REVIEW YOUR CREDIT
The next step in readying yourself to resolve your home loan is to examine and evaluate your credit standing.
In this section of the site, you'll find answers to many questions you may have about credit:
- What is credit?
- Where does credit come from?
- How do you get credit?
- How do you establish a good credit history?
- How do you protect your good credit standing?
- What’s on a credit report?
- What does your credit report say about you?
- How do you fix errors on your credit report?
- How do you repair bad credit
WHAT IS CREDIT?
Credit permits you to obtain something now for little or no money out of your pocket, and pay for it over a specific period of time. Today, almost everyone uses credit in one form or another.
- Open-end credit - is extended on an ongoing basis, but usually with a limit on how much you may borrow. It is often referred to as revolving credit in that as you repay the balance due, credit up to a specified limit is then available to you again to use at anytime in the future. Credit cards, such as VISA and MasterCard, are the most common form of open-end credit.
- Closed-end credit - is extended on a one-time, limited basis, such as a car loan or a personal loan. Although you may still have a positive relationship with the lender after paying off the obligation, you still must requalify each and every time you want another loan.
WHERE DOES CREDIT COME FROM?
Credit is most frequently extended by department stores, finance companies, oil companies, credit unions, commercial banks and credit card companies. Those who extend credit are called creditors.
HOW DO YOU GET CREDIT?
For credit to be extended to you, a creditor looks at two things:
- You as a credit risk. Each creditor has different ways of evaluating applications for credit. By reviewing various factors such as income, length of employment, how long you’ve lived at one residence, previous credit history, amount of outstanding debts, stability of your checking and savings accounts, number of dependents, and so on, creditors can determine, to a certain degree, whether you will repay the amount borrowed over a certain period of time.
- Collateral you are purchasing. If you fail to make payments on collateral purchased with credit, it’s easier for a creditor to repossess items like furniture and appliances than to foreclose on a home. The interest rate for installment debt is much higher than the interest rate for mortgage loan debt and affords the creditor the opportunity to assume a higher level of overall risk in the event of nonpayment. Therefore, credit may be extended to even those with a questionable ability to pay when it comes to purchases like refrigerators and stereo systems.
Where a home has been posted as collateral for a loan, the foreclosure process can be costly and time-consuming. The lender assumes a greater amount of risk at a lower interest rate. Therefore, the lender is going to evaluate you and your credit history more carefully when you’re trying to buy a house. Unfortunately, this is where most people learn their first real credit lesson — when credit is really important — because they are stunned and surprised when denied, based on their credit card use.
HOW TO ESTABLISH GOOD CREDIT HISTORY.
Establishing a good credit history is actually pretty simple:
- Open a checking and savings account. Maintain your checking account by keeping enough money in it to cover all outstanding checks. Make regular deposits in your savings account to establish a history of savings.
- Apply for credit gradually once your checking and savings accounts are in good working order and if you believe your budget can handle the financial load — through retail store credit cards, a major bank credit card or a gasoline credit card.
- Don’t apply for more credit that you can manage. A credit card establishes you with credit as soon as your application has been approved.
- Make regular payments for the products or services you purchase with credit. Every time you make a payment as agreed to a creditor, you are building a favorable credit history. If you consistently repay your debts, your positive credit history will build.
HOW TO PROTECT YOU GOOD CREDIT STANDING.
Failure to repay the credit extended as agreed is where most people get in trouble.
- Late payments affect your credit history. It doesn’t matter that the credit card balance is only $5, or that the payment is only one day late, or that you pay the late fee. Failure to pay on time will put a black mark on your credit history, a black mark that will last for a year or more.
- Minimum payments are another trouble spot. While making the minimum payment — generally about 2% to 3% of the outstanding balance — is acceptable, it does very little to reduce your outstanding debt.
Say, for example, you buy a $2,500 computer using a credit card, and make the minimum payment of $50 per month. Assuming you don’t make any additional purchases with that credit card, how long do you think it will take you to pay for that computer? Would you believe EIGHT YEARS?! It’s true. By the time you’ve paid for the computer, you’ll probably be using it as a doorstop.
- Don’t assume you have a great credit history just because of the continuous offers for revolving credit you receive in the mail. Make sure that you have credit when you need it for a mortgage or a personal loan. You don’t want to be denied due to poor history or overextension of credit cards. What is more valuable — a house or a sweater? It’s up to you.
- Use credit effectively. Determine how much credit you can comfortably afford — 15% to 20% of your take-home pay is a good rule of thumb. Develop a household budget — a detailed list of your income and expenses. If you find that you cannot afford credit purchases, considering your current income and expenses, you should still concentrate on establishing good credit, but continue making most of your purchases using cash. Credit purchases should generally be limited to those that can be paid off at the end of the month. Larger purchases should be evaluated based on need, a usable life (remember the computer) and a payment schedule established to assure that the debt is paid off quickly.
WHAT IS ON A CREDIT REPORT?
The credit report just provides information. It’s up to the creditor to use this information to determine whether you are a good or bad credit risk. Each creditor will analyze the information differently when deciding whether to extend credit to you. The credit report typically includes four types of information:
- Identifying information: your name, nicknames, current and previous addresses, Social Security number, year of birth, current and previous employers, and if applicable, your spouse’s name.
- Credit information: the credit accounts you have with banks, retailers, credit card issuers and other lenders. For each account, your credit report will list the type of loan (revolving credit, student loan, mortgage, etc.), the date you opened the account, your credit limit or loan amount, the account balance, and your payment pattern during the past two years. The report also states whether anyone else besides you (your spouse or cosigner, for example) is responsible for paying the account.
- Public record information: state and county court records related to bankruptcies, tax liens or monetary judgments. In some states, credit reports list overdue child support payments.
- Inquiries: the names of all credit grantors and potential employers who obtained a copy of your credit report for any reason. The inquiries section of your report contains a list of anyone who accessed your report for up to two years. (Federal law requires the two-year retention for employer inquiries, but only six months for credit grantor inquiries.) These time periods protect you as a consumer or job applicant.
Almost as important as what is in your credit report is what isn’t: no information about your race, religious preference, medical history, personal lifestyle, personal background, political preference or criminal record.
WHAT DOES YOUR CREDIT REPORT TELL LENDERS ABOUT YOU?
To obtain a copy of your credit report, contact any of these credit-reporting agencies:
- Experian
- Trans Union LLC
- Equifax
Or go to CreditGuard Coach or Creditattorney.com, where you can review, repair and protect your credit.
Once you have your credit report in hand, use the information provided in our Sample Credit Report (.pdf) to decipher what it reveals.
Experian chaerges an $8.50, with the exception of the following states and the District of Columbia: California, Connecticut, Hawaii, Minnesota, Nebraska, New Mexico, New York, South Carolina, Texas and West Virginia. Call for the applicable charges for these locations.
To request a copy of your credit report, you can either submit a neatly printed, written request or order online. You will need to provide the following information:
National Consumer Assistance Center
P.O. Box 2002
Allen, TX 75013-2104
www.experian.com · 1-888-397-3742
- your first name, middle initial and last name (including Sr., Jr., III, etc., if applicable)
- spouse’s first name (if applicable)
- current address and addresses for the last five years (include apartment numbers and zip codes)
if you ’ve moved in the last six months, you will need to submit a written request to obtain your credit report and include copies of two proofs of residency that reflect your name and current address. These documents can be in the form of a valid driver’s license, telephone bill, utility bills or bank statements.
- Social Security number (include spouse’s, if applicable)
- year of birth
Trans Union charges an $8.50 fee for an individual credit report for residents in most states. In the following states/territories fees vary: California, Connecticut, Maine, Minnesota and the Virgin Islands. Call or check the Trans Union website for the applicable fees.
Credit reports for residents in the states of Colorado, Georgia, Maryland, New Jersey and Vermont are provided at no charge; however, these reports cannot be ordered through the Internet. Residents in these states must submit their requests in writing or over the phone.
You will need to provide the following information:
Consumer Relations
P.O. Box 1000
Chester, PA 19022
www.transunion.com · (440) 779-7200
- your first name, middle initial and last name (including Sr., Jr., III, etc., if applicable)
- spouse’s first name (if applicable)
- current address (if at current address for less than 2 years, list previous addresses)
- Social Security number (include spouse’s, if applicable)
- date of birth
- phone number
- sign the request if written (spouse must sign, if applicable
Equifax charges $8 for each credit report requested in all states except Maine, Maryland and Vermont. Call 1-866-233-3778 or refer to the Equifax website for the applicable fees for these states.
You can order a copy of your credit report over the Internet, submit written requests via fax or mail, or make a request over the phone, under certain circumstances. You will need to provide the following information:
P.O. Box 740256
Atlanta, GA 30348-5496
www.equifax.com
Fax: 1-888-677-5577 · Phone: 1-800-356-4715*
- your first name, middle initial and last name (including Sr., Jr., III, etc., if applicable)
- spouse’s first name (if applicable)
- current address and addresses for the last five years
- Social Security number (include spouse’s, if applicable)
- date of birth
- day and evening phone numbers
- Phone requests are accessable by touch tone phone – enter your address – social – zip code, press the digit stating you were denied credit in the last 30 days.
HOW TO FIX ERRORS ON YOUR CREDIT REPORT
To correct any errors on your credit report, you must write to the credit card company and explain the error.
If the creditor concurs that an error has occurred, the credit card company must report and correct the error to the credit-reporting agency.
HOW TO REPAIR BAD CREDIT
It may take some time, but bad credit can be fixed. You can contact a professional financial counselor or a credit- and budget-counseling agency, if you need help developing a budget/debt reduction plan.
TIP – As ridiculous as this sounds - Lenders view credit counselling as a really bad scar on your credit file. You are much better off paying (approx $300.00 total $60 dwn 4 mos @ $60.00 mo. ) for credit repair. It will save you tens of $1,00.00’s in a very short time. Without credit and improving your financial IQ on this site, your life will be unnecessarily difficult.
Nonprofit credit-counseling agencies:
- Consumer Credit Counseling Service,
1-800-388-CCCS (2227)
- National Foundation for Consumer Credit
8611 2nd Ave., Suite 100
Silver Spring, MD 20910
Phone: (301) 589-5600
- Neighborhood Housing Services
- Please check your telephone directory for a local Neighborhood Housing Services office or a Neighborhood Reinvestment Corporation district office.
You can also get help from Creditattorney.com, Creditguardcoiach, where you can review, protect and learn what steps you need to repair your credit.
The good news is that if you work to reduce your debt by regularly making payments on time for at least a year, then your credit history will be much better looking to future creditors. Although establishing good credit may take a year, once you start making on-time payments, your credit history begins to improve immediately.
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