Understanding
Your Credit Report
Recent studies have shown that ninety percent of Americans have
at least one credit card – and they are using that card – A
LOT!
The average family
carries a balance of between $7,000 and $10,000 on all their
credit cards. Over $1,000 per family goes on interest every
year. And that’s just the average – some people owe much
more!
Overall, Americans spend
over $1 trillion every year on their credit cards, and owe more
than $500 billion of it. If debt continues at the current rate,
then one family in a hundred will be forced into bankruptcy.
Over 90% of Americans’ disposable incomes are spent paying back
debts.
When you add credit card
debt to the regular bills we have to pay each month, which can
tax anyone’s budget. As a result, some bills go unpaid
and others are paid late.
Both of these instances
can damage your credit sometimes so much that you think there’s
no way you’ll ever be able to get out of debt and get credit
for something important like a home or a
car.
The truth is that you can
get out of debt and repair your credit nearly to what it was
before you had credit problems. It takes some time and a
little work on your part, but it IS
possible.
Loan approvals and such
depend on your credit score. That number is what
determines if you can get credit, what your interest rate will
be, and how much money potential lenders will give you. A
good median score is 750, but the higher your score is, the
more financially sound you are.
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While it’s
always a good idea to try and stay away from credit, not
everyone has a hundred thousand dollars lying around to
buy a home or twenty thousand to buy a car. Heck,
for some people, scraping together five thousand dollars
for a good used car is difficult. That’s why we
need credit. So we can buy that which we cannot
afford.
Where the trouble comes
in is when people begin to buy everyday items such as groceries
and clothing on credit cards. Then those bills begin to
get bigger and bigger until pretty soon, they’re paying the
minimum amount due which will take forever to pay off.
Plus, a lot of people just continue charging things even when
they have a large balance on their
account.
Your credit score defines
who you are to businesses and you want it to be as high as it
can be. It doesn’t matter how bad your credit is
now. There are ways that you can raise your credit score
no matter how low it is now. Don’t despair; just get
started – right away!
The very first step you
need to take when trying to raise your credit score is to
find out what your score is and what it means.
Legislation called the FACT Act was passed that allows
all Americans to get one free copy of their credit report
every year. This report lists all of your debts you’ve
had and your payment history on those
debts.
It will tell you where
you owe money, how much you owe, and how you pay (on
time, 30 days late, etc.). All of that information is
compiled together and then analyzed.
After the analysis, a
number is assigned to you as to what your credit fitness
level is. Potential creditors then look at your credit
score and decide if you are going to be able to pay back
the amount of money you are requesting to
borrow.
That’s the short version.
Actually, there is much, much more involved in
determining your credit score. However, what should be
important to you knows how to read your credit report and
how to raise that score so that you are able to get the
things you need. Remember that – the things you NEED, not
the things you WANT!
Let’s start with how to
get your credit report in the first place. There are
three major credit reporting agencies that will offer you
the one free credit report you get each year. They are
Experian, TransUnion, and Equifax. You can contact each
of them directly in the following ways:
-
Equifax – Online, you can find them at
www.equifax.com. You can also order your
free credit report by mail. However, they
only offer this option for free to residents in
the states of Colorado, Georgia, Maine, Maryland,
Massachusetts, New Jersey, and Vermont. All
other states are required to pay a $10
fee.
If you do want to do this
by mail, send your request to Equifax Information
Services, LLC; Disclosure Department; P.O. Box 740241;
Atlanta, GA 30374. You can also call them at     1-800-685-1111  .
There are also a myriad
of websites who will also allow you to download your free
credit report from their websites, but they ultimately
will just be forwarding you to one of the above websites
anyway. However, they are worth checking out for the
information that you can find on them. Here's one that's
highly recommended:
The main thing is that
you will want to get your free credit report in order to
find out where you stand and how far you have to go to
repair your credit. Most of the time when you download
your credit report, you will be able to view and save it
instantly. Save it to your computer’s “My Documents” file
if you can. That way you’ll be able to print it out and
refer to it as much as you need.
Also, some of these sites
offer low-cost memberships that will alert you if a new
item comes onto your credit report. Their services will
offer many different things, but purchasing a membership
is strictly voluntary and probably not necessary if you
want the straight truth.
Once you get a copy of
your credit report, it’s important to know how to read
it. There are going to be an awful lot of numbers,
abbreviations and terms you've never seen before. Trade
lines, charge-offs, account review inquiries -- how do
you read this thing?
Even though you get one
free credit report each year, experts suggest that if you
are serious about improving your credit score, you need
to examine a report from each of the three major credit
reporting agencies. This will, however cost you a small
fee from the other two, so keep that in
mind.
Why do they suggest you
have all three? Creditors can pick and choose which
credit reporting agency they want to report to. Some will
report to all three, but many won’t. You may find that
what is included on one report isn’t on another. The
reports will have different information because it's a
voluntary system, and creditors subscribe to whichever
agency they want -- if any at all.
A credit report is
basically divided into four sections: identifying
information, credit history, public records and
inquiries.
Identifying information
is just that -- 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,
leave it because it might mess up the link. Don't be
concerned about variations.
Other information in this
section might include your current and previous
addresses, your date of birth, telephone numbers,
driver's license numbers, your employer and your spouse's
name. The data in this section is often used to verify
your identity or to confirm that the information you
provided for an application is accurate. Small variations
in this data between the three bureaus are normal as each
agency may have their own recording
procedures.
The personal information
section of your credit report may also include a
"consumer statement." This is a statement that you asked
the credit reporting agencies to add to your report.
Commonly, this statement is used to explain a record on
your report.
For example, "The Smith
Bank account from 2004 was a shared account with my
ex-husband." This statement does not impact your credit
score but may help you clarify a situation to a potential
creditor or lender and improve your chances to obtain
credit.
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
On Experian's report,
your payment history is written in plain English -- never
pays late, typically pays 30 days late, etc. Other
comments might include internal collection and charged
off or default. Charged off means the creditor has given
up, thrown in the towel. Basically, the company has made
efforts to collect the debt, realized that it’s not going
to be paid, and subsequently wrote it
off.
Other reports use payment
codes ranging from 1 to 9; an R1 or I1 on a report is an
indication of a good payment history on a revolving or
installment account. Often, the code key will be listed
on the report so you can better understand what the codes
mean, but they may not.
Credit accounts are
divided into five categories: real estate, installment,
revolving, collection and other. Here is a better
description of each category:
Real Estate: First and second mortgage loans on
your home.
Installment: Accounts comprised of fixed terms
with regular payments, such as a car
loan.
Revolving: Accounts with opened terms with
varying payments, such as a credit card
account.
Collection: Accounts seriously past due that
have been assigned to an attorney or collection
agency.
Other: Accounts where the exact category is
unknown. This could include 30-day accounts, such as an
American Express card.
Your credit report lists
a summary of the details and terms for each account. This
summary includes information about the account number,
condition, balance, type and pay status for each account.
The summary for collection records is slightly
different.
The following information
is for real estate, installment, revolving and other type
records:
A portion of the number
is hidden for security reasons. A partial account number
is all that is needed to file a dispute about the
record.
For each account, the
report also displays an illustrated payment history over
the last 24 months. There will be a key at the top of
this section describes each payment history symbol and
what it indicates for your account. Green boxes marked
"OK" show that your payment was made on
time.
Most credit reports also
give you more in-depth information about specific
accounts. This is also an important part of the credit
report you’ll want to review for
accuracy.
The following information
may be reported for your account in this
section:
-
Reported: The last date when any
activity for this account was shown. Activities
include payments, credit card billings and
changes in your terms. Very recent activity may
not yet show on your account, since it takes time
for it to appear in the credit reporting agency's
system.
Collection accounts are
accounts that are seriously past due and have been
transferred to an attorney, collection agency or
creditor's internal collection agency. As your debt is
transferred between different agencies, you may see
several records on your report for the same
debt.
Only one record should be
marked as open at a time. All the collection records and
the original debt record will expire from your credit
report at the same time. Collection records use a unique
summary format on your credit report:
-
Original
Creditor: The name of the original
creditor where you accumulated your debt. This
could be an account that is listed on your credit
report (such as a credit card) or an account that
is not listed on your report (such as a library,
video rental or cell phone company). If this
creditor was a medical office, the name may be
masked for your privacy.
The next section is the
part you want to be absolutely blank. The public records
section is never a good story. If you have a public
record on there, you've had a problem that has required
litigation. It doesn't list arrests and criminal
activities; just financial-related data, such as
bankruptcies, judgments and tax liens. Those are the
monsters that will trash your credit faster than anything
else.
Here are definitions of
the eight types of public records you could see listed on
your credit report:
The summary information
listed for each of these types of public records can
vary. Here are some definitions of common record
categories:
If the public record is a
bankruptcy, three other fields will be
visible.
The final section is the
inquiries. That's a list of everyone who asked to see
your credit report. Any time anyone gets into the report,
it'll post an inquiry. That means if you try to apply for
a credit card, it’s listed as an inquiry. Have you been
shopping for a car? Every time a dealership runs a credit
report, it shows. If you call the credit bureau and ask
for a copy, it will be on there. It's a very detailed
entry record. Generally, this is great for the
consumer.
Inquiries are divided
into two sections. "Hard" inquiries are ones you initiate
by filling out a credit application or taking your child
to the orthodontist. "Soft" inquiries are from companies
that want to send out promotional information to a
pre-qualified group or current creditors who are
monitoring your account.
You may have heard that a
large number of inquiries can have a negative impact on
your credit score, but you're probably OK. The vast
majority of inquiries are ignored by the FICO scoring
models. They're not the steak in the steak dinner, so to
speak.
For instance, the model
has a buffer period that ignores inquiries within 30 days
of getting a mortgage or a car loan. It also counts two
or more "hard" inquiries in the same 14-day period as
just one inquiry. You could have 30 in two weeks and it
only counts as one.
However, on the other
hand, having a lot of credit inquiries on your account
could also show potential creditors that you are trying
to live your life on credit which means you might not
have the means to pay back the debt. This is especially
true if you’ve been applying for a lot of credit cards.
And there are always many opportunities to apply for a
credit card.
Of course, you know about
all of the offers that come in the mail. They usually
read “You’ve Been Approved!” as an enticement for filling
out the application. This is not always true with
pre-approval offers, so proceed carefully. I usually
shred them up and forget them.
Another time that you
will be asked to apply for credit occurs in public places
and the companies are offering products for free in
exchange for a credit application. I was at a baseball
game recently and one credit card company was offering
free team T-shirts and all I had to do was fill out their
credit card application. I didn’t do it, but what an
enticement – especially for a fan!
Watch out, too, when you
are shopping at your favorite department stores. They
also have store credit cards and may offer you a
percentage off your purchase in exchange for a credit
application. In general, this is not a bad idea – which
we will talk about a little later in rebuilding your
credit – because store credit cards are great when
helping rebuilding your credit.
The bottom line is that
if you don’t need another credit card, don’t apply for
one. It’s always good to have one on hand for
emergencies, but having five or six can just be a
temptation to spend beyond your means.
There may also be a
section on your credit report that lists creditor
information. The creditor contact section lists the name
and contact information for each creditor that appears on
your credit report. This can also include the contact
information for creditors that have made
inquiries.
Each creditor's address
is listed to the right of the creditor's name. When
available, a phone number is listed for the creditor.
Creditors without listed numbers should be contacted by
mail.
So that’s the first step
– getting your credit report and going over it with a
fine tooth comb. But where’s that magic number – your
credit score? Let’s begin with a short section on the
credit score itself and where it comes
from.
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