The Credit Handbook
How to Get Credit
If you’re thinking about applying for credit, pick up an application today. Review the application to see what information you’ll need to gather. Review your credit report, too. Then, when you’re ready to apply for credit, you’ve already done your homework.
Simply put, your credit report is a compilation of data gathered by credit reporting agencies about you. The credit reporting agencies sell this information to companies and organizations with a legitimate business need to know how you manage credit.
As you’ve seen earlier in this book, it’s important to build a good credit history. How you handle credit today will affect your access to credit later. For example, if you have a major credit card and several store cards, you make payments on time, and pay off your bills, your credit report will show that you have been responsible with credit. This will help you when you wish to get a new credit card, finance a car, or purchase a house. A negative credit rating can hurt your ability to get further credit. This is because most creditors rely on your credit history when deciding whether to grant you credit.
What Information Is in a Credit Report?
Your credit report is based on information supplied over time by your creditors. Information in your credit report includes:
- Identification and Employment Data: Your name, birth date, address, Social Security number, employer, and spouse’s name are routinely listed. The bureau may also provide other information, such as your employment history, home ownership, income, and previous address, if the creditor requests it.
- Payment History: Your accounts with different creditors are listed, along with your credit limits, how much of each limit you’ve used, and how you’ve repaid your debts. Related items might include collection actions against you.
- Inquiries: Credit bureaus maintain a record of all creditors who have requested your credit report within the last six months.
- Public Records: Public information that relates to your credit-worthiness, such as bankruptcy filings or tax liens, will be listed.
Creditors use all of this information to judge whether you are likely to be a good credit risk.
If a creditor rejects your application for credit because of your credit report, you may ask the credit bureau for a copy of your credit report. If you request it within 60 days of being turned down, the report is free.
Look at Your Credit Report
It’s a good idea to look at your own report at least once a year. This way you’ll know what the creditors know about you. Even if you have not been denied credit, it’s good to find out what is in your credit file. It is especially good to look at your report if you’ve never reviewed it or if you are planning a major purchase in the near future. Checking out your credit report in advance could speed the credit-granting process.
Obtaining Your Report
Every year consumers can get a free copy of their credit report from each of the credit agencies—Equifax, TransUnion, and Experian. The credit bureaus have created a centralized website, toll-free telephone number, and mailing address for Minnesota consumers to order their reports. Annual reports may be requested in the following ways:
- Log on to: www.AnnualCreditReport.com
- Call: (877) 322-8228
- Write to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA., 30348-5281
Be aware that some companies may try to charge you for your free annual credit report by adding on services that you might not need. You are not obligated to buy these services to obtain a copy of your credit report. Although consumers can only receive their credit reports for free once per year, consumers may still request additional reports by mail. Consumers may contact the credit bureaus as follows:
You Can Correct Errors in Your Report
Experts estimate that 80 percent of credit reports contain mistakes, ranging from misspelled names to accounts that the consumer did not open.
Consumers should dispute such errors in writing with the company and the credit bureaus. Under the Fair Credit Reporting Act, credit bureaus must investigate disputes, usually within 30 days, and must remove all inaccuracies. If you disagree with the results of the investigation, you may write a brief statement explaining your side of the story. At your request, your note will be included with future credit reports.
If negative information in your report is accurate, only time will erase it. Credit bureaus may report negative information for seven years and bankruptcies for ten years.
Ever wonder how you really rate with creditors? As you know, creditors want to know whether you will be a good credit risk. To help them figure this out, most creditors use scoring systems they have designed over time. Your credit score is determined by assigning points to such things as your income, how long you’ve been in your current job, what your work is, whether you own your home or rent, how much credit you have, and more. Here’s how the system works.
Information about you and how you’ve used credit in the past (your bill paying history, the types of accounts you have, whether you make late payments, etc.) is collected from your credit application and your credit report. Scoring models may also consider your job or occupation, length of employment, and whether you own your own home. Creditors use a statistical program to compare this information to the credit performance of similar consumers. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. The total number of points—the credit score—helps predict how creditworthy you are.
It boils down to the three “Cs”:
- Character. Creditors believe that people with “character” will pay their bills even during difficult times.
- Capacity. Your ability to get credit is based in part on your ability to repay your debts.
- Collateral. These assets reflect how you’ll repay debts if your capacity fails. Unlike a mortgage or car loan, credit card debt is unsecured. Your signature is your promise to repay the debt.
Different lenders will look at your situation and may score you differently. Therefore, it is smart to apply again if you’ve been turned down. But here’s an important tip: don’t apply too many places at once for credit cards. When you apply for credit, this is recorded on your credit report as an “inquiry.” Your report lists all the inquiries made by creditors, and too many credit card inquiries at once may cause your credit score to go down. Creditors may think that you could have too many open accounts and become overextended.
How Can I Improve My Score?
You may wonder how you can improve your credit score. Credit models are complex and vary widely, so it is better to look at general action you can take, rather than trying to change your score with one particular creditor. These tips can help improve your score:
- Pay your bills on time. Payment history is usually a significant factor in your credit score. It will hurt your score if you pay bills late, have had a bill referred to collections, or have declared bankruptcy.
- Look at your outstanding debt. Many scoring models look at the amount of debt you have and compare this to your credit limits. If the amount you owe is close to your credit limits, this may hurt your score. Paying down your outstanding balances can help your score. Also, try to avoid new debt.
- Give it time. It will help your score if you have a longer track record with credit. Having a fairly new credit history may hurt your score, but this should be offset if you make timely payments and keep low balances.
- Don’t apply for too many credit cards at once. If you have too many “inquiries” on your credit report, indicating that you have applied for credit with different creditors, this could hurt your score. Remember, not all inquiries are counted. Inquiries by creditors monitoring your account or offering “prescreened” credit cards are not counted. Most credit scores are not affected by multiple inquiries from auto, mortgage, or student loan lenders within a short period of time. These inquiries are usually treated as a single inquiry and will have little impact on your score.
- Look at your current accounts. Although a track record is good, having too many credit card accounts can hurt your score. In addition, many credit scoring models look at the types of accounts you have. For example, loans from finance companies may hurt your credit score.
What if I Get Turned Down?
If you are turned down for credit, ask why. The federal Equal Credit Opportunity Act requires that the creditor give you an explanation, though sometimes you have to ask for it. You may find that the creditor believes your salary is too low, your credit score is not high enough, or you haven’t been at your current job long enough. Time may resolve these problems, so try again when your situation changes. If you were turned down because of your credit score, ask the creditor how you can best improve your chances if you apply again.
Sometimes you can be denied credit because of information from a credit report. In this case, the federal Fair Credit Reporting Act requires the creditor to tell you which credit bureau supplied the information. You have the right to contact that credit bureau within 60 days to get a free copy of your credit report.
If the creditor says you were turned down because you were too close to your credit limits on your current cards or that you have too many accounts, you may want to reapply after paying down your balances or closing some accounts.
Co-Signers Can Help
If you are a young person applying for credit for the first time, you may be able to get your first credit card by having your parents co-sign for you. You would qualify for the credit card using your parents’ income and good repayment history. You can then make purchases with the credit card, and you or your parents are responsible to pay the bills.
Other people having difficulty getting credit can use a friend or family member as a co-signer as well. This is recommended as a last resort because problems may occur. The co-signer must promise to pay your debts if you don’t. Even if you make regular payments, your co-signer’s personal credit capacity is reduced by the amount of your credit limit. Worse, a creditor has the right to demand payment in full from your co-signer if you become delinquent in your payments. If you use a co-signer, repay your debts promptly and after a short time try again to get credit on your own.
Do You Really Want To Be a Co-signer?
When you are asked to co-sign a loan, consider the worst case scenario—that you will be repaying the debt. Then ask yourself whether you can handle additional debt right now. People who co-sign a loan often regret it later. For example, if your girlfriend or boyfriend asks you to co-sign a loan, think twice. The debt could be around longer than the significant other. Also, many grandparents agree to co-sign car loans or student loans for their grandchildren. If the grandchild doesn’t pay the debt, the grandparent is stuck with it. Before you co-sign, consider this information:
- Be sure you can afford to pay the loan. If you’re asked to pay and can’t, you could be sued and 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. Creditors will consider the co-signed loan as one of your obligations.
- Before you pledge property, such as your car or home, to secure the loan, make sure you understand the consequences. If the borrower defaults, you could lose these items.
- Ask the lender to calculate the amount of money you might owe. The lender isn’t required to do this but may if asked. You also may be able to negotiate the specific terms of your obligation. For example, you may want to limit your liability to the principal on the loan, and not include late charges, court costs, or attorney’s fees. In this case, ask the lender to include a statement in the contract similar to: “The co-signer will be responsible only for the principal balance on this loan at the time of default.”
- Ask the lender to agree, in writing, to notify you if the borrower misses a payment. That 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 important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and warranties—if you’re co-signing for a purchase. You may need these documents if there’s a dispute between the borrower and the seller. The lender is not required to give you these papers; you may have to get copies from the borrower.
Try a Secured Credit Card
If you don’t qualify for a major credit card, and don’t want to ask a co-signer for help, consider a secured credit card. These are major bank credit cards tied to a savings account you hold at the same bank. The money in your savings account is your credit limit. The savings account acts as a security deposit for your credit card. Secured credit cards work and look exactly like regular bank cards. One reminder: make sure your lender makes regular reports to a credit bureau, so your secured credit card will help you build a credit history.