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Credit |
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How to Improve |
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Credit Basics
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Your Credit Score
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To dispute inaccurate
information on your Experian, Trans Union or Equifax credit report,
write to the bureau that supplied the information. In your letter be
sure to include:
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Your full name, first,
middle and last and including any applicable suffixes (Jr., Sr., II,
etc.)
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Your complete mailing
address
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Your date of birth
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Your Social Security
number (this is necessary to access your credit report)
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The name and account
number of the creditor and item in question
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The specific reason for
your disagreement with the disputed item
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Your signature
Mail disputes to:
Experian
1 (888) EXPERIAN
Equifax Information
Services
1 (800) 378-2732
P.O. Box 740241
Atlanta, GA 30374-0241
Trans Union
Corporation
1 (800) 916-8800
P.O. Box 390
Springfield, PA 19064-0390
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Establish
a Good Credit History as Soon AS Possible
If you do not have a well-established
credit history, you should begin to build one.
The trick is to start small: try
applying for credit with a local business, such as a department store or
a local bank or credit union. These local merchants may have lower
credit standards than larger lenders. Before you apply for credit, make
sure the credit grantor reports credit history information to one of the
major U.S. credit bureaus so you can build your history.
Other options if you are having
difficulty opening a credit account include asking a friend or family
member to cosign your loan or credit card application or obtaining a
secured card, which is guaranteed by a deposit you make with the card
issuer.
Actively Monitor and Manage
Your Credit
While the most obvious thing you can do to build a solid credit history
is to pay your bills on time, you can also take steps to protect your
credit standing and make sure your credit report is accurate when you
apply for credit.
Many credit reports contain
inaccuracies, usually caused by innocent errors but occasionally by
fraud (such as identity fraud, in which a thief uses someone else's name
to open credit accounts). The Fair Credit Reporting Act ensures your
right to dispute such inaccuracies in your credit report without charge.
(For information about how to do this, see our Dispute Information.)
To effectively use this right, you need
to be aware of what information appears on your credit report. One easy
and inexpensive way to do this is by signing up for a free trial of the
CreditCheck Monitoring Service [link to order form], which includes a
free copy of your credit report.
You can also plan a credit strategy much
like you would a budget to improve your credit worthiness. Taking steps
like applying for a major credit card if you only have local credit,
closing old unused credit accounts, and keeping tabs on the number of
inquiries in your report can improve your credit status. See our tips on
Handling Your Credit to Prepare for the Future for details.
Skip the "Credit Repair"
Clinics
Although some consumers pay credit clinics hundreds or even thousands of
dollars to "fix" their credit reports, only time can improve bad credit.
The Federal Trade Commission has investigated and reported at length on
these often-fraudulent "clinics." And some credit repair plans actually
encourage you to commit fraud yourself by attempting to create a second
credit identity.
The key fact: There is nothing a credit
repair clinic can legally do to fix a credit report that you can't do
yourself for free.
Consumer credit reports contain
easy-to-follow instructions for disputing inaccurate information at no
charge. Inaccurate information will be changed or deleted. Accurate
information that shows negative payment habits will usually remain on a
credit report for seven years, with bankruptcies remaining up to 10
years. Federal law mandates this.
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Major Life Events Impact
Your Credit Many major
life changes, such as marriage and divorce, purchasing a home, or having
a child are also financial changes that involve your credit.
Marriage & Divorce
While marriage can open financial opportunities for people who are now
able to pool their resources most effectively, it also involves new
responsibilities and issues for personal credit.
- Changing your name. If you change
your name--at marriage or any other time-it is important that you
make sure your creditors and the credit bureaus are notified of the
change. Otherwise, you might lose your credit history.
- Keep credit in your own name. Women
especially must take care to keep some credit in their own name-Judy
Smith, rather than Mrs. John Smith, for example. Every year women
who have never paid a bill late are denied credit because they have
no credit history in their own names.
- Joint accounts mean joint
responsibility. This is true even if a divorce decree includes
provisions about one of the parties paying the bills. As far as a
creditor is concerned, you are both responsible for the bills, even
if only one of you ran up the charges. Arrangements must be made
with the creditor, either through changing the account or closing it
entirely and opening a new one, if one of you is to be released from
liability for the debt.
Purchasing a Home
Buying a home-especially the first time-makes significant demands on
personal credit. It requires a solid credit rating, and once it takes
place it can dramatically change some credit dynamics. On the one hand,
homeowners build equity-an asset that contributes to their net
worth-with each mortgage payment. They also establish another level of
credit history and stability by making their mortgage payments on time.
On the other hand, a mortgage is a large loan, and may impact things
like your debt-to-income ratio in the first years of the loan.
Having Children
Beginning a family is another life change that puts demands on your
credit. Many parents find that their credit card bills soar as they
equip their homes and lifestyles to welcome and accommodate their
children. But it's especially important to take good care of your credit
when you take on the added responsibility of children, using it wisely
and managing it well. That way you know your credit will be available
when you need it-like 8 years from now when those tiny infants head off
for college.
The Death of a Spouse
If you have a joint account with your spouse, by law a creditor cannot
automatically close the account or change the terms because of the death
of your spouse. More than likely, the creditor may ask you to update
your application or reapply in your own name. The creditor will then
decide whether to continue to extend you credit or change your credit
limits. While your application is being reviewed, the creditor must let
you use the account without new restrictions.
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Improve Your Credit Profile To Get Better Credit Deals
When you apply for credit, the lender will
undoubtedly check your credit report. The information in your credit
history helps lenders decide how much credit and what interest rate you
are eligible for. The better your credit history, the more likely you
are to qualify for the best credit deals.
But what will they be looking for?
Pay Your Bills on Time
Creditors always look for indications that the prospective borrower is a
good credit risk: a person who will pay back his or her debts in a
timely fashion. Obviously, a history of on-time payments demonstrates
that you are just such a person.
But that doesn't mean your credit
history must be perfect for you to qualify-few people's are, after all.
"Good" credit can include a few minor dings in your report, such as:
- Up to two credit card payments 30
days late.
- One installment payment, such as an
auto or student loan payment, 30 days late.
No payments of any kind should be more
than 60 days late and there should be no outstanding public record debts
such as judgments or liens.
Keep Your Debt Load Reasonable
One factor any creditor must assess before offering credit is the total
debt of the person applying. If a large portion of your income each
month is already committed to paying off other debt, the lender will
wonder if you may have trouble paying back an additional loan.
As a rule of thumb, financial experts
say that non-mortgage debt payments should not exceed 10-15% of your
take home pay each month. If your debts are currently too high, consider
ways to pay some down before you apply for new credit.
A note about cosigning: If you cosign
somebody else's loan, the outstanding amount is considered your debt,
even if the individual for whom you cosigned is paying all the bills.
Because cosigning means you have promised to pay back the loan if the
other party does not, it is considered one of your liabilities. So think
carefully before you cosign, even for someone you know will pay the
debt; it does impact your credit.
Avoid Unnecessary Inquiries
Whenever you authorize a creditor, employer, or other business to check
your credit report, an "inquiry" is added to the report itself-a note
that someone has checked your credit. (Checking your own credit report,
however, does not lodge an inquiry.) An inquiry usually stays on your
credit report for two years.
A lender considering you for a loan will
look at the number of inquiries recorded there and when they took place.
A large number of inquiries occurring in a short period of time may be
interpreted as a sign that you are either:
- Applying for lots of credit because
of financial difficulty.
- Overextending yourself by taking on
more debt than you can actually repay.
Therefore, it's always a good idea to
minimize inquiries into your credit report. If you're shopping around
for mortgages, for example, don't let every lender you consider run a
credit check. You might have to settle for slightly more approximate
estimates on what the lenders can offer you, since they can't verify
your credit history. But that's still better than as a less solid credit
risk and wants to charge a higher rate.
Eliminate Excess Unused Credit
Just as a high number of inquiries suggests you may be overextending
yourself, a lot of available credit means you have the capability to
overextend yourself in the future, even if you have not done so in the
past.
Although people may perceive having
several credit cards with high limits a sign that they have good credit,
too much of this good thing can make them seem like a poorer credit
risk.
The lender needs to be reasonably sure
that you will continue to be able to repay your debt in the future. But
if you have thousands of dollars of unused credit available, you might
spend it all the month after your loan goes through and suddenly have
more debt than you can pay off.
To prevent this concern from arising,
you should close unused credit accounts before applying for a large
loan, and/or consider having your credit limits reduced. If you do
either of these things, make sure to ask the creditors to record that
the account was closed or changed at the consumer's request-you don't
want anyone to get the impression the bank closed the account because of
problems with your payment habits.
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The Fair Credit Reporting Act, or FCRA,
is a law that originally went into effect in 1971 and that was beefed up
considerably, in 1997, by amendments passed in Congress. The original
FCRA protected your rights as a credit-active consumer by placing limits
on who may see a copy of your credit report. It mandated that, while you
yourself may request a copy at any time, no one else may legally review
your report unless they intend to:
- Conduct a credit transaction.
- Make an employment decision.
- Underwrite insurance.
- Conduct a legitimate business
transaction.
The 1971 FCRA also provided that your
credit report may be reviewed in response to a court order or federal
grand jury subpoena.
Anyone who knowingly and willfully
obtains a credit report under false pretenses may be fined up to $5,000
and imprisoned for up to one year.
The new version of the law that went
into effect on September 30, 1997 further protects credit-active
consumers and gives them more control over their credit information.
Highlights of the updated version of the
FCRA law are summarized below.
Credit Reports
- Anyone reviewing your credit report
for any reason other than those listed above is now guilty of a
felony, instead of a misdemeanor as in the old law. Credit bureaus
and other information providers must take careful precautions to
make sure that they are disclosing credit information to users who
are obtaining it for legal, permissible purposes as outlined in the
FCRA. Any credit grantor or other entity that wants to obtain credit
reports from a credit bureau must certify to the bureau the legally
authorized purpose(s) for which it will use the reports.
- Free credit reports must be
provided once a year to victims of identity fraud and anyone who is
unemployed or poor. Individuals who have been denied credit may
obtain a free credit report within 60 days, instead of 30 days as in
the old law. Anyone else who requests a credit report will be
charged up to $8.00 per report (this price will be adjusted for
inflation).
- Potential employers may no longer
use credit reports to make employment decisions without the consent
of the job applicant. Before the potential employer can deny
offering the job to the applicant based on the information in the
credit report, the applicant must receive a copy of the report.
Credit Disputes
- When a consumer disputes credit
information on his or her credit report, the three major credit
bureaus, Experian, formerly TRW, Equifax, and TransUnion, must
notify each other of the reinvestigation. In the past, it was the
consumer's responsibility to notify each bureau.
- Under the updated law, credit
bureaus are required to use information supplied by the consumer as
well as the credit grantor when reinvestigating inaccurate credit
information. This was not a requirement under the old law, and
bureaus relied primarily on the credit grantor's version.
- Reinvestigations requested by
consumers must be completed within 30 days by the major credit
bureaus.
- If the completeness or accuracy of
any data reported by a credit grantor to a credit bureau continues
to be disputed by a consumer after the information has been
reinvestigated by the credit grantor, the credit grantor may not
report the information to the credit bureaus without indicating that
it is still being disputed by the consumer.
- Bureaus as well as credit grantors
(such as banks or retailers) must provide consumers with better
notices of their rights. In the past, when a consumer was denied
credit, the credit grantor was required to include the name and
address of the credit bureau that supplied the report on which the
decision was based. Under the new law, the following information
must also be included:
- Phone number of the credit
bureau (including a toll-free number if it is one of the three
major bureaus).
- A statement that the credit
bureau did not make the decision to take adverse action.
- Notice of the consumer's right
to obtain a free copy of the report from the credit bureau by
submitting a written request within 60 days.
- Notice of the consumer's right
to dispute the accuracy or completeness of the information in
his or her report with the credit bureau.
Credit Accuracy
- Banks, retailers, and credit card
issuers that report credit information to credit bureaus are now,
for the first time, held responsible for ensuring that the
information they report is as accurate as they can make it (i.e.,
they must use information supplied by the consumer to correct or
update their own records before reporting it). In addition, these
credit grantors are required to assist credit bureaus in
reinvestigations.
- If a consumer closes out a credit
account, the credit bureau, bank, or retailer must label the account
as one in good standing that was closed at the consumer's request.
In the past, creditors many times assumed that if an account was
closed, it was done at the request of the credit grantor, and this
was interpreted as negative payment behavior on the part of the
consumer.
Credit Offers
- Prescreened lists, which banks,
retailers, and credit card issuers purchase from credit bureaus and
use to identify qualified and interested consumers to whom they
market credit cards and other retail loans, have also been affected
by the FCRA amendment. Under the old law, companies who used the
lists were required to send "firm" credit offers to creditworthy
consumers, meaning that even if it was determined later that the
consumer did not qualify, the offer could not be withdrawn. Under
the new law, card issuers can withdraw an offer of credit if the
consumer does not meet the prescreening criteria.
- Banks are required to provide
consumers with a new prescreening disclosure that explains that the
offer results from prescreening by a credit bureau, and that
consumers may notify the credit bureau if they wish to be dropped
from future prescreening.
- The three major bureaus must
provide a joint toll-free number for consumers to call who wish to
opt out of prescreened lists.
Credit Clinics
Credit repair clinics often charge consumers hundreds or thousands of
dollars to allegedly "fix" bad credit reports. Although these clinics
claim to be able to eliminate negative credit information from a
consumer's file, if the negative information is accurate, it will remain
on the consumer's credit report for up to 10 years. This is mandated by
Federal law. If the consumer pays the credit repair clinic before it
performs its services, the consumer may lose a great deal of money.
Under the new law, credit repair clinics may no longer collect a fee
before performing their services.
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Federal law carefully regulates how
information about your credit can be used. The two most important laws
for credit-active consumers are probably the Equal Credit Opportunity
Act (ECOA) and the Fair Credit Reporting Act (FCRA).
The ECOA mandates that every consumer
who applies for credit has an equal chance to obtain it. This is not a
guarantee that credit will be granted, but rather that the factors used
to determine whether an application is accepted or rejected will be
consistent and consistently applied for all applicants.
The FCRA ensures that consumers' rights
and privacy are protected even as the credit reporting industry makes it
possible for credit histories to be transmitted so quickly that stores
can offer instant credit to consumers who qualify.
How Can I Learn More About
Credit and The Law?
The federal government maintains several informative World Wide Web
sites with lots of information about consumer credit issues. These two
relate to the FCRA specifically:
- http://www.ftc.gov/bcp/conline/pubs/credit/fcra.htm
(summarizes the law)
- http://www.ftc.gov/os/statutes/fcra.htm
(gives the actual text of the law)
Requirements for Accessing
Credit Reports
To guard against abuse and to protect your privacy, the FCRA requires
that all businesses must meet the following requirements before they are
allowed to access credit information:
- Proof of a permissible purpose
under federal law
- A background check and on-site
inspection of the business
- A current business license
- A signed contract requiring the
business to use the data properly
The only time your credit report can be
accessed without your permission is in prescreening for credit offers or
if a judge subpoenas your credit information. You can opt out of
prescreening by contacting the three major credit bureaus, although you
will then receive no more pre-approved credit card offers.
Accepted or Rejected?
You have the right to know whether your application for credit was
accepted or rejected within 30 days of filing it. If it was rejected,
you have the right to know why. The creditor must either immediately
give you the specific reasons your application was rejected or provide
you with reasons if you ask for them within 60 days. Indefinite or vague
reasons are illegal, so ask for specifics.
If you have been denied credit because
of the contents of a credit report, the creditor must also provide you
with information about how to contact the credit bureau that supplied
the credit report. This is one of the few circumstances under which you
are entitled to a free credit report directly from the credit bureau.
What If There Is Inaccurate
Information in My Credit Report?
The law guarantees your right to dispute inaccurate information on your
credit report free of charge. If you find an error in your credit
report, simply call or write to the credit bureau. The bureau will check
with the source of the information and send you an update. The dispute
process can take up to 30 days. If you still disagree with the
information, you can add your own statement to the credit report. For
more detailed information about how to contact the credit bureaus to
dispute inaccuracies on your report, see our Dispute Information.
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Credit scoring is a scientific method
that uses statistical models to assess an individual's credit worthiness
based on their credit history and current credit accounts. Credit
scoring was first developed in the 1950s, but has come into increasing
use in the last two decades.
In the early 1980s the three major
credit bureaus, Experian, Equifax and Trans Union all worked with the
Fair, Isaac company to develop generic scoring models that allow each
bureau to offer a score based solely on the contents of the credit
bureau's data about an individual. Creditors-especially those in the
mortgage industry-frequently use the scores when deciding who receives
loans. They can order your score, commonly called a FICO score, from one
of the bureaus, but it only draws upon information from your credit
report. Individual creditors often also consider other information, such
as your salary or how long you have been employed at the same company
when making loan decisions.
Each credit bureau has its own unique
system for compiling credit scores. However, the scoring models have
been normalized so that a numerical score at one bureau is the
equivalent of the same numerical score at another. Thus, a score of 700
from Equifax indicates the same creditworthiness as a score of 700 from
Trans Union or Experian, even though the calculations used to determine
those scores are different at each bureau.
A computer-generated score is compiled
using information from an individual's credit report, such as how much
money is owed and whether payments have been made on time. Then that
score is compared to the credit performance of consumers with similar
profiles. The scoring system awards points for each factor that helps
predict who is most likely to repay a debt. A total number of points-a
credit score--helps predict how likely it is that you will repay a loan
and make payments on time.
Credit scores range from 375 to 900
points, but those numbers mean little on their own. They become
meaningful and useful within the context of a particular lender's own
cutoff points and underwriting guidelines.
In general, you are likely to be
considered a better credit risk if your FICO score is high. Under
mortgage lending guidelines, for example, a score of 650 or above
indicates a very good credit history. People with these scores will
usually find obtaining credit quick and easy, and will have a good
chance to get it on favorable terms.
Scores between 620 and 650 (average FICO
scores fall into this range) indicate basically good credit, but also
suggest to lenders that they should look at the potential borrower to
assess any particular credit risks before extending a large loan or high
credit limit. People with scores in this range have a good chance at
obtaining credit at a good rate, but may have to provide additional
documentation and explanations to the lender before a large loan is
approved. This means that their loan closing may take longer, making
their experience more like that of borrowers in the days before credit
scoring, when every individual was researched.
A score below 620 may
prevent a borrower from getting the best interest rates, as they may be
considered a greater credit risk-but it does not mean that they can't
get credit. The process will probably be lengthier and, as noted, the
terms may be less appealing, but often credit can still be obtained.
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You are most likely already familiar
with the concept of "credit," the reputation for paying your bills on
time that makes it possible for you to obtain money or goods with the
understanding that you will pay for them later.
In fact, you probably have already put
your credit to work for you. You employed it when you obtained an auto
or student loan, used your credit card to pay for a trip or new suit, or
were chosen as the tenant for your rented apartment or house. A solid
history of paying your bills may also have been just the objective
character reference needed to help you land your job, too.
But even if you use your credit every
day, you may have questions about the credit industry and how it affects
you. In today's society, credit is much more complicated than keeping a
tally at the local grocery. As a credit-active consumer, you need to
know how credit reporting works and what your credit report contains.
What Is a Credit Bureau?
A credit bureau or credit reporting agency is in the business of
gathering, maintaining, and selling information about consumers' credit
histories. It collects information about consumers' payment habits from
credit grantors like banks, savings and loans, credit unions, finance
companies, and retailers. The credit bureau stores this information in a
computer database and sells it to credit grantors in the form of credit
reports. When you apply for a new credit card or loan, the credit
grantor orders your credit report from at least one credit bureau and
analyzes the information to decide whether to grant you credit. The
credit bureau charges the credit grantor a fee for every credit report
sold.
Although credit-reporting agencies
provide your credit report to lenders when you apply for credit, they do
not make actual lending decisions. It is up to individual lenders to
evaluate your credit report and any other factors they consider
important and then decide whether or not to offer you credit.
The Three Consumer Credit
Bureaus
There are three major credit bureaus providing nationwide coverage of
consumer credit information in the United States: Equifax, Experian, and
Trans Union. Although many national lending institutions report consumer
credit information to all three, smaller banks and other credit grantors
may report to only one-or even none. Therefore, your credit report from
one credit bureau is not necessarily exactly the same as your credit
report from another.
What Exactly Is a Credit
Report?
A consumer credit report is a document that contains a factual record of
an individual's credit payment history. Credit grantors are permitted by
law to review your credit report to objectively determine whether to
grant you credit. There are 190 million credit active people in the
United States who have a charge account, car loan, student loan, or home
mortgage. As those people pay their bills, most lenders report credit
payment information to credit bureaus. So most of the information in
your consumer credit report comes directly from the companies you do
business with.
What Information Does a Credit
Report Contain?
A consumer credit report contains four types of information: identifying
information, credit information, public record information, and
inquiries.
Identifying information includes:
- Your name
- Your current and previous addresses
- Your Social Security number
- Your year of birth
- Your current and previous employers
- If you're married, your spouse's
name
Credit information includes credit
accounts or loans you have with:
- Banks
- Retailers
- Credit card issuers
- Other lenders
Public record information includes any
information that's contained in state and county court records, like:
- Bankruptcies
- Tax liens
- Monetary judgments
Inquiries indicate to other credit
grantors that you have applied for new credit that could result in
additional debt. Potential lenders view multiple recent inquiries on
your credit report as a sign that you are overextending yourself.
(A credit risk score may also be
included when your report is provided to a credit grantor, although it
is not included on consumer review reports. The ways to calculate and
use a credit score vary widely, so a score has little meaning outside of
the context of a particular lender's unique guidelines for use.
Therefore, it is not included on consumer review reports.)
What is a Credit Risk Score?
A credit risk score is a statistical summary of the information
contained in a consumer's credit report. The most well known type of
credit risk score is the Fair, Isaac or FICO score. Sophisticated
mathematical processes calculate the score by assigning numerical values
to various pieces of information in the credit report. Credit bureaus
provide risk scores to credit grantors who use them to objectively
evaluate an applicant's credit-worthiness. The score itself is relative
and will be viewed differently by creditors depending on numerous
factors, including the creditor's risk level, marketing goals, and
business practices. Your risk score will change over time as your credit
history develops. See What Is a Credit Score? For more detailed
information.
Does a Credit Report Contain
Other, Unrelated Personal Information?
No. Your consumer credit report does not contain information about your
race, religious preference, medical history, personal lifestyle,
personal background, political preference or criminal record.
How Long Does Information Stay
on My Credit Report?
Positive credit information remains on your report indefinitely,
although information about an account will cycle off your report if no
new information is reported about it for seven years. (Thus, a closed
account will disappear from your report seven years after it is reported
closed by the credit grantor.)
Most negative information remains for up
to 7 years. Bankruptcies can remain on your credit report for up to 10
years. Other public record information can remain for up to 7 years.
Most inquiries stay on your credit
report for up to two years.
What Is a Mortgage Report?
A mortgage report is a special credit report that lenders use prior to
deciding whether or not to extend you a home loan. Each report is
compiled from credit reports from two or three credit bureaus. The
mortgage credit reporting company purchases credit reports from the
credit bureaus, combines them, and manually verifies specific
information such as employment, credit account balances, and public
record information.
What Is an Employment Report?
An employment report is a modified credit report that helps potential
and current employers make hiring and promoting decisions. The
employment report contains much of the same information about your loans
and credit cards that your credit report has listed. However, your
marital status, year of birth, and account numbers are omitted from the
employment report.
Who May Check My Credit Report?
Federal law carefully regulates how credit reports can be used and by
whom. By law, you have the right to obtain your own reports at a
reasonable price. Before they can access consumer credit information,
businesses must offer proof that they will be using the data for no
other purpose than that allowed by federal law.
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What would you do if a friend or family
member asked you to cosign a loan? Before you answer, make sure you
understand what your obligations are.
When you agree to cosign for someone
else's debt, you are essentially guaranteeing payment if that person
defaults. You are being asked to take a risk that a professional lender
will not take. Think about it: the lender would not need a cosigner if
the borrower were a good risk.
Cosigning Means You're
Financially Responsible-Consider the Risks
The obligations associated with cosigning a loan can be more than people
expect. So before you put your autograph on the dotted line agreeing to
cosign a loan, the Federal Trade Commission requires the creditor to
give you information explaining your commitment. It states:
"You are being asked to guarantee this
debt. Think carefully before you do. If the borrower that you want to
accept this responsibility. You may have to pay up to the full amount of
the debt if the borrower does not pay. You may also have to pay late
fees or collection costs, which increase this amount. The creditor can
collect this debt from you without first trying to collect from the
borrower. The creditor can use the same collection methods against you
that can be used against the borrower, such as suing you, garnishing
your wages, etc. If this debt is ever in default, that fact may become
part of your credit record. This notice is not the contract that makes
you liable for the debt."
If you are thinking about cosigning you
should consider the following:
- Be sure you can afford to pay the
loan. If you're asked to pay and you can't, you could be sued or
your credit rating could be damaged.
- Even if you're not asked to repay
the debt, your liability for the loan may keep you from getting
other credit because creditors will consider the cosigned loan as
one of your obligations.
- Before you pledge property to
secure the loan, such as your home or car, be sure to understand all
the consequences. If the borrower fails to pay, you could lose these
items.
- You may have to pay the full amount
of the debt if the borrower does not pay. You may also have to pay
late fees or collection costs in addition to the outstanding debt.
* Ask the lender to calculate the money you might owe. You may also
negotiate specific terms of your obligation.
- Ask the lender to agree, in
writing, to notify you if the borrower misses a payment. Doing this
will give you time to deal with the problem or make back payments
without having to repay the entire amount immediately.
- Make sure you get copies of all the
important contracts.
- Check your state law for additional
cosigner rights.
When Is It Worthwhile to
Cosign?
When it's important to you that the borrower get credit, and you have
good reason to believe the borrower will repay the debt, it can be
worthwhile to cosign for a loan or credit card.
Parents often cosign for their adult
children who have ample income to qualify individually, but lack a solid
credit or employment history. By cosigning, parents help their children
receive a loan and establish credit in their own name.
Similarly, sometimes a spouse or family
member will cosign for a small loan or credit line to help an individual
establish or rebuild credit in their own name.
Although the statistics on cosigning
support that it's a relatively high risk, that's not always the case.
There have been many successful situations where cosigning served the
interests of all parties. Statistically, though, the risk often
outweighs the benefit. Some studies show that three out of four
cosigners end up having to repay the loan for the original borrower, so
it's important to take steps to protect yourself if you do cosign.
If you are worried about some of the
risks that cosigning carries, you may be able to negotiate specific
terms of your obligation. For example, you might want to have your
liability limited to paying the principal balance on the loan, but not
late charges, court costs, or attorney's fees. In this case, ask the
lender to include a statement in the contract like: "The cosigner will
be responsible only for the principal balance on this loan at the time
of default."
If You Need a Cosigner
If you're in need of someone to cosign a loan for you, talk with family
or friends and explain to them that they'll be helping you to
reestablish your credit. Understand that cosigning is a big step for the
person agreeing to sign for you, so make sure you make them feel as
comfortable as possible about cosigning for you. Show them you'll be
able to repay the loan. Remember that if you fail to repay the debt and
the cosigner has to step in to repay it but can't afford it, then you
both will have damaged credit histories. Therefore, the credit you
obtain will carry a double weight of responsibility-your obligation to
the lender to repay what you borrow and your obligation to your cosigner
to live up to the investment they're making in you.
Whatever your involvement
in a cosigned credit transaction, remember that cosigning means extra
obligations for everyone involved and consider your decision carefully.
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Detect Identity Fraud Early
We all know we should check our credit card statements every month for
charges that we haven't made. But that only catches the thief who uses
an account you know you have.
In the past few years identity fraud has
risen dramatically. In this insidious form of credit fraud, a thief
steals your good credit by taking over or opening accounts in your name,
running up large balances, and leaving you to deal with the collectors
when they come calling.
New accounts opened with your identity
will appear on your credit report, revealing identity fraud to you. If
you don't check your credit report, it could be months before the credit
grantor, fed up with nonpayment, turns the account over to a collector
who tracks you down and demands payment for a loan you've never even
heard of.
As with much less problematic
inaccuracies, identity fraud is something you can detect and remedy most
effectively by checking your credit history thoroughly and on a routine
basis.
Become an Informed Consumer of
Credit Services
Your credit report can have a dramatic impact on your financial
stability. With good credit, you can obtain benefits of all kinds--a
home mortgage or lease on an apartment, an auto loan, low-interest
credit cards, and more-with ease. But if your credit history is poor,
many of these financial options may be unavailable to you. Either way,
you have a right to know what to expect when a lender runs a credit
check on you.
Aside from paying your bills regularly
and on time, the single most important thing you can to be aware of the
contents of your credit report.
Studies have shown that many credit
files contain inaccuracies that can harm your credit rating, leading to
rejections when you apply for loans, insurance, even a job. Often the
result of simple human error, they can be caused by anything from a
clerical error to a computer glitch in which your file is mixed with
that of someone with a similar name.
That's why it's essential that you check
all of your credit files-and monitor your credit regularly--to protect
your good credit standing, even if you always pay all your bills on
time.
And if your credit is less than perfect
now, checking your report will help you identify lingering problems so
you can deal with them effectively and move on toward an improved credit
standing. Whatever your situation, reviewing your report regularly is
the only way to be sure that you will go into any credit conversations
knowing everything lenders will know.
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It can be difficult. Currently, there is
no law requiring that credit scores be released to consumers, and credit
bureaus do not include the scores on copies of credit reports provided
to consumers.
The three major credit bureaus,
Experian, Equifax and Trans Union, worked with the Fair, Isaac company
to develop generic scoring models that allow each bureau to offer a
score based solely on their credit report data on you. Because the
scores are created differently by the credit bureaus and used
differently by lenders, Fair, Isaac and the credit bureaus have said
that knowing a score is of little use to the consumer, and may simply be
confusing.
However, Fair, Isaac is currently
negotiating with the bureaus to change contract agreements that could
allow lenders to more freely disclose credit scores to consumers. The
company said it is responding to increased public curiosity about the
scores. Some lenders already have started revealing scores to potential
borrowers if they ask. And as consumer awareness of credit scoring, and
FICO scores in particular, grows, more and more lenders are willing to
discuss it.
All lenders should, however, tell you
the reasons provided for a low score if that score is a factor in
delaying or denying your loan application. A list of "score reason
codes" comes with each credit score report a lender receives. The codes
explain the top reasons your score was not higher, such as too many
inquiries or delinquency on accounts.
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The first thing to remember is that your
credit score can vary from month to month-even day to day, sometimes.
This is because it is calculated based on the credit data available for
you at the credit bureau on the day the score is requested by a lender.
But there are some specific ways to
improve your credit score. First, when a lender receives your credit
score, it includes "score reason codes" to explain the top reasons your
score was not higher. These codes can give you an idea of how you should
start improving your score, such as closing unused credit accounts or
being more diligent about making payments on time.
Additionally, here are some general
suggestions to help you develop a solid credit history and influence
your score for the better:
- Pay your bills consistently and on
time. And take heart-the scoring models all take into account the
fact that everyone misses a payment once in a while. Also, negative
information loses its potency over time: a recent late payment is
weighted more heavily than a late payment four years ago.
- Check your credit report and remove
any errors. By making sure that only your accurate credit history
appears on your report, you ensure that the credit score it
generates isn't lowered by inaccurate information.
- Keep your debt reasonable. One rule
of thumb: for a good credit score, your account balances should be
below 75% of your available credit. For example, if you have a $2000
credit limit, you should have a balance of no more than $1500.
- Maintain only a reasonable amount
of unused credit. While it's good to have a cushion of credit
available, having ready access to thousands of dollars of debt makes
you a poorer credit risk.
- Avoid too many inquiries. Inquiries
are interpreted as a sign that you have been actively seeking
credit, and may be in financial difficulties or in the process of
overextending yourself.
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Whether you're a first-time buyer or a
seasoned homeowner looking to move up to a bigger or better house, how
you have managed your consumer credit rating can have a real impact on
both the amount and terms of your next mortgage.
Naturally, if you have kept your credit
use reasonable and always paid your bills on time, you will most likely
have very few difficulties obtaining a mortgage loan. But what if you
are one of the many Americans whose credit report is less than perfect?
Contrary to popular belief, it is not
impossible to obtain a mortgage with an imperfect credit rating. After
all, mortgage lenders are in the business of providing loans, and have
it in their interest as well as yours to find an appropriate way to
finance your home purchase.
Credit Doesn't Necessarily Have
to Be "Perfect" to Be Good
In the case of a single bad mark on an otherwise good credit history,
many mortgage lenders will simply ask for a written explanation of the
late payment. If the explanation is reasonable and believable, many
lenders will overlook the isolated problem-especially if it occurred
some time ago and your credit has been good since.
Indeed, as far as lenders are concerned,
the most important time period in your credit history is just the
preceding year or two.
According to guidelines established by
the Federal National Mortgage Association (Fannie Mae), indicators of
good credit do include some leeway for occasional late payments. Thus
lenders will look at:
- Revolving credit (e.g., credit
cards), which should show no payments 60 days or more late and no
more than two payments 30 days late;
- Installment credit (e.g., an auto
loan), which should show no payments 60 days or more late and no
more than one payment 30 days late;
- Housing payments (e.g., mortgage or
rent), which should-not surprisingly-show no late payments (this can
be proven by the payment history from a mortgage lender or by the
borrower's canceled checks for the past 12 months).
Credit Scoring Broadens Scope
of Lenders' Considerations
As credit scoring in mortgage loan decisions has become more
sophisticated, lenders have also begun looking at other factors in your
credit history as well. They might be concerned if your credit cards are
"maxed out" (indicating possible future difficulties in managing debt
and making payments) or, conversely, if you have large lines of credit
available (that you could at some future time run up into unmanageable
debt).
Some lenders will also look at how many
inquiries have been made into your credit report recently, interpreting
a large number of inquiries as a sign that you have applied for a large
amount of credit lately. Applying for numerous lines of credit might
indicate that you have been turned down by several other lenders or that
you are in the process of accumulating new credit accounts which might
leave you with too much credit available to be a good credit risk.
"Compensating Factors" Can Make
a Difference
Credit scoring can also work to your benefit, helping to overcome
potential problems like a high debt-to-income ratio or a slightly
imperfect credit past. Scoring also considers "compensating factors"
that Fannie Mae guidelines indicate might justify some degree of risk to
the lender. These compensating factors include:
- A large down payment;
- An energy-efficient property (e.g.,
with up-to-date heating and power systems);
- Previous large housing payments
(such as high rent), which show the borrower's ability to channel a
larger-than-normal proportion of income to payments;
- A history of good credit and the
potential to accumulate savings in the future (despite a current low
net worth);
- The likelihood of career
advancement and earnings increases due to strong education or job
training (this is particularly helpful to young borrowers who carry
student loan debt);
- A substantial net worth (despite
current low earnings).
Knowing about these compensating
factors-and which of them are at play in your own situation-can help you
to get the loan you need for the home you really want. But you also need
to know what your credit history looks like on paper to be able to
optimize your borrowing ability.
For example, you may have cut up a
credit card years ago, but never bothered to actually close the account.
This account shows up on your credit report as available credit, which
lenders may think adds to your risk. The time to close this unused and
unnecessary account is before you apply for a mortgage.
In addition, you will want to be
confident that the information in your credit report is accurate.
Inaccuracies in your credit report-or, worse, the damage done by credit
or identity fraud-can seriously impact mortgage lenders' likelihood of
offering you a loan.
Reviewing Your Credit Report
Puts You In Control
Many financial planning experts recommend checking your credit report on
a regular basis in order to keep tabs on the information placed on it.
Routine checking on your part allows you to stay on top of what credit
grantors-including mortgage lenders-will read about you when they check
your credit history, and enables you to correct any inaccuracies and
catch fraud before these problems impact your mortgage loan. Disputing
inaccuracies can take up to 30 days to resolve, so taking care of them
well in advance of applying for a mortgage is also important.
The CreditCheck Monitoring Service makes
it easy for you to stay on top of the information in your credit report,
and gives you a free copy of your report when you sign up for a free
trial membership.
The information provided by your credit
report can be invaluable in understanding your credit rating as mortgage
lenders see it, enabling you to correct inaccuracies and know best how
to present your correct credit history and circumstances in order to get
the mortgage you seek.
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Paying cash for products and services
seems to be a practice that occurred in a different era. Today, credit
is a way of life, and plastic has evolved into the currency of choice.
Virtually anything-gas, groceries, doctors' visits, clothing, vacations,
even cars--can be purchased with credit cards.
Yet many consumers are unclear about the
best way to go about establishing and maintaining a good credit history.
What Creditors Look For
Creditors are in business to make money and avoid losses. Typically,
creditors will analyze the information provided in your credit
application and will access a credit report from one or more of the 3
major credit bureaus, Experian, formerly known as TRW, Equifax, or Trans
Union.
When deciding whether to grant credit or
a loan, creditors will consider a number of different factors, such as
your income, how long you have lived at your current address, what kinds
of assets you have, the balances in your checking and savings accounts,
your promptness in paying bills, how long you have been working for the
same company, and how much you owe other creditors.
All creditors have slightly different
criteria, and they will make a judgment about the creditworthiness and
potential risk of each applicant.
How to Establish Credit
There are a number of ways to establish credit. If you have a steady
income and have lived in the same area for at least a year, try one of
these approaches:
- Apply for credit with a local
business, such as a department store or a local bank or credit
union. These local merchants may have lower credit standards than
larger lenders.
- Apply for credit with an oil
company or local department store.
- Take out a small loan from a local
bank or credit union-even if you have no immediate need for the
money. Make payments on time and consider the interest expense an
investment in establishing a good credit history.
- Take advantage of secured lines of
credit offered by some lenders. By depositing a specific amount into
a special account, you receive a credit card with a limit that
equals your deposit. (For example, if you deposit $1,000, your
credit limit will be $1,000.)
- Before you apply for credit, make
sure the creditor or lender reports credit history information to
one of the credit bureaus so you can build your credit history.
Pay Your Bills on Time
Although creditors have different criteria for granting credit, there
are a number of actions which most creditors rank as indicative of a
poor credit risk, including:
- Frequent late payments
- Unpaid bills
- Repossessions
- Accounts turned over to a
collection agency
- Legal judgments
- Liens
- Bankruptcies
Paying your bills on time is the best
way to maintain a good credit rating and be considered a good credit
risk. However, there are a number of legitimate circumstances which can
cause you to become behind in your payments, such as illness, injury, or
the loss of your job.
Talk to Your Creditors
If you begin to fall behind in your payments, contact your creditors
immediately. Most are willing to work out an alternative payment
schedule with you if you expect to repay your loan or balance within a
reasonable period of time.
Creditors and lenders want to collect
their money at the least possible cost. By working with you before the
situation becomes critical, they can save time and money on collection
efforts, and they know up front when to expect payment.
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The widespread use of credit scoring
allows for speedy, objective analysis of credit histories. In the early
1980s, the three major credit bureaus, Experian, Equifax and Trans Union
all worked with the Fair, Isaac company to develop generic scoring
models that allow each bureau to offer a score based solely on their
data about an individual. A computer-generated score is compiled using
information from your credit report, such as whether payments have been
on time. Then that score is compared to the credit performance of
consumers with similar profiles. The scoring system awards points for
each factor that helps predict who is most likely to repay a debt and
produces a single number-your credit score.
Credit scoring has allowed companies to
offer "instant credit," which was unheard of in years past. As you
browse through aisles of washing machines or peek into the windows of
new cars, a prospective lender can order your score and, if they like
what they see, give you loan or credit approval on the spot. It also
means that borrowers are less likely to experience problems with
individual lenders' prejudices. Because credit scoring is objective and
based on large volumes of verified statistical data, credit scoring
brings a new level of fairness to the credit-granting process.
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A credit score or credit bureau risk
score is based on information drawn from your credit report. About 30
individual factors are used to determine the score. Certain factors,
such as payment history, have more weight than others, such as the
length of your credit history. However, a factor may be more important
to your credit score than to someone else's score because of differences
in individuals' credit reports. Also, each factor's importance can
change as your credit report changes. Factors can be categorized in five
areas:
- Payment history. Payment
information on credit cards, installment loans (such as a car loan),
mortgage loans or finance company accounts. Are there public record
items, such as judgments or bankruptcy, and collection items?
Details on late or missed payments, including how much was owed, how
late the payments were and how recently they occurred. How many
accounts show no late payments. According to Fair Isaac, this
category usually determines about 35% of your score.
- Outstanding debt. Amount owed on
all accounts and on different types of accounts, such as credit
cards or installment loans. How many accounts have balances? How
close are you to each credit limit? According to Fair Isaac, this
category usually determines about 30% of your score.
- Credit history. How long have you
been building a credit history? How long specific accounts have been
established and how long since you used each account? According to
Fair Isaac, this category usually determines about 15% of your
score.
- Pursuit of new credit. How many
inquiries and new accounts does your report show, and how recent are
they? How long has it been since the most recent inquiry? Whether
you have made on-time payments to re-build your credit after a
period of frequent late payments. According to Fair Isaac, this
category usually determines about 10% of your score.
- Types of credit in use. How many
accounts are reported for bank cards, travel and entertainment
cards, department store cards, installment loans, and so on.
According to Fair Isaac, this category usually determines about 10%
of your score.
Also informative is the list of
"reasons" that may be provided to account for why a score isn't higher.
When lenders request your credit score, they also receive a list of the
four most significant reasons your score is not higher. Although lenders
do not have to tell you your score, they should share the reasons listed
on the report with you.
The possible FICO reasons are:
- Amount owed on accounts is too
high.
- Delinquency on accounts.
- Too few bank revolving accounts.
- Too many bank or national revolving
accounts.
- Too many accounts with balances.
- Consumer finance accounts.
- Account payment history too new to
rate.
- Too many recent inquiries in the
last 12 months.
- Too many accounts opened in the
last 12 months.
- Proportion of balances to credit
limits is too high on revolving accounts.
- Amount owed on revolving accounts
is too high.
- Length of revolving credit history
is too short.
- Time since delinquency is too
recent or unknown.
- Length of credit history is too
short.
- Lack of recent bank revolving
information.
- Lack of recent revolving account
information.
- No recent non-mortgage balance
information.
- Number of accounts with
delinquency.
- Too few accounts currently paid as
agreed.
- Time since derogatory public record
or collection.
- Amount past due on accounts.
- Serious delinquency, derogatory
public record, or collection.
- Too many bank or national revolving
accounts with balances.
- No recent revolving balances.
- Proportion of loan balances to loan
amounts is too high.
- Lack of recent installment loan
information.
- Date of last inquiry too recent.
- Time since most recent account
opening too short.
- Number of revolving accounts.
- Number of bank revolving or other
revolving accounts.
- Number of established accounts.
- No recent bankcard balances.
- Too few accounts with recent
payment information.
Keep in mind that your credit report
changes day to day as you make payments or increase balances. If you pay
off your credit cards in full every month but your credit score is
compiled before your payments are reported to the credit bureau, your
score will reflect those balances. Generally, the total balance on your
last statement is the amount shown on your credit report.
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