Understanding and Improving Credit

Posted on: June 29, 2016

For many people, their credit scores are truly a survival priority. No, a great score with TransUnion isn’t going to matter when you’re dealing with a wildfire or flood, much less an EMP. But, keep in mind, our daily lives are impacted by our credit scores. Your score can determine whether you qualify for a bank loan and, if so, the interest rate you’ll receive. It may also affect your ability to rent a home or apartment, the rate you pay for auto insurance, and whether you can get a decent credit card to use for emergencies.

What follows is an excerpt from Prepper’s Financial Guide. I’m not a banker nor a financial consultant. However, what follows is advice and information based upon what I’ve learned from repairing my own credit failures years ago. Read through and have a good understanding of these concepts before deciding to pay any sort of “credit repair” business. Many of them are scams and you can do yourself just about anything they promise to do for you.

Credit Score

In the banking world, you are, for all intents and purposes, your credit score. That number represents your reliability when it comes to debt repayment as well as an indicator of your overall responsibility. It affects many areas of your life, from determining whether you qualify for a loan to the loan terms you might receive, even your rates for insurance. The higher your credit score, the better the rates and terms you’ll receive.

There are three credit bureaus in the United States–Experian, TransUnion, and Equifax. Each of them have a file with your name all over it, whether you like it or not. This file, called a credit report, is supposed to contain an accurate documentation of your repayment history. I say it is supposed to because they aren’t always 100% correct.

Now, persons far smarter than I have attempted to determine exactly how a credit score is generated. We know, for example, that late payments tend to decrease your score and being responsible with your debt load increases your score. However, when it comes to calculating the exact number, well, it is sort of a mystery.

Credit scores range from 300-850, again the higher the better. There are gray areas when it comes to deciding what is “good” credit versus merely acceptable. Lenders have their own guidelines. However, as a general rule of thumb, a score of 740 and up is considered excellent and those individuals usually enjoy the most favorable rates and terms. A score of 680-740 is still considered pretty good. The rates extended won’t be quite as awesome as those in the upper bracket but lenders aren’t going to try and bend you over a barrel, either. The next level down, 620-680, is the lowest rung still considered acceptable by most lenders. You’ll still likely get approved, all other factors being equal, but the terms aren’t going to be all that stellar. The further down you go from there, the less likely you’ll even be approved for credit, let alone see terms that are even close to acceptable.

Again, those ranges are merely ballpark figures. Every lender is slightly different in terms of what they consider good versus average credit scores.

[callout style=”lightblue” centertitle=”true” align=”center” width=”450″] Credit reports vs. credit scores
Obtaining a copy of your credit report is a fairly straightforward process. Getting your own credit score, though, is a whole other ball game. See, the score won’t be printed on the credit report. The credit bureaus keep those scores locked up tighter than a clam with lockjaw. You can request a copy of your credit score from each of the three bureaus, but they’ll charge you a fee for providing it.

There are some credit card companies that have the means in place to provide their customers with their own credit scores. This is a great option for many people, provided you can be responsible with the credit card itself. As this is an option that sort of comes and goes with different companies, you’ll have to do your own research to find which ones currently offer it.


Credit Reports

It is important to review your credit report on a regular basis. This might be the only way you’ll ever learn of errors on it as well as see indications of fraud or identity theft. Fortunately, getting a copy of your credit report is very easy. The Fair Credit Reporting Act (FCRA) requires the three credit bureaus to provide, upon request, one copy of their credit report, free of charge, to each consumer once a year. The report may be ordered via one of three ways:

Online: Visit http://www.annualcreditreport.com/. Be wary of lookalike websites with similar domain names. This one is the only one set up as a result of the FCRA. There are a lot of scam sites out there that will either charge you or just outright steal your information. Ordering your report online grants you immediate access to it.

Mail: There is a form entitled Annual Credit Report Request that must be filled out, then mailed to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

Response time is about two weeks from when the request is received.

Telephone: Call 1-877-322-8228 and order your report. As with mailing, it will take about two weeks to get your report.

It is important to rely upon one of these methods, rather than contacting the credit bureaus directly. The website, mailing address, and phone number listed above are the only ways to obtain your free copy each calendar year. The credit bureaus are likely going to charge you if you go directly through them.

You are entitled to one copy from each bureau every 12 months. Rather than ordering all three at once, I suggest you stagger the requests and order one from a different bureau every four months. This allows you to react quicker in the event you do see something amiss on the report.

Reporting Inaccuracies

Go through each credit report line by line, even including your name, your address, and all of your other identifying information. The balances listed for each account will probably not be accurate right down to the penny as there is a lag between when you make a payment and when that payment is reported to the credit bureau. However, look for accounts that are listed as open, even though you closed them years ago, or accounts that are listed as delinquent even though you’re up to date on all payments.

Be sure to check for any accounts you weren’t aware of as these are indicators of possible fraud. Bear in mind, though, that the names listed as account holders may differ slightly from the ones which are familiar to you. Banks change names from time to time.

Should you find something amiss on your credit report, you need to get it handled as soon as possible. These things take time so the faster you act, the sooner it can get fixed. Every credit report will have instructions on how to report possible errors, which will need to be reported in writing directly to the credit bureau. They have 30 days or so to investigate the matter and respond back to you. Typically, what will happen is the credit bureau will contact the person or entity (both are considered to be Credit Reporting Agencies, or CRAs) that originally reported the information. The bureau will notify them of the dispute and pass along the information you’ve provided on the matter. The CRA must conduct an investigation and report the findings back to the credit bureau.

If the CRA provides documentation that the information is valid and correct, it stays on your credit report. However, if they are unable to provide that documentation, the information is changed or deleted on your credit report.

Of course, you could also skip the credit bureau and contact the CRA directly about your dispute. Depending upon the circumstances, this may or may not speed up the process. It is one thing if you are dealing with a large company that likely has processes in place for dealing with disputes and knows how to handle such matters efficiently. Another thing entirely if you’re dealing with a landlord or some other relatively small-time operation.

Credit Score Management

While we might not know how to calculate our own credit scores precisely, we do know of several factors that come into play with increasing the number.

Payment history

First and foremost, strive to make all of your payments on time, every time. Every late payment counts against you and payments that are completely missed count even more. Pay close attention to due dates and remember that even just paying the minimum is far better than not paying anything at all.

I would venture a guess that the vast majority of bills you have each month can be paid online. Plus, a lot of companies today allow you to schedule payments ahead of time. This can be a great option, provided you are certain the funds will be in your account when the payment is due.

For those who, whether by necessity or preference, still wish to mail checks, here’s a system we used successfully for years. Once a week, sit down with all of the bills that came in the mail. Write out the checks and get the payment ready to mail for each one, sealing the envelope and everything. On the outside of the envelope, where your return address goes, write in the date by which the payment must be mailed, being sure to allow plenty of time for it to arrive before the deadline. Keep all of these payments clipped together on the fridge in the order they must be mailed, the soonest one on top. Check the stack every day or so and mail out the payments as needed, covering your written “mail by” date with a return address label.

Sometimes, we get into trouble because we have several accounts that all require payment at nearly the same time each month. If that’s the case for you, call your credit card companies and see if you can adjust the due date for your account. I’m not talking about a one time deal but permanently. If you have a bunch of stuff that is always due on or near the 20th of the month, maybe get one or two of them moved to the 10th or something to help space things out.

Payment amounts

Whenever possible, pay your balance due in full each month. Doing so not only avoids you having to pay interest charges but it indicates you know how to manage debt responsibly, which increases your credit score. If you have fallen behind a bit and can’t pay the entire balance on a credit card, try to at least pay off any new charges plus the interest fee for the month. This will prevent your balance from growing each month and help you to get a better handle on the account.

Always pay as much as you can afford on each account every month. Sometimes that won’t be a whole lot, I know, but do what you can to pay off balances quickly.

Historical accounts

Sometimes, when we finally pay off an account, we’re tempted to close it completely so as to avoid getting into further trouble. That’s not the worst idea in the world. But, consider keeping at least one old account open. Use it from time to time, making small purchases and paying the balance in full when the bill arrives. This helps you to build a positive history of debt management.

Diversify your debt

Creditors like to see that you know how to handle different types of debt. As situations warrant, diversify your debts so as to include installment loans, credit cards, and a mortgage. I’m not suggesting you run out and buy a new set of furniture for the sole purpose of trying to increase your credit score! But, if given the option of using a credit card or an installment loan, go with the one that not only gives you the most favorable terms but is one you might not have used in the last few years.

Debt ratio

Ideally, your credit debt should be around 30% of your net income. This figure does not include mortgage payments. Debt ratios are a key figure in determining whether you’ll get approved for a loan or line of credit. Creditors want to see that you not only have the necessary income to pay the loan but that enough of that income is free to be used for the payments.

Credit management

Avoid ever maxing out a credit card as this is a big red flag for creditors. Keep the balances low if you can’t pay them off each month. At the same time, though, and I know this sounds counter-intuitive, you need to use credit to build up your credit score. Paying cash for everything and never using a credit card or installment loan doesn’t provide any positive information to the credit bureaus. If you’re nothing but a blank slate to them, you aren’t going to enjoy any sort of stellar credit score and should the time come you need to open a line of credit, you won’t qualify for the most favorable terms.

Examine monthly statements

It should go without saying but go through each billing statement every month and make sure everything is accurate. On top of checking for errors, be sure you understand what each charge is for, especially when it comes to utility accounts like cell phones and internet services. Those companies in particular are notorious for adding fees and charges for services you didn’t order or that just plain don’t apply to your account. Should you find something you don’t understand or you believe to be an error, contact the company immediately to get it handled.

Along these same lines, any time you experience a service outage with your Internet or phone, you should notify the provider as soon as possible. Most of them will, if asked, credit your account for the outage. While this might only turn out to be a buck or two, that’s still money that stays in your pocket.

The takeaway here is that you need to pay attention to your credit and how it affects other areas of your life. Having the means to pay your typical living expenses in cash each month is great but consider the fact that at some point down the road, whether you like it or not, you may just need to apply for a loan. Managing credit effectively will go a long way toward improving your overall financial existence.

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