MASTERING YOUR CREDIT ~ 2012
Published By JAC at Smashwords
Copyright © 2011 by J. A. Clarke. All rights reserved. Published and created in print and electronically in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced, transmitted or distributed in any form or by any means or medium, electronic, recording, or otherwise, or stored in a database or by any information storage or retrieval system, without the prior written permission of the publisher.
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This publication is designed and intended to provide accurate and authoritative information in regard to the subject matter covered. The information contained in the publication is deemed reliable, but readers should confirm the accuracy of said information before acting upon it. It is sold with the understanding that neither the author, nor the publisher, or retailer of this publication is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
DEDICATION
This Book is dedicated to those poor souls who have been foolish and misguided in their finances and credit use and have become lost like nomads in the desert of credit. Fear not, oh confused masses, there has come into being a Book which pulls back the furtive veil of ‘Credit’ and exposes the truths about it. Do not let the minions of deceptions and lies about ‘credit’ foil that most honorable journey in the pursuit of understanding, knowledge, strength, patience, self-control, insight, financial independence and good credit for all.
Let there be light…………………. and an 850 FICO!
J. A. Clarke
Table of Contents
INTRODUCTION.
CHAPTER ONE – Why is credit so important?
CHAPTER TWO – What is credit?
CHAPTER THREE – What is my credit score?
CHAPTER FOUR – How is my credit score calculated?
CHAPTER FIVE – What is a credit report?
CHAPTER SIX – How do I get my credit report and credit score?
CHAPTER SEVEN – How do I correct my credit report?
CHAPTER EIGHT – How can I improve my credit score?
CHAPTER NINE – How to avoid credit repair scams?
CHAPTER TEN – How to avoid identity theft and credit scams.
CHAPTER ELEVEN – How to get your credit house in order.
CHAPTER TWELVE – How to review your finances, make a budget
and deal with creditors.
CHAPTER THIRTEEN – Checking Accounts – They are watching.
CHAPTER FOURTEEN – Websites about credit you should know.
CHAPTER FIFTEEN – Federal Laws on credit.
CHAPTER SIXTEEN – Forms: Review, Correct and Improve Your Credit.
CONCLUSION.
Introduction
This Book is for those of us who are not perfect. To those who have made mistakes and wish to move forward and learn from their errors and have a better life. Many of us have made critical lapses of judgment when it comes to our ‘credit’ and how we handle our money, debts, checking accounts, credit cards and bills.
Inside these pages you will find all of the information and insights necessary to understand how ‘credit’ works, how it affects your daily life, how to find and correct your credit reports and credit scores and, in the end, how to manage your credit and finances more effectively. Credit is a necessary evil in our modern, global society, and without good credit, our day to day lives are much harder than it needs to be. By learning how ‘credit’ works and thereby harnessing the power of ‘good’ credit, you will unlock the doors to a better, more stress free life.
So, if you are committed to breaking the chains of economic servitude and are ready to empower yourself with the information found within these pages, let us begin the journey to better credit…Rebuild Your Credit, Rebuild Your Life!©
Chapter One
WHY IS CREDIT SO IMPORTANT?
Have you ever wondered why you did not get that great job even though your resume was perfect (even with those ‘typos’) and the interviewer thought you were the next ‘it’ person at the Company? Or what about the cable or cellular service you were hoping to get but then they turned you down? And then there is the apartment you could not get approved for. The auto insurance rates that just seem higher than all of your friends even though you have a better driving record. And the new or used car that you just can’t seem to get qualified for?
It’s your CREDIT. Every day various companies, employers, banks, lenders, apartment owners, retailers and others review the credit of individuals to decide who gets the money, the cars, the insurance, the apartments, the big TV’s, the services or the jobs? And you are left empty handed.
If you have good ‘credit’, the world is your oyster, as I heard them say. But if your credit sucks, you will get left out in the cold. Bad credit means no cars, cellular phones, cable service, apartment, home, credit cards, credit lines, bank loans, insurance, job and on and on.
Oh, you may be able to still get those things in life, but it will cost you a whole lot more, along with security deposits, higher interest rates, less choices, and more debt and less value for your hard earned money.
In these post Great Recession – Federal Deficit credit crisis times, every penny counts. Gas is more expensive. Groceries, cloths, insurance and cars all seem to be getting more expensive each day. Generally, it’s bad news all around. If you are unemployed or only working part-time and want more, poor credit is now an even bigger problem – A major hurdle to your future prosperity.
Some experts project that if you have ‘poor’ credit, you may end up paying as much as $225,000 in excess credit costs and charges over your lifetime. That’s a huge sum of money which could be sitting in your retirement account for your future, or your children’s future – a college fund, a new car, their first home! Or what if your parents need your help during retirement…it’s just a plain waste of money and that’s what bad credit does to you.
Bad credit makes everything harder. If you have managed your bills poorly and have run your credit into the ditch, it is time you get out of that hole and build yourself a new life on a bed rock of good credit. It won’t be easy but it can be done and believe it when we say that if you make the commitment and follow the rules and take gentle steps to restore your credit, you will find yourself in the light of day, with the credit storm clouds behind you, on your way to credit freedom and financial success.
But, if you want to begin this path of good credit, where do you start? Well, class is in session and you must start where everyone starts, Kindergarten, the beginning, one step in front of the other….So, what is the beginning?
If you want to fix your credit and improve your chances at getting the goods and services you need to live at the best possible prices and terms, and help your family at the same time, you must first understand the following – What is Credit?
Chapter Two
WHAT IS CREDIT?
Credit….The ever mysterious word that invokes thoughts of buying now, shopping with charge cards and paying your bills later. Men, with grey pin-striped suits, sitting in their ivory towers on Wall Street, the modern ‘robber barons’ of the 21st Century, making decisions affecting Global corporations and Nations. That may be true, but ‘credit’ affects all of us every day in every way you can imagine.
In its most basic terms, the word ‘credit’ means, according to Webster’s Dictionary, the following:
Reliance on the truth of something said or done; belief; faith, trust; confidence. When Jonathan and the people heard these words they gave no credit unto them, nor received them. -1 Macc. x. 46
Reputation derived from the confidence of others; esteem; honor; good name; estimation, John Gilpin was a citizen of credit and renown. – Cowper.
A ground of, or title to, belief or confidence; authority derived from character or reputation. The things which we properly believe, he only such as are received on the credit of divine testimony. – Hooker.
That which tends to procure, or add to, reputation or esteem; an honor. I published, because I was told I might please such as it was a credit to please. – Pope.
Influence derived from the good opinion, confidence, or favor of others; interest. Having credit enough with his master to provide for his own interest. – Clarendon.
(Com.) Trust given or received; expectation of future payment for property transferred, or of fulfillment or promises given; mercantile reputation entitling one to be trusted; - applied to individuals, corporations, communities, or nations; as, to buy goods on credit.
Credit is nothing but the expectation of money, within some limited time. – Locke.
As you can see from these definitions of ‘credit’, credit is a matter of trust.
It is, in essence, a confidence or belief that you will keep you word; meaning that you will give others the faith and comfort level, the confidence, that you will do the right thing and be honorable in your dealings with others. Which in this case means paying your financial obligations on time and in full as agreed. Sounds reasonable, even easy…but in real life, it sometimes is difficult.
When you go to your bank and ask for a car, home or business loan, you are basically asking the bank to trust you enough (based upon your character, good name and prior history of keeping your financial promises) to give you their depositors’ money (that’s right, it’s the people’s money in the bank, like yours, that the bank lends out - a big responsibility) with a promise that you will pay it back on time and with interest, in full (the cost to ‘rent’ that money from the bank – yes, rent - you pay interest on a loan to ‘rent’ the money so you can use it; just like an apartment).
Likewise, when you get cable service or a cellular telephone, electric or water service, or renting an apartment, the service provider or landlord is extending you a form of credit in that you are asking them to let you use their services, goods and property in exchange for your promise to pay for those services or use of their property. These companies or individuals are extending you ‘credit’ based upon your ‘history’ of keeping your word and paying your obligations on time and in full as promised.
And when you ask for a credit card or other lines of credit, you again are making a ‘promise’ to those credit grantors, like Visa, MasterCard, American Express, Sears, AT&T, or your local utility company, agreeing to pay your obligations on time and as ‘promised’.
But, if you do not pay your bills on time, forget to honor your promises to those companies and individuals, ignore their requests for payment and generally fail to do what you agreed to when you asked for their trust and confidence in you, you will get a reputation for not keeping your word with these companies and will be viewed as a ‘poor credit risk’ and, in the future, companies will not want to lend you money or otherwise grant you credit in order to get the goods and services you want and need.
You are now probably feeling bad that you may have not been keeping your promises as far as your debts go (or maybe not, in which case, you really need to change your ways). But, you also may be wondering just how does anyone know if you are paying your bills on time or not? Unfortunately, we live in the age of computers and a 24/7/365 information cycle.
With the advent of computers have come companies that keep track of your credit information, along with most of your personal data, and these companies have developed sophisticated computer programs that review all of your personal, public and financial information and through that analysis of this data generate a ‘credit score’ which calculates your credit worthiness from your history of credit use and whether you are a good or bad credit risk for the future.
This means that every time you get credit, borrow money, use your credit card, pay a bill late, bounce checks, overdraft your bank account, fail to pay your car loan, cellular bill or cable as promised, file bankruptcy, get sued for failing to pay your medical bills, these companies find out about it, record it, analysis it, and tell other credit issuers and anyone else who wants to know (for a fee), all about it. And like everything else on the internet and in the cyber-world out there, all of this data stays out there for a long time and can make it harder for you to get credit in the future.
The worst part is they keep score – that’s right, they keep score. It sucks because if your score is low, you get screwed the next time you want credit.
Even worse, your current creditors may regularly check your ‘credit score’ to see if you are doing the right thing by your other creditors and if you have not been paying those obligations and bills on time, your creditor may restrict or otherwise lower, or even close, their credit with you since you are not keeping your promises with others. Makes sense…if you are not paying some of your bills on time or at all, how long will it be before you stiff your current creditors; only seems logical…and fair.
So, what is this important ‘credit score’, how is it calculated and where do you find it? Let’s get into it and see what lurks in that scary, dark forest of credit.
Chapter Three
WHAT IS MY CREDIT SCORE?
Credit scoring is the way creditors determine whether to give you credit, and how much to charge you for it. It is a system or method to ‘score’ your credit habits and use patterns. Creditors use various types of information about you and your credit usage, such as the type of credit accounts you have, whether you pay your bills on time, the number and type of accounts you have, whether you have delinquent accounts, late payments, high balances, collection actions, and even the age or length of time you have had your credit accounts. They then compare your ‘credit’ habits to other similarly situated people and see how you stack up against them. If you find yourself doing better than the average “Joe”, that’s great - congratulations. And if you don’t do so great, well it sucks to be you!
In the 1950’s, the Fair Isaac Company developed a math calculation, or methodology, which could help retailers like Sears Roebuck and Macys figure out which customers were more likely to pay their credit lines on time. Over the years, with the creation of the first credit cards, like Diners Club, Visa and American Express, more and more companies who were extending credit wanted to try and minimize their losses from people who were not paying their bills.
So, as computers came along, the Fair Isaac Company, also now known as ‘FICO’, created extremely complicated computer programs to calculate your credit worthiness and predict how well you will pay your bills in the future. This credit evaluation is not a way to see if you are a good or bad person but rather a means to predict if you will pay back the money you are borrowing or pay the fee for the service you are using. It calculates risk…and the higher the risk, the higher the cost to ‘rent’ the money or use the services.
Again, this makes sense…If you have a friend of yours who never paid back any money he or she borrowed, you would be less inclined to give them $30…right? No different for Visa, Best Buy or Verizon…they are not charities. They are in the business of making money and it is only fair that they get paid on time and as agreed. I know it sounds crazy, but it’s true.
In order to ‘predict’ or ‘score’ your future ability and willingness to pay your bills on time and as promised, FICO, with the help of several other companies, called credit bureaus, began compiling everyone’s credit information, personal and public, to input into these ‘FICO’ type computer programs. Over time, those companies, like TransUnion, Equifax and Experian, have created huge databases (it is unbelievable how much stuff they have on all of us) of personal credit information about pretty much everyone in the United States. Yes, that means you too! Pretty much the worst part of Orwell’s ‘1984’. But fear not, we will use their ‘scary’ programs against them and empower you to win this game of chess…or maybe its checkers? No matter, let’s us press on!
A ‘FICO’ score is between 300 and 850, with 60% of the scores between 650 and 799. According to FICO, the median, or middle, score is about 723. The performance of the scores are monitored and periodically are adjusted, or aligned, across ‘scorecards’ within each scoring model or system, as well as across the three credit bureaus, so that the ‘score’ represents the same credit risk to lenders and credit grantors regardless of its source.
As you may know, each of us has three credit scores for the credit scoring model because the three national credit bureaus (Experian, Equifax and TransUnion) each have their own independent database of information on us. Consequently, the information or data about an individual consumer can vary from bureau to bureau.
As we discussed earlier, some employers, especially financial institutions, will request permission from job applicants to run a credit check as part of their application process. This credit information can be used as an indicator of a person's level of financial responsibility and personal trustworthiness. Financial institutions, like banks and retailers, want to know if you are financial train wreck since you might be more inclined to do something ‘bad’…I know it sucks and is probably a load of crap; but it’s their rules, so let become the best players we can be and beat them at their own game! Moving on…
All of this data is collected from your credit applications and your credit reports from the three major credit reporting agencies, Equifax, Experian, and TransUnion. Using a statistical formula, creditors compare your information to the credit performance of consumers with similar characteristics or ‘profiles’.
Each of these three credit bureaus can have different information about any particular person, and there are many different credit scoring models in use, which means a person can have several different credit scores at the same time. Many lenders use third-party credit scoring systems, such as the FICO scoring model, to evaluate the creditworthiness of a borrower. Because a credit score does not consider race, sex or ethnicity, these credit scoring models are generally considered to be the most fair and objective credit underwriting tool available to credit grantors…right.
Then, the credit scoring system used by the credit reporting agencies generates, or awards, points for each characteristic or factor. From this analysis, a total number of points — the mysterious ‘credit score’— is generated and from this ‘credit score’, credit grantors can predict how creditworthy you are.
Being ‘creditworthy’, basically, is how likely you are to pay back the money, credit or services you have used and do so on time and in full as required. Generally, the better the credit score, the better the credit risk and usually from this, better interest rates, terms and conditions for consumers who are deemed good credit risks with these higher credit scores.
Consumer credit reports are available to everyone free once a year from each of the three nationwide credit reporting companies. However, if you want a copy of your report more than once a year from any of the credit reporting companies, you will have to pay a fee for it.
The credit reporting companies and other businesses also offer consumer credit scores for sale either alone or as part of a package of products, which usually incorporate copy of your credit report and sometimes a monthly service or program to monitor your credit file. Not such a bad deal if you are in the middle of rehabilitating your credit.
Most those companies’ websites are in this book under Chapter 13 – so check them out and see which one, if any, works for you for the price they are charging and use your common sense since not all of these services are created equal.
So, how does FICO and others actually calculate your credit score and what types of things do they look at to create this ‘score card’?
In real terms, you need to be a brain surgeon or an MIT graduate to really figure it out. Plus, each program used by the various companies has different parameters and values given to each part of your personal credit life. But, no fear…we will break it down to its most basic parts and help you understand what makes these ‘FICO’ and other credit scoring programs tick and help you break the ‘code’ and better manage your finances and credit so you can have the best credit score possible and give you a competitive edge so you can get the things you want and need at the best prices and terms.
For your three credit scores to be calculated, each of your three credit reports must contain at least one account which has been open for at least six months. In addition, each report must contain at least one account that has been updated in the past six months. This ensures that there is enough information – and enough recent information – in your credit file on which to base a credit score on each report.
Credit scores use different names at each of the credit reporting agencies. All of these scores, however, are developed using the same general methodology as Fair Isaac Company (FICO), and they say each of them have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data (like we believe that, but when in Rome, do as Romans – meaning that we are stuck with these scoring models and so you need to rejuvenate your credit score with these scores, whether we like it or not). Here are the names of the FICO score for each credit reporting agency:
Credit Reporting Agency
Experian
Equifax
TransUnion
Name of Credit Score
Experian - Experian
BEACON® Score - Equifax
EMPIRICA® - TransUnion
OK, so we know who they are, but what are they….mineral, plant, animal? They are math calculations based upon what other people like you do with their credit and then it figures out a number, your ‘credit score’, and there you have it….simple, right? No…well, let’s go a little deeper.
Chapter Four
HOW IS MY CREDIT SCORE CALCULATED?
Credit scoring is nothing more than a computer program creditors use to help determine whether to give you credit or not. It is a calculation or math problem used to help creditors decide whether to extend credit to you and on what the terms you are offered that credit and the rate you will pay for the loan, services or goods.
Information about you and your credit experiences, like your bill-paying history, the number and type of accounts you have, whether you pay your bills by the date they’re due, collection actions, outstanding debt, and the age of your accounts, is collected from your credit report. So, what’s a ‘credit report’? We’ll get to that in a little bit….but, I digress!
Using this information and these complicated statistical programs, creditors compare this information to the loan repayment or credit history of other consumers with similar credit habits and profiles as you. For example, a credit 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 creditworthy you are — how likely it is that you will repay a loan and make the payments when they’re due.
In general, when people talk about "your credit score", they're talking about your current ‘FICO’ or other credit score system program. However, there is no one credit score used to make decisions about your credit. This is true because many lenders use their own credit scores, which often will include the ‘FICO’ score as well as other information about you.
There are other credit bureau scores, although ‘FICO’ based credit scores are by far the most commonly used. Other credit bureau scores may evaluate your credit report differently using other credit scoring models or programs like the ones we have discussed earlier. In some cases, a higher score may mean more risk, not less risk as with FICO scores, based upon the methodology of the scoring system used. But, generally speaking, the higher the consumer credit score, the better.
The credit score from each credit reporting agency considers only the data in your credit report at that agency. If your current scores from the other credit reporting agencies are different, it's because the information that these credit reporting agencies have on you differs from one another; don’t panic….this is common.
As your information changes at each credit reporting agency, so will any new credit score based on your credit report. So, as a result, a credit score can change day to day, month to month, and year to year.
And what data is important for the credit scores?
Credit scores are calculated from a lot of different credit data in your credit reports. This data can be grouped into five major categories as outlined below. The general percentages below reflect how important each of the categories is in determining your credit score:
These percentages are based on the relative importance of the above five main categories for the average consumer, which are as follows:
1. Payment History – 35% of your credit score
Late payments on bills, such as a mortgage, credit card or automobile loan, can cause your credit score to drop. But paying them on time helps your credit score- paying bills when they are due and on time will improve your credit. Other factors affecting your credit score in this area are as follows:
-Account payment history information on various types of credit accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.).
-Any adverse or negative public records (bankruptcy, judgments, suits, tax liens, wage attachments, garnishments, etc.), collection items, and/or delinquencies (past due items).
-The length of any delinquency (how long the account has been past due).
-The amount past due on your delinquent accounts or any collection accounts.
-The amount of time since your accounts became last past due, delinquent or how old any of your adverse or negative public records or collection accounts have become.
-The number of any past due accounts or items in your credit file.
-The number of accounts current or paid as agreed.
2. Amounts Owed – 30% of your credit score
Also known as your ‘credit utilization’, this is the ratio, or percentage of current revolving debt (such as credit card balances) as compared to your total available revolving credit or credit limit. You can improve your credit score by paying off debt and lowering this ‘credit utilization’ ratio. Applying for and receiving new credit accounts, or an increase in your credit limits, will also push down this credit utilization ratio.
But, the closing of an existing revolving account will have a negative effect - this will hurt your ratio negatively, that means ‘bad’, and therefore have a negative, that’s right - ‘bad’, impact on your credit score. Other factors influencing your credit score in this area are as follows:
-The amount or balance owing on your credit accounts.
-The amount or balance owing on the specific types of credit accounts.
-The lack of a specific type of account balance.
-The number of credit accounts with balances.
-The proportion or the utilization of your credit accounts’ available credit being used (meaning what are the balances compared to the total credit limits on certain types of revolving accounts).
-The proportion of installment loan amounts or balances still owing (the current balance owed as compared to your original loan or credit amount on certain types of installment loans).
3. Length of Credit History – 15% of your credit score
As your credit history ages and gets older, it can have a positive impact on your credit score, just like wine…I think. Other factors influencing your credit score in this area are as follows:
-The length of time since your credit accounts were opened.
-The length of time since your credit accounts were opened by types of account.
-The length of time since each credit account had its last activity.
4. New Credit – 10% of your credit score
Recent searches for credit, also known as ‘credit inquiries’, which occur when you are seeking or applying for new credit, can also lower your credit score.
Too many credit inquiries are a bad thing. With a lot of inquiries, creditors will think you are on a binge for credit – not good.
While most credit inquiries are recorded and displayed on your credit report for up to two (2) years, credit inquiries that were made yourself (to check your own credit), by your employer (for employee verification) or by companies initiating pre-screened offers of credit or by insurance companies, do not have any negative or adverse impact on your credit score and are not usually seen by other credit grantors. However, you can see these inquiries on your own credit report to let you know who has been viewing your credit file. Other factors influencing your credit score in this area are as follows:
-The number of recently opened credit accounts, and the amount of accounts that have been recently opened as compared to those credit accounts that were already existing.
-The number of recent credit inquiries.
-The length of time since the most recent account opening(s) occurred.
-The length of time since your most recent credit inquiries.
-The re-establishment or creation of positive credit history following a period of negative past history of late payments or credit issues.