Money Management: Credit

Credit is your reputation as a borrower. Nearly everyone uses some form of credit, and it is a privilege that should be managed wisely.

Types of Credit

• Credit Cards – Credit cards can be used just about anywhere.  No payoff deadline. Monthly minimum payments vary based on the balance. Usually has the highest rate of these four types of credit.
• Installment Loans – Typically used for large purchases such as a car or an appliance. Loan term can vary from a few months to many years. Monthly payment amounts are often set for the life of the loan. Usually has a lower interest rate than a credit card.
• Mortgage Loans – Used specifically for a loan to purchase a home. Usually repaid over 15-30 years. Monthly payments may be set for the life of the loan, or change more frequently, depending on the type of mortgage.  Usually has a lower interest rate than an installment loan. Mortgage loans may provide an income tax break on interest paid to the lender. Please refer to your tax preparer for more information.
• Student Loans – Used for tuition and other college expenses. Some loan programs let you delay making payments until you graduate.  Loan term is usually up to 10 years, depending on the amount borrowed.  Monthly payment amounts are usually set annually, when interest rates are adjusted. Student loans normally have a lower interest rate than an installment loan.

Credit Reports

A credit report contains information about your credit history and the status of your credit accounts.

This information includes:

• How often you make your payments on time
• How much credit you have
• How much credit you have available
• How much credit you are using
• Whether a debt or bill collector is collecting on money you owe.

It also can contain public records such as liens, judgments, and bankruptcies that provide insight into your financial status and obligations. Lenders use these reports to help them determine if they will loan you money, what interest rates they will offer you, or whether you continue to meet the terms of the account.

You can obtain a free credit report every 12 months from each of the three main credit reporting agencies – Equifax, Experian, and TransUnion – from a central website, www.annualcreditreport.com.

Credit Scores

A credit score is a number that represents credit worthiness. For many years, credit scores were only associated with high-ticket items such as a car or a home. Today, credit scores can affect your ability to get a good rate on commodities such as car insurance or cell phones, and can even determine whether or not you are hired for a job or get promotion.

Ninety percent of lenders and creditors use the FICO score, which ranges from 300 to 850. The higher the score, the better it is for the consumer, because a high credit score can translate into a low interest rate.

The Five Factors that go into Credit Scoring

Credit Scores are comprised of five factors. Points are awarded for each component, and a high score is most favorable. The Factors are listed below in order of importance.

• Payment history (35%) – Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments, and charge-offs all have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.
• Outstanding Credit Card Balances (30%) – This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit.
• Credit History (15%) – This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.
• Types of Credit (10%) – A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only. You should always have 1-2 open major credit card accounts.
• Inquiries (10%) – This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a twelve-month period. Each hard inquiry can cost from 2 to 25 points on a credit score, depending on the amount points someone has left in this factor. Note that if you pull your credit report yourself, it will have no effect on your score.

Remember that a credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. It is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.

Building Credit

Building your credit is a process that doesn’t happen overnight, but there are many things you can do to start building a positive credit history.

• Timely Payments – One of the simplest ways to build your credit is to pay your bills on time. Making timely payments shows that you are a responsible consumer.
• Open a secured loan – A secured loan may be a good idea if you’re looking to build your credit. With a secured loan, you borrow money against your savings account while still earning interest on the balance in the account.
• Credit Card accounts – Open a credit card and only use 30% or less of the limit. Pay the balance off monthly.
• Take out a small car loan – Apply for a small car loan and make a 10-20% down payment. Be sure to make your monthly payments on time.
• Let your accounts age – The longer you've had credit, the better it is for your credit score. Leave your oldest accounts open since they help increase your credit age and build good credit.

Disputing Errors on the Credit Reports

Mistakes do happen. If information in your credit report is wrong, your credit score could suffer. Dispute any serious errors, such as:

• Accounts that aren't yours.
• Reports of late payments when you paid on time.
• Bankruptcies older than 10 years or accounts that were wiped out in bankruptcy but are listed as still due.
• Other negative information that's older than seven years.

Make a copy of your credit report and circle the item you are questioning. Remember to keep the original copy for your own records.

Prepare a letter to the credit reporting agency that provided you with the report in question, and request to have the erroneous items removed or corrected.

Prepare a letter to the creditor reporting the problem, especially if you feel you are a victim of fraud or id theft. Inform the creditor that you are disputing an error reported to the CRA, state why the claim is inaccurate and include any relevant documentation to prove your point.

Send your correspondences via certified mail. You should receive a response from the CRA within 30-45 days. If the error has been corrected, they will send you a fresh copy of your credit report at no charge showing you the item has been removed. If they can’t remove the item, you have the right to include your side of the story on the credit report.

Contacting the Bureaus

Equifax 
P.O. Box 740241
Atlanta, GA 30374-0241
1-800-685-1111

Experian
P.O. Box 2104
Allen, TX 75013-0949
1-888-EXPERIAN (397-3742)

Trans Union 
P.O. Box 1000
Chester, PA 19022
1-800-916-8800