How to Interpret Your Credit Report
HOW TO INTERPRET YOUR CREDIT REPORT
OK, so now you have your FREE credit reports and you are confused because there are an lot of numbers, abbreviations and terms you’ve never seen before.
Trade lines, charge-offs, collections, inquiries, Public Records, and you are trying to figure out how in the world can you interpret the information correctly?
Let’s start at the beginning, there are three major credit-reporting agencies in the United States:
Experian
TransUnion
Equifax
Everyone is entitled to a free copy of their three credit reports, one from each of the credit reporting agencies annually thanks to a 2004 Federal Law. You must request your free credit reports through a centralized source.
To order online, visit www.annualcreditreport.com.
By phone, call (877) 322-8228.
Or, you may complete the form on the back of the Annual Credit Report Request brochure, and mail it to:
Credit Report Request Service
P.O. Box 105281, Atlanta, GA, 30348-5281.
Each of the three reports will have different information because creditors subscribe to one or more of the three Credit Bureaus. Obtaining all three reports from each guarantees that you get all the information reported on your Credit by all your Creditors.
A credit report is basically divided into four sections: identifying information, credit history, public records and inquiries.
Identifying information is 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, the Credit
Bureaus leave it because it might mess up the link. Don’t be concerned about variations.
Other information might include your current and previous addresses, your date of birth, telephone numbers, driver license numbers, your employer and your spouse’s name.
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.
Next, you need to understand the language contained in credit card offers and statements. If you do not, this lack of knowledge will send you down the wrong path to more debt and higher interest rates. I want you to have a basic understanding of these frequently used credit card terms.
Average Daily Balance — This is the method by which most Credit Card Banks calculate your payment due. An average daily balance is determined by adding each day’s balance and then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by a card’s monthly periodic rate, which is calculated by dividing the annual percentage rate by 12. A card with an annual rate of 18 percent would have a monthly periodic rate of 1.5 percent.
If that card had a $500 average daily balance it would yield a monthly finance charge of $7.50.
Annual Percentage Rate (APR) — A yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans.
Balance Transfer — The process of moving an unpaid credit card debt from one issuer to another. Card issuers sometimes offer teaser rates to encourage balance transfers coming in and balance transfer fees to discourage them from going out.
Cash Advance Fee — A charge by the bank for using credit cards to obtain cash. This fee can be stated in terms of a flat per transaction fee or a percentage of the cash advance. For example, the fee may be expressed as follows: “5%/$10”.
This means that the cash advance fee will be the greater of five per cent of the cash advance amount or ten dollars.
The Banks may limit the amount that can be charged to a specific dollar amount.
Depending on the Bank issuing the credit card, the cash advance fee may be deducted directly from the cash advance at the time the money is received or it may be posted to your bill as of the day you received the advance.
The cost of a cash advance is also higher because there generally is no grace period. Interest accrues from the moment the money is withdrawn. Also, most Credit Card Banks limit your cash out amount to a percentage of your Total Card Limit.
Card Holder Agreement — The written statement that gives the terms and conditions of a credit card account. The cardholder agreement is required by Federal Reserve regulations. It must include the Annual Percentage Rate, the monthly minimum payment formula, annual fee if applicable, and the cardholder’s rights in billing disputes.
Changes in the cardholder agreement may be made, with written advance notice, at any time by the issuer. Rules for imposing changes vary from state to state, but the rules that apply are those of the home state of the issuing bank, not the home state of the cardholder.
Finance Charge — The charge for using a credit card, comprised of interest costs and other fees.
Floor — The minimum rate possible on a variable-rate loan or line of credit, after any initial introductory rate period. For example, on a credit card with the Prime rate as its index, no matter how low the Prime rate drops, the rate on the line may never decrease below the stated rate floor.
Grace Period — If the credit card user does not carry a balance, the grace period is the interest-free time a lender allows between the transaction date and the billing date. The standard grace period is usually between 20 and 30 days. If there is no grace period, finance charges will accrue the moment a purchase is made with the credit card. People who carry a balance on their credit cards have no grace period.
Minimum Payment — The minimum amount a cardholder can pay to keep the account from going into default. Some card issuers will set a high minimum if they are uncertain of the cardholder’s ability to pay. Most card issuers require a minimum payment of two percent of the outstanding balance.
Over-the-Limit Fee — A fee charged for exceeding the credit limit on the card balance.
Periodic Rate — The interest rate described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month. The daily periodic rate is the cost of credit per day.
Pre-Approved – A credit card offer with “pre approved” only means that a potential customer has passed a preliminary credit information screening.
A Credit Card Bank can still decline the customers it invited with “pre approved” junk mail if it doesn’t like the applicant’s overall credit rating.
Secured Card — A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments. It is used by people new to credit, or people trying to rebuild their poor credit ratings. You must make sure that the Bank will report your payment activity the Three Major Credit Bureaus.
Teaser Rate — Often called the introductory rate, it is the below-market interest rate offered to entice customers to switch credit cards or lenders.
Variable Interest Rate — Percentage that a borrower pays for the use of money, and which moves up or down periodically based on changes in other interest rates or financial indexes such as Prime, LIBOR, Cost of Funds, Treasury Bills etc.
Congratulations, now you are ready to open that next credit card offer or your statement with complete confidence because you know how to read and interpret them.
