Credit

What is Credit?

Credit is the ability to borrow money.

When someone says that their credit is “good” or “bad”, it is based on their financial reputation or history. When you borrow money based on your credit, it is some type of loan that you promise to pay back – usually with interest.

Interest is the fee you are charged for borrowing money. The interest rate will vary depending on your credit level. If you want to know what your credit is, you pull a credit report. (Instructions below)

Your Credit Score is a numerical representation of the information in your Credit Report.

A credit score is made up of:

  1. Payment history (extremely influential): This factor still comes in at #1 as a predictor of risk. Late payments remain on your report for up to seven years for a reason. Creditors use your score to help determine how likely you are to pay your debt, so a history of untimely payments usually raises a red flag.
  2. Age and type of credit (highly influential): This factor refers to your account mix and length of credit history. The key idea is to maintain a variety of account types, like credit cards and loans, over time.
  3. Credit utilization (highly influential): Your utilization percentage is calculated by dividing your balances by your available credit. It’s generally recommended to keep your balances under 30 percent of your total credit limit.
  4. Total balances (moderately influential): This looks at the balances of both current and delinquent debt. Similar to utilization, reducing the amount of debt you owe can help improve your score.
  5. Recent behavior (less influential): This factor looks at how many credit accounts you’ve recently opened and the number of hard inquiries placed on your file.
  6. Available credit (least influential): This is the amount of credit you have available at your disposal.

What is the difference between a hard hit (inquiry) and a soft hit and how do they affect your credit score?

A hard hit is when a financial institution or credit card company checks your credit when deciding to lend you money (credit cards are a type of loan). Anytime this happens, it can lower your credit score by a few points and may remain on your credit report for up to 2 years.

A soft hit is when your credit is checked for any other reason such as a background check or a “pre-approved” credit offer. Additionally, when you check your own credit report, that is counted as a soft hit. These do not affect your credit score but may or may not show up on your credit report.

What is a “thin” file?

If you go to check your credit score and there is not enough information on your credit history, this is called having a thin file. This could be due to not having had credit cards or loans in the past, if you have just opened a credit or loan account or are re-opening credit after closing all of your previous credit accounts, or if the credit reporting agency lists you as deceased. If you have never had credit or are just establishing credit, a score will be available once you have a history of receiving credit and making payments.

Where to get a free credit score:

There are a number of sites that offer “free” credit scores but there are things you should be aware of before using them.

Most sites will collect personal information on you in return for providing a free score. This information could include your name, address, social security number and other personal information such as current loans or savings account information. Additionally many of these sites will offer you additional “paid” services such as Credit Monitoring or ID Theft Protection – this is how they earn money. Be sure to know what you are agreeing to before you give out your credit/debit card information.

Free Sites:
Credit Karma – www.creditkarma.com – provides Equifax and TransUnion Credit Scores
Credit Sesame – www.creditsesame.com – provides TransUnion Credit Score
Credit.com – www.credit.com – provides Experian Credit Score
Quizzle – www.quizzle.com – provides TransUnion Credit Score

All sites will:
• Explain what your credit score means as well as providing information on improving your score
• Push their “paid” products
• Interpret score and how to improve
• Offer useful free educational tools
• Use encryption to secure your data

Notes on these free scores:
Your scores could vary as much as 40 points between different credit reporting agencies. This could be due to the fact that not all information is reported to all of the agencies or information could be provided at different times to each agency.

Your credit score is just a snapshot of your credit. You want to manage your credit via your credit reports and be sure that information is up-to-date and correct.

Here is a quick breakdown of where the scores fall in a range of 300 to 850:

Credit Score Range

Credit Reports

A Credit Report is a record of your debts and payments.

A credit report includes:

  • Your current and past address information.
  • How much debt you currently have./li>
  • Your debt history (what debt did you have in the past).
  • Your payment history (do you/did you make your payments on time).
  • Whether or not there is negative information about you in public records (such as bills that have gone to collections).

Everyone is allowed free access to their credit report from each of the three credit reporting bureaus:

Experian, Transunion, and Equifax

You have the option to either pull all three reports, once every 12 months, or to pull a different report, once every 4 months.

Credit Reports can be accessed in three different ways:

Online at AnnualCreditReport.com. For step-by-step instructions, click here: Ordering a Credit Report step by step

Calling 1-877-322-8228 (You will go through a verification process.)

Or Completing the Annual Credit Report Request Form Annual Free Credit Report Request Form and mailing it to: Annual Credit Report, P.O. Box 105281, Atlanta, GA 30348-5281

*Be prepared to provide the following information when obtaining a credit report:

  • Full Name
  • Date of Birth
  • Social Security Number
  • Current and previous address(es) for the last five years
  • Daytime phone number
  • Photocopy of driver’s license or other picture ID, current billing statement or other document showing your name and address (if you apply via the mail)

Disputing your credit report

Sometimes a credit agency may have outdated or wrong information about you. Each agency will have slightly different information which is why it is a good idea to review them all. The first step is to review each credit report and list all accounts/information needing correction or deletion from the credit report.

Common errors in credit reports include:

Identity Errors: wrong name, phone number, address, incorrect accounts resulting from identity theft

Incorrect reporting of account status: closed accounts reported as open or reported as owner of the account when you are actually just an authorized user

Data management/processing errors: accounts that appear multiple times with different creditors listed, information that should no longer be on your report such as a debt that is more than seven years old

Balance Errors: accounts with incorrect current balance or credit limit

The Written Dispute Letter

You will write a separate letter to each agency, based on all of the accounts listed for that particular agency.

Attach COPIES, not originals, of your supporting documentation, including a copy of the credit reports highlighting the accounts in dispute.

Provide copies of your driver’s license or state-issued ID card (enlarged) and a copy of a utility bill in your name verifying your current address

Send letters with supporting documentation as certified mail with return receipt to the appropriate credit reporting agency:

Equifax
Equifax Online Credit Investigation
Equifax Information Services LL
P.O. Box 740256
Atlanta, GA, 30374
Phone: (800) 864-2978

Experian
Experian Online Disputes
Experian
P.O. Box 4000
Allen, TX 75013
Phone: (888) 397-3742

TransUnion
TransUnion Online Disputes
TransUnion Consumer Solutions
P.O. Box 2000
Chester, PA 19022-2000
Phone: (800) 916-8800

Allow 30-45 days for the credit agency to respond