Understand the Ins and Outs of Credit
If thinking about credit scores, credit reports and credit fraud makes your head spin, you are not alone. Credit is not a subject typically taught in school and it can be confusing. But if you take time to learn a little about the subject, you may be surprised how easy it is to understand, control and stay on top of your credit.
What is a Credit Score?
The Fair Isaac Corp. developed the FICO score algorithm to predict the likelihood of bankruptcy or default. Three nationwide credit-reporting agencies — Equifax, Experian and TransUnion — collect and store your credit history and sell your FICO score to lenders such as banks, credit unions, auto finance companies and landlords. Lenders use your FICO score to determine your credit risk so it is important to regularly check your credit score. Scores can range from a low of 300 to a perfect score of 850 depending on credit report data.
Your FICO score is based on factors including:
· Your payment history
· The amount you owe
· How long you have had credit
· The types of credit you have
· The new accounts you have recently opened
Your payment history has the biggest impact, making up 35 percent of your score. But your debt-to-available-credit ratio, also known as the credit-utilization ratio, has a high impact too at 30 percent. This ratio applies only to revolving credit — not installment accounts such as mortgage, vehicle and student loans. To maintain a good FICO score, the ideal credit-utilization ratio seems to be in the range of 1 to 10 percent. The higher the debt-to-available-credit ratio, the more impact it will have on lowering your score.
To improve your credit score, try to pay the full balances of your cards on time. If you must carry balances, keep them low and pay them down as quickly as you can. If you are not carrying balances but use your cards frequently, you may be able to increase your credit score faster by paying your entire balance before the statement closing date to maintain a zero percent ratio. If you pay between the statement closing date and the due date, as many people do, the ratio will reflect that balance as a debt even though you pay it in full.
Pay all your bills on time and if you fall behind, get current as soon as possible. Pay off your debt and keep it down. Try to save before you buy instead of using credit. Apply for only the new credit you really need and don’t apply for too much credit at the same time.
Your credit score determines the interest rate you will receive — in general the lower your credit score, the higher your interest rate. Higher interest rates mean higher payments and paying more money over time. It truly pays to control your credit!
Managing Your Credit Report
Your credit report contains information about you that credit reporting agencies compile and sell to lenders, including your addresses, debts, payment habits, arrest record and bankruptcy filings.
It is important to check your credit reports at least once a year to make sure all information is accurate and up-to-date. You should also review your report before you seek a loan for a major purchase, like a car or home. To check your credit report, use AnnualCreditReport.com, the only site directed by federal law to provide credit reports. You can choose to pull reports from all three nationwide credit-reporting agencies at once or spread them out individually over the year.
You can also get a no-cost credit report through your personal financial manager or personal financial counselor, who can provide access to the credit score and analysis tool from the FINRA Investor Education Foundation.
According to the Federal Trade Commission, you should beware of imposter sites that claim to offer “free credit reports,” “free credit scores” or “free credit monitoring.” They aren’t part of the free annual credit report program and may come with strings attached. These “imposter” sites may include terms like “free report” in their names or purposely misspell their URLs to get you to their sites.
Disputing Errors on Your Credit Report
To dispute an error on your credit report, send a dispute letter with copies of supporting documents to the credit bureau via certified mail and request a return receipt. They must investigate your claim and may contact the information provider for more details. If the credit bureau contacts the information provider, the provider must review and report back to the credit bureau.
You can also send a dispute letter directly to the information provider, along with copies of documents showing your disputed claim.
Avoiding Identity Theft
Identity theft occurs when someone uses your personal information without your permission. You may not realize anyone has stolen it until you review your credit report. This is why it is important to protect your identity and learn ways to avoid identity theft.
Know the warning signs of identity theft, including seeing credit or debit accounts or charges you do not recognize, bills for accounts you did not open and IRS notices that say you filed multiple tax returns.
You may want to consider a credit freeze to restrict access to your credit report if you are concerned about identity theft. A credit freeze locks down your credit and makes it virtually impossible for identity thieves to open new accounts in your name. Freezing your credit does not affect your credit score, but you will have to lift the freeze temporarily to apply for credit.
A fraud alert allows creditors to pull your credit report but requires them to verify your identity as the person making the request. Both fraud alerts and credit freezes may prevent new fraudulent accounts, but may not halt misuse of existing accounts. As a service member, you may also request an active-duty alert to minimize the risk of identity theft during deployments.
Credit monitoring and credit locks are commercial products that protect your credit against identity theft but they are relatively expensive when compared to credit freezes, which are a government-mandated service.
If you need to report identity theft, visit IdentityTheft.gov and report it to the Federal Trade Commission. You will receive a no-cost personal recovery plan that will walk you through each recovery step, prefill letters and forms for businesses, debt collectors and others and track your progress as it adapts to your changing situation.
Making wise credit decisions and keeping an eye on your credit for mistakes or fraud will give you peace of mind and save you money when you borrow. Use available resources and make a no-cost appointment with a personal financial manager or personal financial counselor at your nearest Family Center if you have questions about credit and its impact on your current and future financial situation.
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