Managing Money:
Using Credit
Credit Reports
Credit bureaus collect information from the companies who have granted credit to you and from public records in state and county offices and courts. Your credit report lists information such as your current and previous addresses, Social Security number, date of birth, and current and previous employers. Public records such as bankruptcies, tax liens and mortgages also are listed. Your history of bill paying is described and rated. Credit bureaus act as data collection storehouses. Their business is to collect and store information about you for their customers who for the most part, are credit grantors.
If you have established several credit accounts, how do you know what your credit record looks like? Frequently, people don't know what their credit history says until they are turned down for credit. Denial may be for a variety of reasons such as not employed long enough or having recently moved to the area. Or you may not get a loan because of some piece of negative information reported in your credit file. Federal and state laws give you the right to know what your credit report says about you.
What Does Your Credit Report Say About You?
Credit reports are like photographs—they capture a fixed image at a certain point in time. A credit report is a picture of you in words and numbers and gives others an impression of your behavior. If your credit report indicates that you are generally on time with your credit payments, the impression is positive. If you are usually late, have not completed some of your loan payments and have more credit than you can handle, your credit picture is negative.
How Does Credit Work?
Your ability to borrow money or use credit depends on a number of factors including the availability of money, your previous willingness to borrow money and your history of payment for credit obligations. Availability of money is determined by general conditions in the economy. Rising interest rates generally leads to less money for individuals and businesses to borrow. This means that individuals will not only pay higher interest rates, but it takes a better credit history to qualify for loans.
Sometimes people feel hurt after being turned down for a loan. They often say, "I'm a great credit risk, I pay cash for everything". However, those who do pay cash have no history or proof to indicate the type of risk they would be. If you haven't borrowed money before, lenders have fewer clues in deciding to grant you a loan. They may take longer to decide to approve the loan, charge you higher interest rates or turn down your loan application altogether.
Were you aware that interest rates could vary depending on your credit report? If you establish a credit history early, you will have already done the necessary footwork that will greatly simplify a credit application when you need it.
Your credit report is an impression of what you might do in the future. Future choices are directly linked to past actions.
Checking Your Credit Report
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| Credit File Request |
Because it is estimated that 70 percent of credit reports contain at least one mistake, requesting a credit report each year is a safety measure you should exercise. Credit bureaus must notify you if negative information is added to your credit report. If you receive a letter stating that potentially negative credit information has been reported on your credit report, you may wish to review that information. The Credit File Request Work sheet provides a form to use in requesting your credit report(s) and the addresses of the three credit bureaus. Consumers in New Mexico are allowed one free report per year from each of the three major credit agencies, Experian, Equifax Inc. and TransUnion. You also can receive a free report if you are turned down for credit or if you believe you are a victim of identity theft. Lenders are not required to report information to all three credit bureaus. Thus, the three credit bureaus have somewhat different information, and they report it in different ways. It is a good idea to get your credit report from each credit bureau every year.
Get a free credit report electronically by logging on to www.AnnualCreditReport.com. You can access all three credit agencies from this Web site.
- Click: Check to see when your state is eligible for free reports.
- Select: New Mexico
- Click: Request Report
- Complete your personal information
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| How To Read Your Credit Report |
You also can call the credit agencies:
- Equifax: 1-800-685-1111
- Experian: 1-888-397-3742
- TransUnion: 1-800-888-4213
Credit Scores
Credit scores are computed by lenders using a formula to determine if you are a good credit risk. FICO scores are based on the company who developed the scoring system, Fair, Isaac & Co. The models analyze your credit history based on five categories: payment history, amount you owe, length of credit history, new credit and credit mix. Lenders base the interest rate for loans and mortgages on your credit score which, until recently, you were not able to see. You also can request a Credit Bureau Report plus your FICO score from any one of the three credit bureaus for an additional fee. Get a copy of your report before you apply for a home or auto loan. If necessary, you can be candid and explain any negative information.
To get your FICO score, go to www.fairisaac.com You can order a current Equifax credit report, a FICO score, and an explanation of the key factors that shape the score. You will be charged a small fee. The scores run from 375 (worst) to above 900 and are generated through complex statistical models. Prime borrowers have scores in the 620 to 660 range (this varies among lenders). Prime borrowers qualify for loans with the best interest rates and terms.
Payment history. Thirty–five percent of your score comes from your credit account payments, with the most recent payments counting more than older payments. If you have consistently paid your bills on time, your score will be higher.
Amount you owe. Thirty percent is based on your current debt load, how much you owe on all of your accounts if you generally carry an unpaid balance on credit card accounts. Getting credit only when you need it and using it below your credit limits, leads to higher scores.
Length of credit history. Fifteen percent of your score is based on how long you have used credit.
New credit. Ten percent is based on recent credit applications. You'll be scored lower if you have loaded up on credit by applying for more credit cards. In other words, don't get a credit card just for the 10 percent discount on that day's shopping. Having access to a lot of credit, even if you don't use it, lowers your credit scores. Potential lenders may view numerous inquiries about your credit negatively because this may indicate you will overextend your capacity to pay your credit bills. If you do not want to receive unsolicited credit offers, call 1-888-5OPT-OUT (1-888-567-8688) and your name will be removed from all three credit bureaus for possible solicitation.
Credit mix. The last 10 percent is based on the type of lenders you deal with.
Disputing Information in Your Credit Report
Once you have reviewed your credit report(s), you have the right to dispute any reported information. You can call or write to the credit bureau—their information is listed on your credit report. If you write, make copies of the correspondence to substantiate your claim in case the error persists. If you call, make sure you get the name of the person you are talking with and date your notes. Be sure to state 1) What is wrong, 2) Why it is wrong and 3) What should be fixed?
Within 30 days, the credit bureau must notify you regarding the outcome of your request. If the disputed information cannot be verified in 30 days, the disputed item will be deleted from your credit report or updated as you request. If the disputed information is verified at a later date, it will be reinserted in your credit file and you will be notified. If the credit reporting agency's investigation does not resolve the issue, you have the right to add a 100-word statement to your report, which will be included in all future requests for your credit file. It is wise to report disputed information to all three credit-reporting agencies.
Some errors you might find on your credit report include:
- Mention of a dispute with a mortgage company who agreed that you were correct, but did not remove the negative information from your credit report.
- Your name or Social Security number is the same as someone else.
- A lender reports that you have been paying your bills after the due date (even though they have been deducted automatically from your checking account).
Who Can Request a Copy of Your Credit File?
Persons/businesses can request copies of your credit file when they plan to use your credit information to 1) extend credit to you, 2) consider offering employment, 3) underwrite insurance, 4) rent you a place to live, 5) determine eligibility for certain types of licenses, 6) evaluate other legitimate business needs, 7) determine child support payments and 8) provide information about current residence of individuals.
Your Credit History Follows You
The three major automated credit bureaus in the United States hold files on 95 percent of those who use credit. Within seconds a credit report can be transferred from Miami to Denver.
Credit reporting companies only report the information given to them by previous lenders. Files are coded on a scale of zero to nine. "Zero" means a new account with no rating. "One" means pays on time, "two" means pays somewhat slow and so on up to "nine", which means goods have been repossessed.
Building a Respectable Credit History
Your credit file is your record to lenders and others seeking the information. If you make your payments within the agreed time and contact creditors if you have temporary problems, your credit history will encourage other lenders to grant you credit. If you have a credit account that you haven't used for two years, close it. Cutting up or destroying credit cards does not close an account. You need to contact the company who issued the credit. Your credit report looks better if it contains information only related to your active accounts. A good credit history is positive when you want it and essential when you need it.
References:
Kratzer, C., (2004). Managing your money: How much credit can I afford?, Circular 595, New Mexico Cooperative Extension. Las Cruces, NM.
McKenna, J. & Makela, C., (2003). Credit: What are your choices? Fact sheet No.9.140, Colorado State University Cooperative Extension. Ft. Collins, CO.
McKenna, J. & Makela, C., (2003). Credit cards. Fact sheet No.9.144, Colorado State University Cooperative Extension. Ft. Collins, CO.
McKenna, J. & Makela, C., (2003). Credit reports. Fact sheet No.9.141, Colorado State University Cooperative Extension. Ft. Collins, CO.
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