MANAGE YOUR CREDIT

LIKE AN EXPERT

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The decisions you make now about how you manage your finances and handle money and credit can affect your ability to borrow money in the future, as well as the cost of borrowing that money. They also can affect your ability to rent or buy a place to live, get auto or life insurance, or even get a job. The more you know about credit, the better prepared you will be to manage your finances and establish a solid financial foundation.

When you get credit, you are borrowing money from a lender, and you have to pay back that money — usually with interest. You can get credit in many different ways: through a credit card, a personal loan, an educational loan, an automobile loan, or a home mortgage. It’s important to maintain a good credit record because it can affect how much you pay to borrow money. If you have a good record, it means that you are a good candidate for a loan — based on your history of paying bills, your job history, and your salary — and it will be easier for you to get loans at lower interest rates. That usually translates into lower monthly payments.

If you have a poor credit history, however, it can be a big problem. A poor credit history usually results from making payments late or borrowing too much money, and it can mean two things: 1) that you might have trouble getting a car loan, a credit card, a place to live and, sometimes, a job or 2) that you will pay a lot to get the loans you need.

Suppose you never financed a car, a com- puter, or some other major purchase. How do you begin to establish credit?

• Consider applying for a secured credit card. It requires you to open and maintain a bank account or other account at a financial institution as security for your line of credit. Your credit line will be a percentage of your deposit, typically from 50 to 100 percent. Application and processing fees are common for secured credit cards. In addition, secured credit cards usually carry higher interest rates than traditional non- secured cards.
• You might apply for a credit card issued by a local store; local businesses often are more willing than national chains to extend credit to someone with no credit history. Once you establish a pattern of paying these bills on time, major creditors might be more willing to extend credit to you.
• Consider asking someone with an established credit history — perhaps a relative — to co-sign the account if you don’t qualify for credit on your own. The co-signer promises to pay your debts if you don’t. You’ll want to repay any debt promptly so you can build a credit history and apply for credit in the future on your own.
• If your application for credit is turned down, the creditor must tell you why. It may be that you haven’t been at your current address or job long enough. Or your income may not be high enough. Different credit card companies have different standards. But if several companies turn you down, it may indicate that you are not ready for the responsibilities that come with getting credit.

collect this information, create a credit report, and then sell it to businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home. A consumer reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years.

You have the right to receive a free copy of your credit report every year. The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, if you ask for it, once every 12 months. You will have to answer some questions to prove that you are who you say you are and to make sure you get the right credit report.

After you receive your credit report, read it carefully. If you find mistakes in your report, you should try to correct that information immediately:

1. First, tell the consumer reporting company, in writing, what information you think is inaccurate. Include copies (NOT originals) of documents with your letter to prove your point. In addition to providing your complete name and address, your letter should clearly identify each item you dispute in your report. Include a statement of the facts, an explanation of why you dispute the information, and your request that it be removed or corrected. You may want to enclose a copy of your report with a circle around the items in question.
2. Next, tell the creditor or other information provider, in writing, that you dispute an item. Be sure to include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider reports the item to a consumer reporting company, it must include a notice of your dispute. And if you are correct — that is, if the information in the report is found to be inaccurate — the information provider is not allowed to report it again.

For more information about correcting mistakes in your credit report, visit www.ftc.gov/credit and look for How to Dispute Credit Report Errors. Creditors use credit scoring systems to determine if you’re a good risk for a credit card, an auto loan, or a mortgage. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and how long you’ve had your accounts, is collected from your credit application and your credit report.

Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. 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, that is, how likely it is that you will repay a loan and make the payments on time.

Credit scoring models are very complicated and often vary among creditors and for different types of credit. If one factor changes, your score may change — but improvement generally depends on how it relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.

Nevertheless, scoring models generally evaluate the following types of information in your credit report:

• whether you paid your bills on time
• your outstanding debt
• how long you have been paying bills
• whether you applied for new credit recently
• the number and types of credit accounts you have

A credit card makes it easy to buy things now and pay for them later. If you’re not careful, you can lose track of how much you’ve spent by the time the bill arrives. And if you don’t pay your entire bill, you’ll probably have to pay finance charges on the unpaid balance.

If you continue to charge while you have an outstanding balance, your debt will grow. Before long, your minimum payment will cover only the interest. Not only could it take years to catch up, but you will have paid much more for the items than they originally cost. If you start having trouble repaying your debt, you could harm your credit record.

If you’ve already established your credit history but are having trouble making your monthly payments — or if you’re being contacted by debt collectors — you might feel overwhelmed. But there are things you can do to manage your debt.

1. Develop a budget: Make a list of how much money you bring in and how much money you spend on a monthly basis. Start by listing your income from all sources. Then, list your “fixed” expenses — those that are the same each month — like mortgage payments or rent, car payments, and insurance premiums. Next, list the expenses that change — like entertainment, recreation, and clothing. Writing down all your expenses, even those that seem insignificant, can help you track your spending patterns, identify necessary expenses, and figure out priorities. The goal is to make sure you can make ends meet on the basics like housing, food, health care, insurance, and education.
2. Contact Your Creditors: Contact your creditors immediately if you’re having trouble making your payments. Tell them why it’s difficult for you, and try to work out a modified payment plan that reduces your payments to a level you can manage. Don’t wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you.
3. dealing with debt Collectors: The Fair Debt Collection Practices Act is the federal law that dictates how and when a debt collector may contact you. A debt collector may not call you before 8 a.m., after 9 p.m., or while you’re at work if the collector knows that your employer doesn’t approve of the calls. Collectors may not harass you, lie, or use unfair practices when they try to collect a debt. And they must stop contacting you if you ask them to in writing. For more information, visit www.ftc.gov/credit and see Fair Debt Collection.
4. Credit Counseling: If you’re not disciplined enough to create a workable budget and stick to it, if you can’t work out a repayment plan with your creditors, or if you can’t keep track of mounting bills, consider contacting a credit counseling organization. Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops.

   They should send you free information about the services they provide without requiring you to provide any details about your situation. If a firm doesn’t do that, consider it a warning sign and go elsewhere for help. For more information, visit www.ftc.gov/credit and see Fiscal Fitness: Choosing a Credit Counselor.

5. Consolidate Your debt: You may be able to lower your debt payments by consolidating your debt through a second mortgage or a home equity line of credit. But remember that these loans require you to use your home as collateral. If you can’t make the payments — or if your payments are late — you could lose your home. For more information, visit www.ftc.gov/credit and see Knee Deep in Debt.

If you are having trouble managing your debt or setting up your first account, you might be tempted by offers that guarantee to provide you with a loan, wipe out negative information on your credit report, or consolidate your debts.

Before you do business with any company, check it out with your local consumer protection agency or the Better Business Bureau where the company is located. Some common credit scams involve offers for debt relief, guarantees that you’ll get credit if you pay a fee first, or offers to remove accurate negative information from your credit report.

If you are trying to get solvent, be on the alert for advertisements that offer quick fixes like these:

• “Consolidate your bills into one monthly payment without borrowing”

• “STOP credit harassment, foreclosures, repossessions, tax levies and garnishments”

• “Keep your property”

• “Wipe out your debts! Consolidate your bills! How? By using the protection and assistance provided by federal law. For once, let the law work for you!”

These services usually involve filing for bankruptcy relief, which can hurt your credit and cost you attorneys’ fees.

If you’re having trouble paying your bills:

• talk with your creditors

• contact a credit counseling service

• consider a second mortgage or home equity line of credit, but remember the risk: if you can’t make the payments, you could lose your home

Some scam artists target consumers with bad credit or no credit. In exchange for a fee you pay in advance, they “guarantee” that you will get the credit you want as a credit card or a personal loan. The fee you pay in advance may be as high as several hundred dollars.

The FTC has shut down many of these companies because they didn’t deliver on their promise. Resist the temptation to follow up on an advance-fee loan guarantee; it may be illegal. A legitimate lender never guarantees in advance that you’ll get a loan.

 

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