Your Credit Report, Your Life

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A huge part of your life is ruled by your credit report, so you should know what it says and check it regularly.  Every time you take out a loan or apply for credit, it appears on your credit report.  Whether it's individual or joint debt, in the form of a mortgage, car loan, student, loan, personal loan or credit card, the credit report will show on a monthly basis, how you have handled what you owe.
 
There are three credit bureaus: Experian, Equifax, and TransUnion. Each person is allowed to get a free credit report once per year from each of these three bureaus. Fair Isaac Corporation ( now officially FICO) calculates your score based on your monthly payment history (35 percent), the amount of credit you have available (30 percent), the length of your credit history (15 percent), the number of times you have applied for new credit (10 percent), and the mixture of your debt (10 percent) to calculate your FICO score.  Obviously, the biggest component of your score is your monthly payment history.
 
This score can range from 300 (horrible) to 850 (perfect), and it will serve as a benchmark for potential employers, landlords, banks, utility companies and other lenders.  If you are irresponsible with your debt these entities assume you will be an irresponsible employee, renter or account owner.  Having a poor credit score could keep you from being hired and will make you more risky in the eyes of a lender so your interest costs will be higher.
 
Your report is free but you will have to pay approximately $12.00 to get your score. Loan account and payment history will stay on your report for seven years, except in the case of certain bankruptcies which will stay on for ten years. To get the best loan rate these days, lenders are looking for a credit score above 720.
 
In addition to your debts, your credit report also shows personal information such as your current and previous addresses, your Social Security number, your name (and any variations), your public record, (which would include any bankruptcies, civil penalties, judgments, or liens), and any accounts that are in collection.  Although rent, utility payments and medical debt don't show up under the current debt category, if you are seriously delinquent in making payments and one of these accounts is placed with a collection agency, it will appear under collection items and count as a big negative against your score.
 
Whenever you don't pay what you owe, whether it be in a bankruptcy, settlement or through negligence, your credit score will take a big hit.  Keep in mind, if you co-sign for a loan to help out a friend or relative and that person doesn't make the necessary payments, you'll be on the hook and your score will suffer for it.  Also, if you have a credit card and allow someone else to use it as an authorized user, that person will have the ability to charge up to the credit limit, even if they didn't check with you first.  Claiming that you didn't know payments weren't being made or that you didn't okay the charges won't excuse you from paying back the debt.
 
Many advertisements claim to have the ability to legally eliminate 50-75 percent of your debt, but regardless of their claims, there are serious consequences when you settle your debt. Doing a settlement is almost the same as filing for bankruptcy in terms of negatively impacting your credit score since you aren't paying back what you owe.
 
In bankruptcy you have legal approval to get rid of part or all of your debt. However if you do a settlement, Uncle Sam considers the debt that was forgiven (over $600) as additional income. For instance if you had $30,000 in credit card debt and settled with the lenders for half of the amount, $15,000, you would be liable to pay income taxes on the $14,000+ that you didn't have to pay back.
 
Studies have shown that over 80 percent of credit reports have some sort of error on them. You must review your report regularly to ensure its accuracy and know where you stand with your debt. If there are errors, contact the credit bureaus in writing with any proof, and keep copies of all correspondence in a file. They have thirty days from receiving your dispute letter to respond with written verification that the debt is yours or they have to remove the item from your report. The credit bureaus have slightly adjusted there evaluation weightings in the last year due to the mortgage crisis and high unemployment, but that doesn't mean you can escape your debts. At the same time more states have instituted laws requiring jail time for people who have been negligent with their debt obligations and haven't appeared in court when subpoenaed.
 
The bottom line is your credit report can have a profound influence on your financial reputation and your life, so understand the laws and give yourself a regular credit check-up!

This article was written by Hollis Colquhoun.

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