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.
To avoid being denied credit, you need to find ways to improve your credit scores. Some tips to help you include the following.
Pay down your credit cards. Paying off your installment loans (mortgage, auto, student, etc.) can help your scores, but typically not as dramatically as paying down or paying off revolving accounts such as credit cards.
Lenders like to see a big gap between the amount of credit you’re using and your available credit limits. Getting your balances below 50% of the credit limit on each card can really help.
While most debt experts recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.
Use your cards lightly. Racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month.
What’s typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.
You typically can increase your scores by limiting your charges to 30% or less of a card’s limit. If you’re having trouble keeping track, consider using a check register to track your spending, logging into your account frequently at the issuer’s Web site, or using personal finance software like Quick Books or Quicken, which can download your transactions and balances automatically.
Check your limits. Your scores might be artificially depressed if your lender is showing a lower limit than you’ve actually got. Most credit card issuers will quickly update this information if you ask.
If your issuer makes it a policy not to report consumers’ limits, however, as is the usual case with American Express cards, the bureaus typically use your highest balance as a basis for your credit limit.
If you consistently charge the same amount each month, say $2,000 to $2,500, it may look to the credit scoring software like you’re regularly maxing out that card.
You could go on a wild spending spree to raise the limit, but a better solution would simply be to pay your balance down or off before your statement period closes. Check your last statement to see which day of the month that typically is, then go to the issuer’s Web site about a week in advance of closing and pay off what you owe.
It won’t raise your reported limit, but it will widen the gap between that limit and your closing balance, which should boost your scores.
The older your credit history, the better your scores will be. But if you stop using your oldest cards, the issuers may stop updating those accounts at the credit bureaus. The accounts will still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts. That’s why we recommend that you that use your oldest cards every few months to charge a small amount and paying it off in full when the statement arrives.
If you’ve been a good customer, a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing, and your chances for a “goodwill adjustment” improve the better your record with the company. But it can’t hurt to ask.
A longer-term solution for more severe accounts is to ask that they be updated. If the account is still open, the lender might erase previous delinquencies if you make a series of 12 or more timely payments.
Dispute old negatives. Say that dispute with your dentist over an unfair bill a few years ago resulted in a collections account. You can continue protesting that the charge was unjust, or you can try disputing the account with the credit bureaus as “not mine.” The older and smaller a collection account, the more likely the collection agency won’t bother to verify it when the credit bureau investigates your dispute.
Some consumers also have had luck disputing old items with a lender that has merged with another company, which can leave lender records a real mess.
Dispute significant errors. Your credit scores are calculated based on the information in your credit reports, so certain errors there can really cost you. But not everything that’s reported in your files matters to your scores.
Here’s a list of negative items that’s worth correcting with the bureaus:
• Late payments, charge-offs, collections or other negative items that aren’t yours.
• Credit limits reported as lower than they actually are.
• Accounts listed as “settled,” “paid derogatory,” “paid charge-off” or anything other than “current” or “paid as agreed” if you paid on time and in full.
• Accounts that are still listed as unpaid that were included in a bankruptcy.
• Negative items older than seven years (10 years in the case of a bankruptcy) that should have automatically fallen off your reports.
You actually have to be careful with this last one, because sometimes scores actually go down when bad items fall off your reports.
Some of the negative items that you probably shouldn’t worry about includes:
• Various misspellings of your name.
• Outdated or incorrect address information.
• An old employer listed as current.
• Most inquiries.
If the misspelled name or incorrect address is because of identity theft or because your file has been mixed with someone else’s, that should be obvious when you look at your accounts. You’ll see delinquencies or accounts that aren’t yours and should report that immediately.
However, if it’s just a mistake by the credit bureau or one of the companies reporting to it, it’s usually not much to worry about.
Two more items you don’t need to correct:
• Accounts you closed listed as being open.
• Accounts you closed that don’t say “closed by consumer.”
Closing an account can’t help your scores, and may hurt them. If your goal is boosting your scores, leave these alone. Once an account has been closed, though, it doesn’t matter to the scoring formulas who did it, you or the lender. If you messed up the account, it will be obvious from the late payments and other derogatory information included in the file.
Other actions to beware when you’re trying to improve your scores:
• Asking a creditor to lower your credit limits. This will reduce that all-important gap between your balances and your available credit, which could hurt your scores. If a lender asks you to close an account or get a limit lowered as a condition for getting a loan, you might have to do it, but don’t do so without being asked.
• Making a late payment. The irony here is that a late or missed payment will hurt good scores more than bad ones, dropping 700 plus scores by 100 points or more. If you’ve already got a string of negative items on your credit reports, one more won’t have a big impact, but it’s still something you want to avoid if you’re trying to improve your scores.
• Consolidating your accounts. Applying for a new account can lower your scores. So, too, can transferring balances from a high-limit card to a lower-limit one or concentrating all or most of your credit-card balances onto a single card. In general, it’s better to have smaller balances on a few cards than a big balance on one.
• Applying for new credit if you already have plenty. On the other hand, applying for and getting an installment loan can help your scores if you don’t have any installment accounts or you’re trying to recover from a credit disaster like bankruptcy.
By the way, all these suggestions work best if you have poor or mediocre scores to begin with. Once you’ve hit the 700 mark, any tweaking you do will tend to have less of a positive impact.
And if your scores are in the “excellent” category, 760 or above, you’ll probably be able to eke out only a few extra points despite your best efforts. There’s really no point, anyway, since you’re already qualified for the best rates and terms.
A final recommendation to improve your chances of not being denied credit is to join a Credit Union.
Many are locally owned and often are more liberal to granting you credit than a traditional national bank.
To bank with a credit union, you must first have to qualify to be a member. Many credit unions qualify you as a member if you “live, work, or worship” in the town where they are located.
After becoming a member, you pay a “share” into the credit union, which is simply the money you agree to let them use while you’re a member.
So what exactly is a credit union? In the most overly basic sense, a credit union is an institution that is administered by its members for the purpose of pooling together money from these very members. And rather than making a profit, the credit union gives that money back to its members in the form of better interest rates. To put it simply, it’s a non-profit bank which means it has no shareholders, no profit making bank fees. And when was the last time you heard of a credit union in financial trouble?
One important thing to note is that with a credit union, your money isn’t insured by the FDIC. Instead, it is insured by the National Credit Union Association for up to $250,000. That’s the same amount covered by the FDIC.
Most people understand that low credit scores will translate into higher mortgage and credit card interest rates. But few realize there are plenty of other insidious ways that low scores can add to a person’s payment costs.
CAR INSURANCE
The fact that some companies base auto insurance premiums on credit scores comes as a surprise to most of the clients who we help.
In fact, according to a recent survey by Conning & Co., 92 of the 100 national and large insurance companies use this avenue. Some only apply it on the initial application for insurance, others pull your score every three years. Thirty-eight percent of insurers who responded to the survey use credit to determine eligibility into different underwriting programs. Fifty-two percent use it to determine both eligibility and rating classification.
The bad news is that consumers with bad credit scores pay between 20 percent and 50 percent more in auto insurance premiums than those with high scores. That is a substantial difference when you consider all the insurance policies most people buy each year for multiple personal and recreational vehicles they own.
This type of credit profiling is referred to as “Tiered Pricing” in the insurance industry in which different levels of descending credit scores translates to higher premiums. Basically, the insurance industry has correlated folks with poor credit scores to higher risk clients.
Homeowners insurance policies also are subject to this “Tier Pricing”.
CAR LOANS
Recently, the Consumer Federation of America (CFA) announced that its investigation into American Honda Finance Corporation revealed dealers in this car manufacturer’s network charged different markups to customers from different credit tiers. Those in the least creditworthy tier could face prices that were 3.5 percentage points higher than those with higher scores.
Although they have supposedly capped their markups at 2.5 percent, General Motors Acceptance Corporation and Ford Motor Credit Corporation take the same approach.
Did you ever wonder when you walked into a Automobile Showroom why the salesman wants to get your Social Security Number? So that his Sales Manager call pull your credit report and then they can decide what to charge you for the car you want to buy.
People with poor credit usually pay an interest rate between 19 percent and 26 percent on a new car purchase, compared with the 6 percent to 7 percent average.
I don’t know about you, but if I had to pay 26% interest on a car loan, I would start checking local bus schedules!
People don’t equate that into dollars and cents. However, that can be a difference of $100 to $200 a month on your car payment. It certainly adds a lot more interest to the balance to pay off that new car, especially on a longer term seven year loan.
Some Banks have as much as a 10 per cent difference in car loans they approve, depending on that all important credit score.
It always comes down to how the Lenders see the car loan borrower as a risk that they can assess and determine.
EMPLOYMENT
Most employers today take your credit scores very seriously. The fear is that credit problems at home will create stress and distraction at work. In turn, it will negatively affect your job performance. If you are their employee, will you be getting phone calls from collectors at work? Will the employer have to garnish your wages?
I have one client who was offered a 25% raise to switch to another company. She was told all she had to do was interview with a Vice President and she had the job. What they didn’t tell here was that after the Vice President approved her for the position, the Personnel Manager would check her credit. They found that she had some credit problems due to her husband being laid off work for six months the past year. This caused them to be late with some payments and drastically decreased their scores. She was not hired for the higher paying job!
Today, 70 percent of companies will check credit before they decide to hire a prospective employee. Larger companies are more likely than small ones to check your credit.
HOUSING
Rental Property Owners and their Management Companies will reject tenant applications with poor credit scores as they associate low scores with tenants who will either pay their rent late or not at all. No Landlord wants a tenant like that as it will cost them a lot of money for a legal eviction. And, the Landlord depends upon collecting the rent on time so that he can pay his mortgage on the rental to his Bank.
UTILITIES
Most families who apply to Utility Companies for service when renting or buying a home are shocked that their credit scores are checked. Poor credit scores usually require a much higher deposit paid upfront before the telephone company will connect your line or the electric company will turn on your lights in the new house.
CELL PHONES
These providers increasingly rely on credit scores to sort the good risks from the bad credit. And bad credit definitely doesn’t get the best deals at Verizon. Instead of contract plans that offer more minutes for your dollar and come with a wider selection of phones, those who do not make the credit cut must use prepaid cards for cell phone service.
DOCTORS
I had a client who was considering laser eye surgery, the doctor immediately pulled her credit score to see if she qualified for his monthly payment plan. Otherwise, the cost of the procedure was due before surgery was scheduled.
This also happens with Plastic Surgeons, Oral Surgeons, and Orthodontists for the kids’ braces.
SCHOOL LOANS
I know a son of a friend of mine who was turned down for a student loan to attend Medical School because of his poor credit score.
He isn’t alone. I have also watched other individuals delay their college plans when their scores disqualified them from university and federally funded loans. And in this case, it isn’t a matter of having to pay a higher interest rate because of poor scores.
It’s black and white. You either get financing or you don’t. Poor credit getting in the way of achieving your educational goals is a high price to pay.
MARRIAGE
Most folks think that a married couple has a combined credit score. Nope. You can’t marry your way out of a bad FICO rating, and many times a large difference in credit scores between partners causes too much tension for the marriage to survive. I have personally known couples who called the wedding off when a poor credit score was disclosed.
Can you imagine your fiancé telling you, “Sorry, honey, I love you, but until you get your credit score up to 700, the wedding is off.”
For example, let’s say one of the engaged parties own a home. If the owner spouse dies, the home and mortgage become part of the estate. If the surviving spouse wants to take over the mortgage, he or she needs to qualify with credit and income to the Bank holding the home loan. Most people rely on the fact that they’ll live to pay off the mortgage, so this isn’t a concern. Big mistake!
Unfortunately, more Americans are becoming very much aware that credit can affect most aspects of their lives. The need to have good credit today is not just an option, it is a necessity to be able to live a full and productive life.
People with poor credit scores will continue to be victimized by Banks, Employers, Landlord, Utility Companies, Doctors, and even a potential spouse unless they take action and get some help with their credit scores.
