credit report is a lot like it sounds. It’s a record of your credit history. There is always a charge to access a credit report and it can be accessed by anyone who has your name, social security number, birth date and address. Usually this will be a bank, money lender or rental property manager that you’re applying to for a credit account or rental property. Sometimes this information is accessed by companies trying to offer you credit, like the ones that send you credit card offers in the mail.

Credit reports contain a full disclosure of your credit history including how often you make your monthly payments, if you make the payments on time, how many accounts you have, etc. The point of companies requesting this report is so that they can decide whether or not to lend you money or expect regular monthly payments from you; a credit report is supposed to give them insight on how seriously you take your finances.

The information found in these records are collected by credit bureau agencies from the people who give you your mortgage, credit cards and other credit lines. The credit bureaus then compile and compute all the data about you and output it into a credit report with a tidy, compact credit score.

There are four major credit bureau agencies in the U.S.; they are Experian, Equifax, TransUnion and Innovis. Most credit reports come from the first three companies and lenders will often pull a your credit report from more than one company to ensure accuracy in reporting.

Just FYI, the catchy, free credit jingles are actually from Experian, one of the major credit bureaus . . .

What's on a credit report?

-One Credit Score (usually a FICO or Fair Isaac Corporation score) will appear on your report for every bureau that reports. A tri-merge report (a report generated from all the info provided by 3 bureaus at once) will usually have 3 scores. Most lenders will use the middle (or median) score if there are three.

-Contains information on any and all credit accounts in your name and includes:

• exactly what type of credit account it is (i.e. installment, revolving, etc)
• the name of the company the credit line is with
• the account numbers
• the amount you owe
• the starting amount of the loan (or the limit if it’s a revolving account)
• the monthly payment amount
• how long the account has been open

-Late payments

• If the payment was more than 30, 60 or 90 days late
• How many times and in which months the payment was late

-Outstanding collection payments, property liens, bankruptcies, foreclosures, etc. - It is important to note that negative records usually continue to appear on your report even if you have paid them off or fulfilled the obligations.

-Old addresses, phone numbers, employment information and any aliases

-A list of other companies that have requested a copy of your credit report within the last year or so.

-Sometimes a credit report can verify or falsify citizenship based on information collected by social security numbers.

Things NOT found on a credit report (unless they’re sent to collections):

(cell) phone bills, utility bills, medical bills, grocery store advantage cards, etc.

What helps or hurts my credit?

Credit is “good” only as far as it helps to prove to a lender that you are a responsible borrower. These are the things that can effect your credit score and the things that most lenders will look at to decide if you are worth the risk:

POSITIVE INDICATORS

-At least one credit line that has a history going back 2+ years.

-A total of three or more accounts in your history. Anything less will usually not be enough to indicate your risk, good or bad.

-A FICO score of 650 or higher. - 650=fair, 680=good, 720=really good, 750=excellent

-On-time payments.

-Payments in excess of the minimum requirement. When you pay more than the minimum the debt is resolved much faster and because of the way interest works, over time, the overall amount you end up paying toward the loan is decreased.

-Maintaining low balances on revolving accounts.

NEGATIVE INDICATORS

-Any late payments, especially if they are over 60 or 90 days. Payments are most often deemed "late" when they're overdue by 30 days. On a mortgage, most payments are due on the 1st and the lender allows until the 15th to pay. Usually the payment is considered "late" if it is not paid by the last day of the month.

(It is always a good idea to call your lender before a payment is late to discuss leniency. Some lenders will not report a 30 day late if you communicate your circumstances and have proven to be responsible in the past.)

-Having too many revolving accounts open, especially if you keep high balances that are close to the card's limit. Just stay away from too many credit cards!!

-Bankruptcies! Depending on the lending guidelines, a bankruptcy within the last 7 years will usually be an automatic disqualification for a decent mortgage.

-Collections, liens, defaults, etc. Often a lender will overlook these if they have been paid, but just know that even paid collections, liens and defaults remain on your report; they will appear with a zero balance, but will take a long time to be permanently removed.

-Too many inquiries into your credit. If a bank is thinking of lending you money, but sees that you have had your credit pulled multiple times in the last few months, they may be concerned that you have a new and undisclosed credit account that is not yet being reported.

Curious about your own credit report?

Credit bureaus were mandated a few years back to allow individuals to monitor their credit report. You can check your report every year for free at annualcreditreport.com.

It really is free, but can be a little tricky to navigate as the companies still try to bait you with offers that you may mistake as part of the free service . . . just read the fine print as you go and you'll be fine.

Also, have your credit card, bank statements and other personal information accessible as the site asks very detailed and specific information about your different accounts in order to verify you're really who you say you are!

Why is it important to check your credit report every year?

Well, there's a few reasons . . . Sometimes you'll find that a forgotten power bill or library fee was sent to collections and for one reason or another, you didn't get the notification. By checking your report before it's time to get a loan or be credit-approved, you have the chance to clear up any pesky outstanding items.

Another reason to check your report is to find any fraudulent use of your credit without your knowledge a.k.a. identity theft! These types of issues cause the most havoc with your credit score and your report! The sooner you catch these problems, the better. Again, knowing a problem exists before you're trying to qualify for a loan will give you time to appeal the fraudulent reporting and allow for some time to let your score and report bounce back to normal.

Making and clearing up changes on your credit report can be a process; sometimes requiring a fair amount of time and effort. Often, when appealing to remove fraudulent credit lines, liens, collections, etc. it can take the credit bureaus 90 days to completely finalize these changes. If you need to rush this process, there are companies who can help, but they'll also charge you a small fortune depending on how much is going on with your report and how fast you need it.

Last but not least, start checking your children's credit report annually! Identity theft of children and the deceased are the best find for credit perpetrators because these go the longest without detection. Although it'll take you some extra time to scope out each child's credit report every year, it can make a world of difference if scams are caught along the way rather than when they go to get their first credit card or student loan only to find years worth of defaulted debts and a subprime credit score.

And on that note . . .

Is it important to know your credit score?

The selling point of most agencies to view their report is that you can see your credit score, which you will not see on the annualcreditreport.com site. The truth is that knowing your score isn't a bad thing, but my personal opinion is that it's not necessary.

Your score reflects whatever you see on your report. It's gauged by so many things that every person's credit history comes up with a slightly different score. If you know that your report is accurately reporting your credit lines, if you pay your bills on time and don't have credit beyond your ability to pay, then you really shouldn't have to worry about your score all that much.

A credit score is constantly fluctuating, and different bureaus almost always show a small range in reported scores, so if you're looking up a number to make sure you barely qualify for a lending program, there's no guarantee the number pulled by the lending agency will get the number you were counting on.

The score is the means to the end. Work on the goal of being fiscally savvy, paying your bills on time and living within your means and more likely than not, your credit score will fix itself. In the meantime, check that your report is reflecting your good decisions and your credit will start doing you favors.

So there you have it. Credit 101.

Just for kicks, I'm adding a spoof video from the legit free credit report people. Enjoy.