The Importance of Knowing What is in your Credit Report

Many people believe that they are immune from fraudulent or incorrect information in their credit report. I, however, have experienced a phenomenon I like call “credit reporting agency stupidity.” I would like to use a less harsh word than “stupidity,” but after what I have experienced with these credit reporting bureaus, “stupidity” is the only word that accurately describes their practices.

I am named after my father, therefore, we share the same name. The only difference between my name and my father’s name is that my name has the Roman numeral “II” following my name (denoting “the second”). My social security number is different and, quite obviously, my birthday is different. One would think that any one of these differences would lead a credit reporting agency to understand that my father and me are two separate individuals. However, such is not the case.

I cannot tell you how many banks and credit bureaus I have had to contact in order to remove items from my credit report that belong to my father. It is amazing to me that a credit reporting agency with millions of dollars cannot figure out that I am a separate individual from my father. Are they so ignorant to think that nobody in this country has the same name as another person? Is not that why the government provides social security numbers so as to distinguish between the numerous people with the same name? I can only imagine the problems in the credit report of a person named “Michael Smith!”

The point is, you need to check your credit report regularly to avoid any shenanigans that the credit reporting agencies love to create. Make sure that all the information in your credit report is correct. If you find any inaccurate information (even if it is something like your current occupation or your phone number) dispute the inaccuracy and provide the correct information. Trust me, you do not want to experience “credit reporting agency stupidity.”

Credit Report Disputes

Many times, inaccurate information will appear on your credit report. In my experiences, one of the most common mistakes credit reporting agencies make is that they mix up the credit information of family members with the same name. For example, my father and I share the same name. I cannot tell you how many times my father’s credit accounts have shown up on my credit report. It is very frustrating, however, all one can do is fix the inaccuracy.

The easiest way to remove inaccurate information is to dispute the inaccuracy. The three main credit bureaus (Experian, Equifax, and TransUnion) all have options where a person can dispute inaccurate information through the respective credit bureau’s website. First, you should only dispute the inaccurate information to the credit bureau that has reported the inaccurate information. Therefore, if the inaccurate information is reported only in your Equifax report, there is no need to dispute anything in your TransUnion report because the inaccurate information is not in your TransUnion report. It is important to note that these three credit bureaus are completely separate entities. Therefore, for example, if inaccurate information appears in your TransUnion and Equifax report and you successful get the inaccurate information removed from your TransUnion report, that does not mean that Equifax has to also remove the information.

I wish the process was as easy as sending in a dispute of inaccurate information and waiting for the inaccuracy to be removed from your credit report. However, it is not that simple. Credit reporting agencies are very stubborn. Things will not be easy and you may have to dispute the same inaccuracy more than once. However, with persistence, you should be able to remove inaccurate information.

Credit Card Applications for Beginners

Credit card applications are fairly straight forward and need no special training or education to fill out. However, there are some things you should know.

First, put your full, legal name of the credit card application. The credit card company uses this name to check your credit report to determine whether or not you are approved. Therefore, if you use a shortened name (for example, if your name is Christopher, do not put Chris on your application) on your credit card application, you are going to cause confusion amongst the credit reporting bureaus and are thus going to set yourself up for a credit report dispute in the future. Avoid all of this by always using your full, legal name.

Second, do not lie about your monthly or yearly salary. You are not going to get a higher credit limit by doing this, and additionally, your credit report is not going to support this contention. The point is, do not lie on your credit application.

Third, sometimes you are a student and you are employed, therefore, which should you put down when the application asks for employment status? In my opinion, you should use whichever job title (student or full-time employed) gets you the most benefits for the card for which you are applying.

Last, use internet applications whenever you can. I do not feel comfortable mailing or giving so much personal information (e.g. phone number, address, full name, social security number, employer, employment status, yearly income, etc.). Therefore, submit your credit applications through secure websites. Additionally, when you apply online, you usually can get an answer on your application within 30 seconds.

Following these tips will help make your credit card application go faster and more successfully.

Is a “Free” Credit Report Really Free?

The answer to this question is, YES. A free credit report really is free, you just have to know where to get it. Federal law requires that the credit reporting bureaus provide you with one free credit report per year. Therefore, by law, you can get your credit report for free.

The best place to exercise this right is by going to www.annualcreditreport.com. This website allows you free access to all three of your credit reports (by all three, I mean your credit reports from Experian, Equifax, and TransUnion) once per year. The process is very simple and very safe. In order for you to access your credit reports, you have to answer security questions based on certain credit and/or revolving accounts that you own.

Note that federal law only requires that these companies give you a copy of your credit report, not your credit scores. Therefore, if you want your credit scores, you are going to have to pay for them.

When you obtain your credit report, make sure that you print a copy for your records. Even if your credit report is 20+ pages, it is worth the printer ink to have a copy of your credit report. Look at your credit report and make sure that no inaccuracies exist. If you find an inaccuracy, you need to dispute it so that your credit score is not negatively affected.

Get you free credit report, check your accounts, and maintain your credit.

Getting a Credit Card with Bad Credit

Getting a credit card with bad credit is not as hard as you may think. The types of credit cards that can be obtained with bad credit is the real problem.

There exists a financial practice called adverse selection. Adverse selection is the process of singling out potential customers who are considered higher risks than the average. Credit card companies combat this risk (the risk that people will default on their credit cards) by charging higher interest rates and annual fees. However, this is where the problems begin. If I have a great credit score, why I am going to get a credit card with high interest rates and high annual fees? The answer is, I would not get the card. Therefore, because people with good credit do not want the card, only people with below average credit scores (people that are “high risk”) apply for and obtain the card. Thus, a vicious circle is created. As the credit card companies charge more interest and fees on particular cards to offset the potential of default by high risk cardholders, those particular cards are only obtained by high risk cardholders. Thus, the behavior that the credit card company set out to deter is actually being promoted by the credit card companies’ practices.

So, if you have bad credit, where does this leave you? This leaves you with bad options as to credit card ownership. First, you could get one of those high interest, high annual fee, and low credit limit cards. You will probably pay more in annual fees and interest than you will principal. However, having the card (as long as it is a major credit card; Visa, MasterCard, American Express, or Discover) and using it responsibly will help raise your credit score.

Second, you could obtain a secured credit card. This means that you have to put down a deposit. The amount of the deposit is the amount of your credit limit. It works as a debit card except that it is reported as a credit card (which is a benefit), but it also has high fees and interest rates (these are disadvantages).

Last, you could obtain a merchant credit card (Macy’s, Dillard’s, Sears, etc.). Having this kind of a card will help boost your credit score. However, the interest rate is going to be very high. These cards usually do not have annual fees, but the high interest rate is a great disadvantage.

Even though options are limited and not the best, they are options. Start reestablishing your credit today so that you can help finance your future and save money.

Credit Score Conundrums

In my previous post, What are the Components of a FICO Score?, I discussed what the Fair Isaac Corporation takes into account, and each items respective weight, when calculating your FICO score. The interesting thing that I have noticed is that certain practices can both raise and lower your credit score. Lets look at a few of them:

(1) 30% of your score is based upon you debt to credit ratio, while 10% of your score is based upon the number of credit inquiries and “new” credit. The ideal situation is having a maximum of 25% of your credit in use as compared to your debt. Therefore, if you have $1000 in credit, you want to owe no more than $250 total.

As you continue to make consistent payments on your cards, you will most likely become eligible for a credit limit increase. However, you usually have to ask the credit granting company for an increase on your limit. This is good because it will lower your debt to credit ratio, however, you have just created “new” credit and just had an inquiry dinged against your credit report, and thus could lower your score. Interesting!

(2) Some experts state that you should pay off your outstanding balance in full while other experts say that creditors want to see consistent payments, thus you should always pay your bill over time. We now know that 35% of your FICO score depends upon timely payments. Nowhere in that calculation does the amount paid come into affect. Creditors send you a bill with the minimum payment set for you. Most experts agree that you should more than the minimum payment, but not for credit score reasons. You should make more than minimum payments so that you do not get hosed by the interest charges.

The bottom line is, paying off your amount due, whether in full or in parts, is not going to hurt your score (as long as those payments are timely). If you can afford to pay more than the minimum payment, do it. If you cannot, do not. I seriously doubt a creditor is going to penalize you (by means of a lower credit score) for paying back their money in one lump sum!

(3) 10% of your score is based on the type of credit you have. Most people build their credit score in order to take out installment loans, however, installment loans can lower your score. The situation that presents itself is an odd one. Most people build their credit score in order to purchase a car and/or home. However, taking out one of these loans can lower your score because some creditors may feel that this big monthly obligation could affect your ability to pay them back. Now we are back to the debt to credit ratio and the choice of whether or not to raise the credit limits.

The truth is, it seems that certain simple strategies (pay your bills on time, keep your debt low, and keep your credit high) have been to proven to build a credit score significantly. All of the other little things can either slightly chip away or slightly add to your credit score. As I pointed out, some strategies can have both a positive and negative effect. Therefore, if you want to play it safe, stick to the simple strategies and always be aware of the contents of your credit report and credit score.

Should You Obtain the Services of a Credit Monitoring Service?

As I have been discussing in previous posts, credit is a very important asset in today’s society. Differing views exist as to the overall importance of credit versus the importance of cash, however, supporters of the latter do not deny that credit can be a useful tool.

If you have credit, do you know how to protect it? As you may know, identity theft is one of the most “popular” (for lack of a better term) crimes to commit. Two problems exist with credit and identity theft. First, victims of identity theft have a hard time repairing their credit even though the victim is not the guilty party. Second, you are not aware you are a victim of identity theft until you try to make a purchase that requires a credit inquiry.

Many identity thieves use a different address when obtaining credit in the victim’s name. Therefore, the victim receives no bills, no late notices, and no phone calls about defaults and delinquencies. In the normal, everyday use of your credit card, you credit report is not inquired upon to see if you qualify for a purchase. Your credit report is only used if you intend to make a large purchase (such as a house or automobile). This can leave you “in the dark” as to any illicit credit activity for several months. In the meantime, your credit is literally being destroyed!

In order to prevent this, I use a credit monitoring service. The credit granting company I use offers such a service for $12.00 per month. It has every feature you can think of and gives me instant access to my full credit report and all three of my credit scores. I use this service because it will enable me to quickly identify any unusual information on my report, as well as show me if my credit score raising techniques are working. In addition to those services, the credit monitoring service also notifies me if any unusual activity is being reported on my report.

If you choose to obtain these services, make sure you follow some guidelines:

(1) Make sure the company is reputable. You are going to be giving this company all the information (including your social security number, your address, your birthday, etc.) it would every need to steal your identity. Make sure that the company has many safety features to prevent that from happening.

(2) A larger price per month does not mean better service or product. I have seen prices from $12.00 per month to over $100.00 per month for these services. Make sure you are getting some vastly superior product or service if you choose to shell out an addition $88.00+ per month.

(3) Make sure the service is easy to use and has a way to be immediately reached in the event that you notice suspicious charges on your credit report. You do not want to find something wrong and then find out that you have to submit a claim that could take weeks to process!

If you decide that these services are right for you, shop around, and find the best deal. Protect your credit now and you will be able to save yourself some frustration in the future. Think of this service as a necessary insurance in an identity theft rich time.

How Important is Good Credit?

Do you think that good credit is not an important asset? I have a friend that thought that very thing. Suddenly, not to long ago, reality slapped him in the face. His credit score was so bad that he could not get financed for a car! His lease was up and he tried to get another car, unfortunately, he was denied at every place he attempted.

You may be thinking that he did not look hard enough or was trying to get too expensive of a car. You may be correct, however, the point is that something like buying a car should be an enjoyable experience. Buying a car should not be an industrial pain that consumes one week of your life!

The sad truth about credit is that good credit is hard to get and bad credit is easy to get. If you have bad credit, you need to start today if you want to fix it. If you look at your credit report, you will see that negative information (such as late payments, charge-offs, etc) can stay on your credit report for years!

My buddy could not get financing for a $25,000 car. Could you imagine if he tried to get financed for a big purchase, like a house? That is too scary for me to imagine! Take care of your credit and you will be one step closer to financial freedom.

Tips to Raise Your Credit Score

In my previous post What are the Components of a FICO score?, I discussed the different components of a FICO score and their respective weights in determining your credit score.

This post will provide a few tips that you can use to raise your credit score. First, if you have no idea what your credit score is or what information is in your credit report, I suggest you get both. You can get a free copy of your credit report from all three credit reporting agencies by going to Annual Credit Report. This service is completely free (there is absolutely no catch) and is easy to use.

Your credit score is a different story. I am unaware of any website or company (except Washington Mutual that just started the promotion of giving you access to your credit score for free if you have one of its credit cards) that will give you free access to your credit score. If you really want to know your credit score and do not want to pay for it, there is a free way to obtain the information, although it is a little shady.

If you want to get a free look at your credit score, go car shopping! Better yet, just call a car dealership and tell them you are interested in a car. They will run your credit to see if you qualify for the car you are “interested” in. Once they say you qualify or not, ask the salesperson what you credit score is. They will almost always tell you. When the salesperson wants to move on with the deal, just tell them that you are doing some comparative shopping and price searching and that you will get back to them.

If you are uncomfortable with obtaining your credit score this way, all three of the credit reporting agencies will let you buy the information for around $15.00 for all three scores.

Once you have your credit scores and reports, you can see where you need improvement. There are some general things you can do to start to boost your score. Although you will no longer be able to use the authorized user method to boost your score, you can still, (1) pay bills on time; (2) keep your debt low; and (3) not open lots of accounts at once.

Those are general tips, but there are other things you can do and other information you should know.

(1) If you can prevent it, do not close credit accounts. Many people close credit accounts they hardly use or that they just paid off to avoid the temptation of using the card again. This is a bad move because 15% of your credit score is based upon the length of your credit history. If you find that one of your cards is not in use, start using it for a very specific thing (for example, only buy gasoline/diesel with that one card) and use it for nothing else. By doing this, the card is in use, and the payment will be low. This way, you get to keep your lengthy credit history, and you are building points by making your payments on time.

(2) Closing an account does not mean that you no loner have to pay what is owed. This seems simple enough, but you would be surprised how many people are under the false impression that closing a credit account means that they are no longer liable for the debt. This is a rookie move and should not be made by aspiring entrepreneurs! Do not close the account because you are having trouble paying, instead, stop using the credit card! None of the fees change and none of interest rates decrease by closing the account. Therefore, what is the benefit of closing the account? If you fear that by keeping the account open you will continue to use the card, destroy the card. Later, when you feel you have gotten things back in order, call the credit company and tell them that your card was destroyed (by the washing machine, the dryer, or whatever you can think of), and get a new card. By closing the account, you only hurt your lengthy credit history!

(3) Know that certain debts are weighed differently than others. Revolving debt is weighed more heavily in determining your creditworthiness. Revolving debt is money owed to a creditor who sets your monthly payment based on the current balance. This is different from installment loans, (such as student loans) where the amount owed is fixed (not based on your current balance), usually payable monthly, and almost never changes. Keep those revolving debts low and your score could increase.

(4) If you have bad credit and are having trouble getting a card, try a department store. If you find yourself having trouble getting credit from the “big boys” (Visa, MasterCard, Discover, American Express, etc.) try getting a card from a department store. Their interest rates are terrible, but they are usually much easier to get. This credit will help you start to reestablish yourself as creditworthy and will help improve your score, if you make timely monthly payments and keep the debt low.

(5) If department stores do not work, you can get a secured credit card. Secured credit cards are credit cards with a deposit backing. In other words, your credit limit is set by how much money you give the company. If you deposit three hundred dollars, your credit limit is three hundred dollars. Unlike a debit card though, charges do not come out of that deposit amount. You are sent a bill like a credit card and have to make the payments. Be cautious if you take this route because some of these companies are predatory and charge OUTRAGEOUS fees and interest rates! If you find out that you are paying more to possess the card they you are actually spending by using the card, dump it!

What are the Components of a FICO Score?

The Fair Isaac Corporation is the company the created the FICO score for credit. A credit score can range between 300-850. All three of the credit reporting bureaus (TransUnion, Equifax, and Experian) use a FICO score system, except each bureau calls their respective systems by a different name. TransUnion has EMPIRICA, Experian has the Experian/Fair Isaac Risk Model, and Equifax has BEACON. Do not be confused by these names. Although different by name, these credit bureaus’ systems differ only slightly in calculation.

Although the exact formula used to calculate a FICO score is unknown to the general public, the Fair Isaac Corporation has released the components used to calculate a score and their respective weight in the calculation.

35% of your score is based upon your Payment History. Late payments of all types are reported in your credit report. People are sometimes under the misconception that as long as they pay their credit cards on time, it does not matter if anything else (like your car payment, your cell phone, doctor bills, etc.) is late. This is far from true. Any late payment to a creditor can be reported in your credit report by way of collections, lawsuit, wage garnishment, attachments, lien, and judgments, to name a few.

30% of your score is based upon your Amounts Owed. This is called a debt to available credit ratio. Basically, if you have two credit cards with a $2,500 limit on each, your total available credit is $5,000. If these accounts are “maxed out” then this will lower your score. As a good rule of thumb, you generally want to have a total of only 30% of your total credit in use. Therefore, in this example, if you owe $1,500, you should be okay. Anything more, and you may be at risk of lowering your score.

15% of your score is based upon the Length of Your Credit History. This makes sense if you think about it. If you just got a credit card, there is no accurate way to gauge your creditworthiness. The longer you have credit, the more accurately lenders can determine the risk of lending you money. This equates into a higher score for you.

10% of your score is based upon New Credit. This does not mean that you should not open up any new credit cards. If you want more credit, do so sparingly. If you try to open and/or apply for a lot of credit at one time, it looks like you are in financial trouble or that you are going to be amassing a large amount of debt. Either way, it does not look good to lenders and can negatively affect your score.

10% of your score is based upon the Type of Credit in Use. Also referred to as a “mix,” this component looks to all the types of credit you have. Whether it is revolving, installment, mortgages, etc., a healthy mix will raise you score, although by very little. This component really only comes into play if you do not have many revolving accounts.

Do You Know What Is In Your Credit Report?

Many Americans would be amazed as to what they find in their credit report. I have had to deal with errors in my credit report for a long time now. My problems arise because I am named after my father. You would think that in this day and age, and with the many technological advancements that exist due to computers, distinguishing between two different people would be easy. Apparently, this concept eludes the credit reporting bureaus.

Due to the fact that my father’s accounts appear on my credit report and vice versa, I constantly have to contact the three bureaus and the reporting banks. It really is a nightmare! I have to do this because two things are happening when the bureaus and the banks incorrectly report accounts in my credit report. First, I lose confidence in the credit reporting system and the bank that incorrectly reports. Second, my father loses the benefits of having his accounts in his reports and my debt to available credit ratio changes, which could lower my score.

As you may know, Congress has changed many laws regarding credit reporting in order to benefit the consumer. If you go to www.annualcreditreport.com, you will get a free copy of your credit report from all three reporting companies. These reports are 100% free, meaning you do not have to sign up for some 30-day credit monitoring service. In is important to note that you can only get one free copy of your credit report from the three bureaus only ONCE per year!

If you share your name with somebody in your family, it would be a good idea to check your credit report. Keep in mind that you will not get access to your credit scores, but you will see if any negative information appears on your credit report.