CREDIT 101
- Credit is a necessity for many reasons. Most people know the more obvious reasons why we need credit such as: purchasing a home, purchasing a vehicle or getting credit cards.
- However, many people are unaware their credit sometimes plays a factor in the following areas: insurance rates, qualifying for a new job or promotion, bank memberships, apartment rentals, cell phone services and cable TV.
- While all of these are very different reasons, there is one common denominator: if you do not have good credit, you will pay more and get less. That is why understanding how credit works is detrimental as well as knowing what steps you can take to improve your credit.
WHAT IS CREDIT?
Credit Score
A credit score is a 3 digit number calculation based on ones credit history to give lenders a potential risk factor for lending to somebody. This score helps the lenders predict how likely someone is to repay a loan and make payments on time. There are three major credit reporting agencies:
Equifax :
PO BOX 740241
ATLANTA, GA, 30374-0241
(800) 685-1111
Experian :
701 EXPERIAN PARKWAY
PO BOX 2002
ALLEN, TX 75013
(888) 397-3742
2 BALDWIN PLACE
PO BOX 1000
CHESTER PA, 19022
(800) 888-4213
UNDERSTANDING YOUR CREDIT REPORT AND SCORE
Credit Scoring Formula
- The credit score number itself can range from 300-900. Here is an approximate breakdown of how your score is determined.
| Record of paying your bills on time | 35% |
| Total balance on your credit cards and other loans compared to your total credit limit | 30% |
| Length of credit history | 15% |
| New accounts and recent applications for credit | 10% |
| Mix of credit cards and loans | 10% |
How Lenders Rate the Risk of Lending
This graph shows the distribution of individuals’ credit scores and their risk of defaulting on any given account.
Anatomy of a Credit Report
A credit report is basically divided into four sections: identifying information, credit history, public records and inquiries.
- Identifying information section
- Public Record Section
- Trade Lines Section
- Inquiries Section
Identifying information section
This section provides your name, social security number, date of birth, current and previous addresses, telephone numbers, employer, occupation, and your spouse’s name.
Public Record Section
Collection Accounts:
A collection account ranges from a delinquent trade line account, unpaid medical bills, unpaid utility balances, unpaid cell phone bills, etc. Collection accounts will stay on your credit report for 7 years from the original delinquency date.
Bankruptcy:
Bankruptcies that were filed under chapter 7, 11, or 12 will stay on your credit report for 10 years from the date filed. Chapter 13 bankruptcies will stay on your credit 7 years from the date filed. Any account included in bankruptcy will show “included in bankruptcy” for 7 years from the date filed.
Judgments: (including civil, child support, and small claims)
Judgments will generally stay on your credit for 7 years, although most judgments are renewable in which case it could be on your credit report a very long time. If paid it would be listed as “satisfied” and be expunged after 7 years expired.
Tax Liens: (city, county, state or Federal)
Unpaid tax liens will show on your credit for 15 years from the filing date. Satisfied or released tax liens will show on your credit for 7 years from the date the lien was paid in full.
Credit History or Trade Lines section
- When you opened the account
- The kind of credit (installment, such as a mortgage or car loan, or revolving, such as a department store credit card)
- Whether the account is in your name alone or with another person
- The total amount of the loan, high credit limit or highest balance on the card
- How much you still owe
- Fixed monthly payments or minimum monthly amount
- Status of the account (open, inactive, closed, paid, etc.)
- How well you’ve paid the account
Delinquencies:
Payments made anywhere from 30-180 late. These items will stay on your credit report for 7 years from the original delinquency date.
Your Outstanding Debts:
The more credit cards you have that are maxed out, the lower your score will be. As mentioned above, try to keep your credit card balances at 25 percent or less of your limits.
Charge Offs:
Trade lines that were charged off by the creditor will stay on your credit for 7 years from the date of the original delinquency.
Lost Or Stolen Credit Cards
Any delinquent payments that happened prior to the report of the card being lost or stolen will remain on your credit for 7 years. If the account has never been delinquent and paid as agreed, the credit card reported lost or stolen will remain on your credit for 2 years from the date it was reported stolen.
Accounts Paid As Agreed
Any trade line account in good standing which was paid as agreed will stay on your credit for 10 years.
ELIMINATING CREDIT CARD DEBT
- Track Your Spending
- Stop Using Your Credit Cards
- Stop New Credit Offers (888-5-optout)
- Consolidate Your Debt
- Use Automatic Bill Payment
- Create a Budget
Establish a payment plan with a certain $ amount allotted to paying down your credit cards even if it’s only $25 – $50 extra per month. Every credit card you pay down, roll that amount along with the credit card minimum payment to the next credit card and continue doing that with every credit card you pay off.
- Strategy 1
Tackle the credit card with the highest annual percentage rate first. It doesn’t really matter the amount owed if you’re paying an arm and a leg in finance charges.
- Strategy 2
Tackle the credit card with the lowest amount owed. Many people feel too overwhelmed with credit card balances and mentally feel a lower dollar amount is a more obtainable goal.
GOOD DEBT VS BAD DEBT
Good Debt:
Things of necessity such as transportation and housing.
Bad Debt:
Credit card debt on indispensable items that you want but cannot necessarily afford.
NEEDS VS WANTS
- Certain things in life are a basic necessity to our every day survival. Food, Clothes, Shelter, and Transportation.
| SURVIVAL ELEMENTS | NEEDS | WANTS |
| FOOD | GROCERIES | EATING OUT |
| CLOTHES | BASICS | DESIGNER CLOTHES |
| TRANSPORTATION | TRANSPORTATION | VEHICLES BEYOND YOUR BUDGET |
| SHELTER | AFFORDABLE RENT/MTG | HOUSING BEYOND YOUR BUDGET |
SETTING A BUDGET
| Budget Sheet | |||
| Monthly Expenses Budget | Single-No Children | Single-w/ children | Married- w/ children |
| Housing | 20-29% | 20-29% | 20-29% |
| Utilities & Maintenance | 5-7% | 6-8% | 6-8% |
| Taxes: Fed, state, FICA | 12-17% | 12-14% | 10-12% |
| Food | 6-8% | 8-10% | 8-10% |
| Transportation (inc gas) | 13-19% | 12-15% | 11-15% |
| Savings | 3-5% | 4-6% | 3-5% |
| Recreation | 10-12% | 8-10% | 8-10% |
| Car Insurance | 5% | 3-4% | 3% |
| Clothing, Personal | 4% | 5-6% | 5-6% |
| Medical Expenses | 1-2% | 2-3% | 3-4% |
| Child Care/Education | 1-2% | 1-2% | 7-8% |
| Cushion/Rainy Day Fund | 1-2% | 2% | 1% |
| Total Monthly Budget | (should be equal to or less than Gross Monthly income) | ||
YOUR CREDIT RIGHTS
- Get copies of your Credit Reports
- Every 12 months, you can print a copy of your credit report from all three agencies by going to a single web site, www.annualcreditreport.com
- Pull all three bureaus. Information contained in one credit report may not coincide with information contained in another.
- Draft a dispute letter and send it to the Credit Bureaus
- Hold onto copies of all documents
- Contact Creditors if it’s worth while
- Know what happens behind the scenes of a Credit Report Dispute
- Contact a Lawyer if you need more help