Understanding Credit
If you are like most people, you have only a vague understanding of how credit is granted, obtained, recorded, and maintained. In fact, even if you have vast knowledge of the financial industry, you know that our credit system is not, in any way, based on an exact science. Our credit system and the related tracking of it is based largely on the subjectivity of individual decision making, variable credit scoring formulas, and the further variability of changing objectives amongst the financial institutions granting the credit.
So, whether or not you are credit wise, there is always more information to gather and insight to gain. Here is how you can establish what you know and do now know about your credit:
There are three major credit bureaus (I have included their contact information at the end of this article), each of which has a different name for your credit score, and each of which utilizes a slightly different formula for calculating your score. Contact all three and obtain a copy of your credit report from each of them. Alternatively, there are several businesses that will do this for you and present you with a tri-merge report combining all of the information from the three bureaus into one report. If you have not obtained or read your credit report before, I strongly suggest that you sit down with a financial professional who is familiar with the credit reporting format and go through any questions or concerns you might have. There are several aspects of the credit report that are important for you to know and understand.
Credit Score
Your credit score can vary greatly from bureau to bureau for a number of reasons. It is common, however, for lenders to zero in on your middle score as reported by the three credit bureaus. Credit scores generally range from 380 on the very low end to about 850 on the high end. If your score is 730 or above, you are usually considered an A+ credit risk. Or, in other words, you are deemed to be the lowest risk borrower and will therefore be afforded the best interest rates available for the transaction you are requesting. If your score is between 600 and 699, you are generally considered credit worthy. You will qualify for financing in most cases. If, however, your credit score falls below 600, your credit is impaired and you will struggle to qualify for conventional financing programs and their corresponding interest rates. If your credit score is in this category, you are typically referred to as a sub-prime or high-risk borrower and if you do qualify for financing, you will typically pay high rates of interest as part of the loan agreement.
Creditors
Just about every business you have or will obtain credit from will report to a credit bureau. When you are reviewing your report, note the creditors listed and whether or not a balance owed is indicated. The credit report will also indicate the last time that each creditor reported information on you. Double check the information on your credit report with your own records and recollections to ensure accuracy.
Type of Account
Each account reported on your credit report will include a code that indicates what type of account it is. Examples include whether it is an individual or joint account and whether it is a revolving or fixed term debt. Credit card balances are considered revolving debt; mortgage balances are an example of fixed term debt. Again, double check the information against your own records to ensure accuracy.
Current Status
This is shown as a numeric indicator. If you have an 01 rating next to the creditor and type of account, you are considered current with that debtor. Any rating higher than an 01 indicates that you are currently past due with that creditor. If you have an 02 rating, for example, you are 30 days past due with that creditor according to the report. An 03 rating indicates that you are 60 days past due and so on. An 09 rating indicates that the creditor has charged-off the balance that you owe them, which obviously has a further adverse impact on your credit score.
The balance owed indicates another factor that determines your status. The total balance owed to the creditor along with the current monthly payment and any amounts overdue are all reflected on the report.
Payment History
There are also numeric indications as to your payment history for as long as each account and creditor has been reporting to the credit bureau. If your history on a particular account goes back four years, for instance, you will be able to determine how many of your 48 monthly payments were made on time, how many were 30 days late, etc. You will also be able to determine the date the loan originated, the high balance owed on the loan, and the minimum or regular monthly payment amount.
Note: Creditors can only report you as past due if your payment is late by 30 days or more. While I am not advocating that paying your bills up to 29 days late is acceptable, I think it is helpful to know that there is some latitude available to you, relative to your credit rating, should something unforeseen arise.
Judgments and Liens
There is a section on your credit report that highlights any civil judgments that have been entered against you; tax liens levied by government agencies, as well as bankruptcy filings. As a rule of thumb, bankruptcies stay on your credit report for up to seven years and judgments stick around for up to nine years and are renewable in certain circumstances.
Inquiries
This section identifies every entity that has run your credit in recent history (usually the last two to three years) and the date they ran the report.
Contact Information. Credit reports also contain the telephone number and address for every creditor listed on your report.
Credit Bureaus
Trans Union www.Transunion.com
(800) 888-4213
Experian www.Experian.com
(888) 397-3742
Equifax www.Equifax.com
(800) 685-1111
This article is part of Scott Arney's educational series, entitled The Serial Decision Maker
If you are like most people, you have only a vague understanding of how credit is granted, obtained, recorded, and maintained. In fact, even if you have vast knowledge of the financial industry, you know that our credit system is not, in any way, based on an exact science. Our credit system and the related tracking of it is based largely on the subjectivity of individual decision making, variable credit scoring formulas, and the further variability of changing objectives amongst the financial institutions granting the credit.
So, whether or not you are credit wise, there is always more information to gather and insight to gain. Here is how you can establish what you know and do now know about your credit:
There are three major credit bureaus (I have included their contact information at the end of this article), each of which has a different name for your credit score, and each of which utilizes a slightly different formula for calculating your score. Contact all three and obtain a copy of your credit report from each of them. Alternatively, there are several businesses that will do this for you and present you with a tri-merge report combining all of the information from the three bureaus into one report. If you have not obtained or read your credit report before, I strongly suggest that you sit down with a financial professional who is familiar with the credit reporting format and go through any questions or concerns you might have. There are several aspects of the credit report that are important for you to know and understand.
Credit Score
Your credit score can vary greatly from bureau to bureau for a number of reasons. It is common, however, for lenders to zero in on your middle score as reported by the three credit bureaus. Credit scores generally range from 380 on the very low end to about 850 on the high end. If your score is 730 or above, you are usually considered an A+ credit risk. Or, in other words, you are deemed to be the lowest risk borrower and will therefore be afforded the best interest rates available for the transaction you are requesting. If your score is between 600 and 699, you are generally considered credit worthy. You will qualify for financing in most cases. If, however, your credit score falls below 600, your credit is impaired and you will struggle to qualify for conventional financing programs and their corresponding interest rates. If your credit score is in this category, you are typically referred to as a sub-prime or high-risk borrower and if you do qualify for financing, you will typically pay high rates of interest as part of the loan agreement.
Creditors
Just about every business you have or will obtain credit from will report to a credit bureau. When you are reviewing your report, note the creditors listed and whether or not a balance owed is indicated. The credit report will also indicate the last time that each creditor reported information on you. Double check the information on your credit report with your own records and recollections to ensure accuracy.
Type of Account
Each account reported on your credit report will include a code that indicates what type of account it is. Examples include whether it is an individual or joint account and whether it is a revolving or fixed term debt. Credit card balances are considered revolving debt; mortgage balances are an example of fixed term debt. Again, double check the information against your own records to ensure accuracy.
Current Status
This is shown as a numeric indicator. If you have an 01 rating next to the creditor and type of account, you are considered current with that debtor. Any rating higher than an 01 indicates that you are currently past due with that creditor. If you have an 02 rating, for example, you are 30 days past due with that creditor according to the report. An 03 rating indicates that you are 60 days past due and so on. An 09 rating indicates that the creditor has charged-off the balance that you owe them, which obviously has a further adverse impact on your credit score.
The balance owed indicates another factor that determines your status. The total balance owed to the creditor along with the current monthly payment and any amounts overdue are all reflected on the report.
Payment History
There are also numeric indications as to your payment history for as long as each account and creditor has been reporting to the credit bureau. If your history on a particular account goes back four years, for instance, you will be able to determine how many of your 48 monthly payments were made on time, how many were 30 days late, etc. You will also be able to determine the date the loan originated, the high balance owed on the loan, and the minimum or regular monthly payment amount.
Note: Creditors can only report you as past due if your payment is late by 30 days or more. While I am not advocating that paying your bills up to 29 days late is acceptable, I think it is helpful to know that there is some latitude available to you, relative to your credit rating, should something unforeseen arise.
Judgments and Liens
There is a section on your credit report that highlights any civil judgments that have been entered against you; tax liens levied by government agencies, as well as bankruptcy filings. As a rule of thumb, bankruptcies stay on your credit report for up to seven years and judgments stick around for up to nine years and are renewable in certain circumstances.
Inquiries
This section identifies every entity that has run your credit in recent history (usually the last two to three years) and the date they ran the report.
Contact Information. Credit reports also contain the telephone number and address for every creditor listed on your report.
Credit Bureaus
Trans Union www.Transunion.com
(800) 888-4213
Experian www.Experian.com
(888) 397-3742
Equifax www.Equifax.com
(800) 685-1111
This article is part of Scott Arney's educational series, entitled The Serial Decision Maker
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