| If you have ever had a loan for some money to buy something such as some furniture, then you were given credit. In this situation, you are using someone else's money to make the purchase with your promise to repay the money to the person that loaned it to you.
A loan usually includes both principal and interest. Principal is the money which goes toward paying back the amount you borrowed. Interest is the amount of money that goes to the person who loaned it to you. This is based on the interest rate which represents the lender's cost including your risk as a borrower. Your risk as a borrower is based on your credit history as documented in your credit report. Good credit means that you make your loan payments on time and repay your debts as promised. Good credit is important because it makes you a more desirable credit risk for future loans.
Good Credit
Good credit is needed to borrow a large sum of money such as for the purchase of a home, but "perfect" credit is NOT necessary. If you don't have good credit right now, don't be discouraged. There are some simple steps that can be done over a period of time that will leave you in good credit standing. You will be better off if you improve your credit before you apply for a home mortgage loan or other large purchase. This is important because if you have a habit of paying your bills late, or have a lot of debt, you may not qualify for a mortgage loan. Or the lender may give you a loan, but with a larger down payment requirement or at a higher interest rate.
Credit Report
A credit report is a record of how you are paying or have paid back your loans or credit card debt. It shows how much debt you have, how promptly you made your payments, or if you haven't paid back some loans at all. Credit reports are compiled by national credit-reporting agencies:
Typical credit reports contain four different types of information:
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Identifying Information - name, residential history, phone number, SSN, DOB, employment history.
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Credit Information - Loan dates, credit limits, loan amounts, balance, monthly payments, several years worth of payment history, people responsible for payment of loans, late payments, skipped payments, accounts turned over to collection agencies, and repossessions.
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Public Record Information - bankruptcy records, foreclosures, tax liens for unpaid taxes, lawsuits, overdue child support in some states.
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Inquiries - names of those who obtained a copy of your credit report and how often you applied for credit in the last two years.
Lenders rely on this information about your credit history to judge how you may handle your loan repayment in the future. It is a good idea to order a copy of your credit report each year and review it carefully. You can order a copy of your credit report from any of the national credit-reporting agencies listed earlier.
Credit Report Errors
Credit reports should be accurate, but it is important to ensure accuracy once a year. These inaccuracies may hurt your chances of obtaining credit in the future. Fortunately, you have the right to have any errors corrected at no charge to you. Here are some simple guidelines to correct your credit report:
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Check the credit report for instructions on how to correct errors.
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Call the credit reporting agency to correct the error. This is sometimes all that is necessary.
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If additional information is required to correct the error, the credit reporting agency will tell you what is needed.
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Explanation letters are often used to document the problem. The credit reporting agency MUST investigate your complaint within 30 days and report its findings. If the error is validated, the credit reporting agency must ensure that the new information is given to the other credit reporting agencies to correct their information.
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Sometimes it may be necessary to resolve the dispute directly with the creditor. You can then ask the creditor to send a correction to your file with the credit reporting agency.
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Finally, you have the right to provide up to 100 words of explanation that will show up on your credit report for unresolved disputes. The credit problem will remain on your credit report, but so will your explanation.
Credit Scores
A credit score is used to predict how likely an person is to repay a new loan based on overall experience with many other consumers. This is a quick and convenient way for creditors to look at all the information on your credit report and make a fair decision about your credit.
A computer model is used to assign positive and negative influences to your overall credit score. On-time payments over time is a positive instance and charging the maximum available credit is a negative instance. This instances all add up to create your overall credit score.
A "good" credit score depends on the credit scoring model and the preferences of the lender. One particular computer credit scoring model might have a range from 300 to 900; the higher the number the better. Additionally, each lender can decide on the credit score range that will be considered to be a good risk or a poor risk. Ask your lender what your credit score means relative to the final decision.
Credit scoring provides a level of protection for you. This automated method of reviewing and judging your credit can be performed without regard to age, health, race, religion, gender, national origin, marital status, income, and employment.
Finally, your credit score can be improved. If you are denied credit, you have the right to receive a written explanation of the reason for denial. Then you can make a plan to address these issues. As you improve your credit over time, your credit score will also improve.
Take Control of Your Credit
Here are some steps you can take on your own to improve and maintain good credit:
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Pay loans first
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Pay off credit cards each month
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Keep in mind that credit cards are loans
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Don't charge the maximum on your credit card
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Only apply for and keep the credit cards you need
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Choose a credit card with a low interest rate and no annual fees
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Pay more than the minimum each month on your credit cards
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Close the accounts on credit cards that you don't need
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Use your credit cards wisely to establish credit
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Actively cut your expenses and increase your income
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Track your bills
Getting Help With Your Credit
If you are starting to realize that you may need help to get your credit under control, the following are some suggestions:
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Call your creditors and keep them informed
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Consider the help of nonprofit credit-counseling organizations
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Avoid "credit-repair" companies
Bankruptcy, Foreclosure, Repossession
If you have not paid a loan and have had a vehicle repossession, a home foreclosed on, or have declared bankruptcy, it will have a huge effect on your ability to get new credit. The information about a foreclosure or repossession can stay on your credit report for seven years. A bankruptcy can stay on your credit report for up to 10 years.
If you are in one of these situations and want to apply for a new loan, there are several things you can do. First, you might write a letter to the new lender explaining why the problem occurred. For example, perhaps you were seriously ill, recently divorced, or lost your job.
Another suggestion is to wait a few years before you apply for a new loan. The length of time you must wait will depend on the lender's rules and the size of the loan for which you are applying. During that time, make a strong effort to reduce your debt and pay your bills on time. When you apply for a loan again, make sure the lender knows the steps you have taken to improve your credit.
Create Credit Where There is None
If you typically use cash to pay your bills and haven't borrowed money on loan, you may have never made a loan payment. This can be a problem when you get ready to buy a home and apply for a mortgage loan. The lender will want some evidence of your ability to repay the loan.
In the absence of a credit history, you can still create a nontraditional credit history based on your own report that shows a lender that you have paid your rent, telephone, car insurance, medical, and utility bills on time each month.
Here are suggestions for building a nontraditional credit history:
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Keep copies of bills you pay, including your rent, telephone, electricity, cable television, gas and insurance.
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Keep copies of the canceled checks used to pay your bills
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Ask your landlord, the telephone company, and the gas and electric company to write you a letter. Ask them to include how long you have been a customer and how well you have paid your bills every month
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Show two years of this documentation to your lender
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Use credit cards wisely to help establish credit
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When married, ensure that credit cards are in both your names and that you are both responsible for the payments
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Ask a nonprofit credit-counseling service or housing-assistance agency for help in preparing a nontraditional credit history
(information provided by Fannie Mae Foundation)
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