Intro

For most people, the major purchases in life – home, car, college education, home improvements – are difficult or impossible without credit. Loans allow you to spread the expense over time, making these purchases affordable. Here, we will talk about credit – how it works, how to use it responsibly, and what to do if you are having difficulty with credit. Read the articles provided below to learn more! 

Credit Reports

What Is a Credit Report?

A consumer credit report is a factual record of an individual's credit payment history. It is provided for a purpose permitted by law, primarily to credit grantors. Its main purpose is to help a lender quickly and objectively decide whether to grant you credit. Examples of credit include car loans, credit cards and home mortgages. 

What does a typical credit report include?

• Your name, current and previous addresses, phone numbers, Social Security Number, date of birth, and current and previous employers. This information comes from your credit applications, so its accuracy depends on your filling out the forms clearly, completely, and consistently each time you apply for credit.
• Specific information about each account such as the date opened, credit limit or loan amount, balance, monthly payment, and payment pattern during the past several years. This information comes from companies that do business with you.
• Federal district bankruptcy records, state and county court record of tax liens and monetary judgments, and, in some states, overdue child support. This information comes from public records.
• The names of those who have obtained a copy of your credit report. This information comes from the credit reporting agency.

Credit reports do not contain data about race, religious preferences, medical history, income, personal lifestyles, political preferences, friends, criminal record, or any other information unrelated to credit.

Credit reports may also include a credit score that lenders may use to make loan decisions and assign rates. We'll discuss credit scores a little later.

How do credit-reporting agencies compile credit reports?

Every credit report is custom made. When a credit grantor requests a credit report on a specific consumer, the credit-reporting agency collects information about the consumer from various portions of its computerized database.

For example, when John Q. Consumer goes to DCU for a car loan, the loan officer may request a credit report by giving the credit reporting agency specific information from John's credit application; full name, full address, Social Security number, and date of birth.

The credit reporting agency uses information to search its database for all relevant data reported about John, credit and identification information from lenders, public record data from the court systems, and the credit agency's own records of who has received a recent copy of John's credit report.

In a very short period of time, the credit-reporting agency compiles the information into a single report and transmits the report back to DCU. At that point, the credit reporting agency's job is done.

What do lenders do with the credit report?

Credit reporting agencies provide data to credit grantors at their request. The role of the lender is to make lending decisions. In making their lending decisions, credit grantors often look at factors such as how long you've lived at the same address, the amount of your unused credit, and your past credit history.

Different lenders may use different pieces of information to make their decisions or make different decisions based on exactly the same information. In fact, the same lender may change its decision criteria over time. Only the individual lender knows the reasons for granting or denying credit. However, there are laws that protect consumers from discriminatory lending practices.

How long does negative information stay on a credit report?

Federal law specifies how long negative information may remain on your credit report.

To prevent past errors from haunting you forever, most negative information must be erased after seven years. This includes late payments, accounts that the credit grantor turned over to a collection agency and judgments filed against you in court – even if you later pay the account in full. The length of time a bankruptcy remains on your credit report depends upon which type you file.

• Chapter 7 – (10 years) – A liquidation where assets (if any) are sold to settle debt to creditors.
• Chapter 11 – (10 years) – A reorganization (typically for corporations and partnerships) to address the repayment needed.
• Chapter 12 – (7 years) – A simplified reorganization for farmers where the debtor retains their property and repays debt from future profits.
• Chapter 13 – (7 years) – A repayment plan for individuals with regular income and debt under a certain amount.

Credit reporting agencies use the date of original delinquency or, in the case of public records, the date of filing to determine when negative information is deleted. Positive information remains on your credit report indefinitely.

Will a poor credit record ruin my chances for a mortgage?

Yes, poor credit records will greatly lessen your chances of obtaining a mortgage. According to a recent survey by Fannie Mae, a government-chartered company that provides lenders funds to make mortgages, most American's don't understand the link between their credit records and their chance of obtaining a home mortgage. Just 41% of Americans say that being more than 90 days late paying utility bills three times or more in recent years would be a major problem for obtaining a home mortgage. Thirty-two percent say it would only be a minor problem, and 18% say it wouldn't be a problem at all. The truth is that any late payments reported to credit bureaus harm your ability to obtain loans at favorable rates if at all.

Can I remove accurate negative information from my report?

No one can legally remove accurate information from a credit report. Only time can erase bad credit.

Rebuilding Your Credit

Your future access to credit and the rates you'll pay are tied to how you've handled credit in the past – particularly the recent past.

When you take out a loan, you sign a contract that says you will pay at least the minimum you owe each month on time every time. Your credit rating is damaged when you don't. You've created doubt in the minds of prospective lenders whether you'll do the same on future loans. It may prevent you from getting new loans, the amount your want to borrow, or the lowest loan rates. 

Bad marks on your credit history can prevent you from obtaining employment, particularly where the job involves handling money. It can affect the cost and availability of insurance on your car or home.

If this has happened to you for whatever reason – loss of income, divorce, medical bills, mistakes, or even carelessness – it is possible to rebuild your credit rating over time. Here's how...

Pay your current bills on or ahead of time

This includes utility bills, loan bills, credit card bills, and every other company or lender you owe. Late payments are reported to credit bureaus every month and hurt your credit rating. Here are some tips to help you pay on time every time:

• Set up automatic pre-authorized payments from your savings or checking – Most utility companies let you do this. You often send them a voided check so they can debit your checking account automatically. You need to make sure your account has sufficient funds to cover every charge. Look at the paper bill or on the biller's website for more information.
• Set up automatic charges to your debit or credit card – Some vendors will accept a debit or credit card number and automatically charge what you owe. If using a debit card, you need to make sure funds are in checking account. Using a credit card is okay, but remember that unless you pay off your balance in full every month, you will be paying interest on your charges.
• Set up automatic payments in DCU Bill Payer – This will be debited against your DCU checking account, so you'll need to make sure you have sufficient balances to cover what you pay.
• Pay bills as soon as you receive them – If your bills sometimes get misplaced or forgotten, get in the habit of paying them the day they arrive in the mail before they have a chance to disappear.

Keep balances on your credit cards low compared to your limits

A big factor in your credit rating is how much of your credit limit you actually draw upon. Maintaining balances close to your credit limit counts against you. Maintaining balances that are just a fraction of your total limit counts in your favor.

Avoid applying for new loans while rebuilding your credit

Especially avoid applying for credit cards (including store and gas company cards) and other unsecured loans unless you are certain you can transfer a balance and reduce your interest rate. Auto, home equity, and mortgages are examples of secured loans. Too many credit inquiries on your credit report signals you may be taking on new debt.

Avoid closing open credit card accounts

Pay down or pay off your balances, but keep the accounts open. Having available unused credit signals that you can manage credit wisely. You can lock up or cut up the cards if you're afraid you might use them.

Consider a Credit Builder Loan at DCU

In this loan, the amount you borrow is locked in a dividend-earning savings account. As you make monthly payments, your performance is reported to the credit bureaus. At the end of the loan, the money in the savings account, including dividends, becomes yours to use as you wish. If you've made all your payments on or ahead of time, you'll have helped your credit rating in the process.

Budgeting

Many people damage their credit history by living beyond their means. By learning how to budget and control your spending, you not only can help your credit rating, you can be more financially prepared for emergencies and save for the future.

Monitor your credit history

You can order your credit report once a year, from each of the three credit bureaus. Look at one of them every four months to ensure the information is accurate. If you think something has been reported wrong, contact the biller to resolve the error. Errors will negatively affect your credit rating unless removed.

Be patient – this takes time

You can damage your credit rating very quickly, but rebuilding it takes much longer. Expect to do all the right things for a year or more before you see significant improvement in your credit rating. Negative information can stay on your credit report for up to seven years and certain types of bankruptcy for ten years.

Remember most people do have good credit ratings. With care, you can, too.