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2016 Understanding Consumer Credit Guide




1.  What is Credit?

 In This Chapter….

  • What is credit and what forms does it take?
  • How do credit cards work, and how much do they charge?
  • What are the other popular forms of credit?
  • How do you obtain credit for the first time?

You may often hear the term “credit” but may be unsure of its meaning. Credit is your ability to buy goods and services without spending cash at the time of purchase. In other words, credit is borrowing. The usual way to accomplish this is via the use of a credit card. When you do so, the credit card company immediately pays the seller of the goods or service and expects you to reimburse it through one or more payments. That means, in effect, you’ve borrowed the purchase price from the credit card company and, if you fully repay within 30 days, don’t have to pay any interest on the borrowing.

Credit also refers to any loans and mortgages you might have. When folks have “good credit,” it means that they can secure additional loans fairly easily and at a reasonable interest rate. If you have “bad credit,” you may not be able to borrow more money, and if you do, you will probably have to pay a high interest rate or put up “collateral” — something of value that the lender can sell if you don’t pay your loan on time. A mortgage is a loan collateralized by your home or other property.


1.1  Credit Cards

Companies such as Visa, MasterCard, American Express and Discover issue millions of credit cards each year. When you receive a credit card, you agree to make the minimum monthly payments on your credit balance — how much you’ve charged on the card minus how much you’ve paid back. If you don’t pay back your balance within a month, you’ll be charged interest, calculated daily, on your remaining balance. If you don’t make the minimum monthly payment on time, you’ll have to fork over a late fee — usually in the $25 to $35 range but may be significantly higher — and you could damage your credit score, which we cover in Chapter 2.2.

Your credit card has a limit on the amount you can charge or take as a cash advance. Over time, you credit limit may increase if you make all your payments on time. You also may qualify for lower interest rates if you maintain on-time payment history and don’t have a large percentage of your available credit outstanding. Interest rates, or annual percentage rates (APRs), vary by type of credit card. In early February 2015, the rates shown on the following chart illustrate the national average interest rates.


As you can see, bad credit can cost you, on average, 8 percentage points of additional annual interest (22.73% vs 14.89%), which is one reason why you want to avoid a bad credit score. On the other hand, a good credit score will save you, on average, more than 4 percentage points (10.24% vs 14.89%), and the difference between the average APRs on good (instant) credit and bad credit is whopping 12.49 percentage points (22.73% minus 10.24%).

Each credit card you use will require at least a minimum monthly payment. You can often cut your total minimum monthly payments by transferring the balances of most of your cards to a card that offers incentives for balance transfers, such as low fees or a period of zero interest.

If you pay only the minimum amount each month, it might take forever to pay off your balance, and you’ll spend a fortune on interest payments — not a recommended practice! Your indebtedness figures into your credit score, as we discuss in Section 3.3.2 below.

1.2  Mortgages

mortgagesA mortgage is a loan collateralized by real property, usually you home. Normally, when you buy a home, you fork over a down payment (usually between 3.5 percent and 20 percent of the purchase price), and take out a mortgage for the balance. You’re obligated to make monthly payments that consist of loan repayment and interest. At the beginning, just about all of the money goes to pay interest, but slowly over time more and more of each payment reduces the principal amount of the loan. Your access to credit, which depends on your credit history, credit score, income, the value of the property and other factors, will determine whether you can get a mortgage, how much you can borrow and how much interest you’ll pay. One of the fastest ways to destroy your credit rating is to miss a few mortgage payments. If you fall a few months behind, the bank may begin legal foreclosure proceedings that can end with you losing ownership and being evicted from your home.

The federal government offers mortgage assistance programs for low-income home buyers. For example, you can apply for a mortgage insured by the Federal Housing Administration that can keep your down payment as low as 3.5 percent. Because the mortgage is insured, your lender will be more willing to qualify you for the loan. The FHA also insures manufactured or mobile homes.

You have many options when you take out a mortgage, including:

  • The number of years to pay back the loan
  • Fixed or adjustable interest rates
  • Interest-only loans

You can receive mortgage advice for free from a housing counseling agency approved by the U.S. Department of Housing and Urban Development.

This Chart Illustrates the effect late payments on mortgage can have on your FICO Score


1.3  Loans and Credit Lines

Other popular types of credit include:

  • carloanAutomobile financing — a loan to purchase a vehicle, backed by a lien that can result in the lender repossessing the car if you fail to make the payments. Some car loans extend as long as 84 months. You can arrange automobile financing from your car dealership or from your bank/credit union. Shopping around is the best way of finding the lowest available rate, given your credit score.
  • Second mortgage — if you have a good credit score and history, you might be able to take out a second mortgage on your home. This requires you have a certain amount of “equity” in the home — that’s the value of your home in excess of your outstanding mortgage amount. Second mortgages typically charge relatively high interest rates because the lender has a claim priority lower than that of the primary mortgage lender if the home goes into foreclosure.
  • houserepairHome equity line — additional credit available when you need it, backed by your equity in your home. This is often used to make home improvements, but it actually is quite flexible and can be used many different ways. It’s a “revolving” loan — after you pay it off, you can borrow from it again.
  • studentloandebtStudent loan — available directly from the U.S. government at relatively low interest rates and from private lenders at higher rates. You usually don’t have to start paying these back until you finish your course work or stop attending school. Some programs are set up to forgive part or all of the loan if you take certain jobs, such as inner-city school teacher, for a set period of time — usually 10 years.
  • gascardDepartment Store * Retailer * Gas * Charge Cards — these are very similar to Major Credit Cards, except they are issued by stores and oil companies to charge purchases from the issuer. Big department stores and gas stations like to issue charge cards as a way to build consumer loyalty. As with credit cards, you must have a sufficiently high credit score to receive a charge card. THESE CARDS MAY HAVE HIGHER INTEREST RATES THAN MAJOR CREDIT CARDS

This Chart Shows the Total Amount of Debt in Each Major Category of Consumer Credit


1.4  Accessing Credit for the First Time

How do you get credit if you never had credit? Here are two ways that work very well.

1.4.1  Secured Credit Card

securedcreditcardHow do you get credit if you don’t have a credit history? One popular method is to take out a secured credit card from your bank. In this arrangement, you agree to maintain a minimum balance in your bank account, and that balance becomes the amount you can charge on your secured credit card. This isn’t a debit card, which is really just an alternative way of writing a check. You are billed and must make minimum payments just like you would with a regular credit card, but if you miss a payment, the bank will take the money from your bank account and may terminate the card.

It’s vital that you use a secured credit card from a bank that will report your transactions to the credit bureaus — that’s the only way these cards can help you establish a credit history, and some banks don’t play ball. Ask your bank up front about its reporting policies, its maximum charge amount, its fees and interest rates.

Over time, a spotless payment history will help you establish a credit score. You might then be able to replace your secured card with a regular credit card and free up the minimum balance in your bank account.

1.4.2  Authorized User

creditcoupleAnother method to establish credit for the first time is to become an authorized user of someone else’s credit card account. By doing so, you are allowed to use the credit card as if it was yours, but you are not legally obligated to pay the bill. This is quite different from a joint account, in which you are responsible for payments.

By becoming an authorized user, you can begin to build your own credit history and score through “credit piggybacking.” That’s because the credit history of the account owner can be included in your credit report. You can confirm with the card issuer and the credit bureaus whether this reporting is taking place.

1.5  Chapter Summary

In this chapter, we introduced the concept of credit, which is the amount of money you can borrow. We described the common forms of credit, including:

  • Credit and charge cards
  • Collateralized loans
  • Student loans

We also suggested a way to create a credit history through the use of a secured credit card. In the next chapter, we’ll describe how your credit history is compiled, reported and, if necessary, corrected. FOR MORE ON BUILDING CREDIT GO TO “STEPS TO REBUILDING CREDIT” THE LAST CHAPTER OF THIS MANUAL

creditbureaus2  Credit Reports

In This Chapter….

  • Who prepares credit reports?
  • What information do credit reports contain
  • What are delinquent accounts and key derogatories?

creditreport2Your credit report contains important information about the status of your credit accounts and highlights of your bill repayment history. Persons and businesses read your credit report before they grant you credit or a loan, rent you an apartment, sell you insurance, connect your cable TV and, often, hire you. Your credit report contains details that help determine your credit score. In short, a credit report, for better or for worse, tells the world a great deal about how you’ve managed your finances. It boils down to a simple question: What is the likelihood of getting repaid?

2.1  Credit Bureaus

In the U.S., credit reporting is dominated by three private bureaus: Experian, Equifax and TransUnion. Most of the time, the three bureaus share the same basic information about a person, although differences can and do develop among the three. Each has its own algorithm for computing your credit score, so it’s actually more likely that you have three different scores assigned to you. All three scores are based on a common foundation, the FICO scoring system originally developed by the Fair Isaac Company. We discuss credit scores at great length in Chapter 2.2.


Let’s examine more closely the information contained on a credit report.

2.2  Information on a Credit Report

Although the format of the credit reports from the three major credit bureaus vary somewhat, they all provide the same basic information.

2.2.1  Identifying Information

sscardThe report will clearly identify you by your name, address, date of birth, Social Security number and information about your current and previous employment. The information comes from several sources, including financial institutions, lenders, employers and rental property owners. You can update or correct this information by communicating with the credit bureau.

2.2.2  Credit Accounts

This section of the credit report contains information about all of your credit accounts, also known as trade lines. The information comes from each lender that has created an account with you. A credit report lists the following information for each account:

  • Account Type: credit card, retail account, mortgage, auto loan, etc.
  • Account Opening Date
  • Date Account Was Closed or Transferred: if applicable
  • Credit Limit or Loan Amount: including your current balance and available credit
  • Payment History: the report indicates the payments you’ve made or failed to make. Also includes late fees and penalties. Part of your credit score depends upon your payment history (see Section 3.3.1 below).

2.2.3  Credit Inquiries

Whenever you apply for credit, the lender will ask one or more of the credit bureaus for a copy of your report. The credit report lists inquiries made in the last two years. Lenders that want to offer a financial product to people within a certain credit score make involuntary inquiries. This type of inquiry has no effect on your credit score. For example, credit card companies will check credit reports before offering pre-approved cards. Voluntary inquires arise from your requests for credit or loans. The number of voluntary inquiries may affect your credit score.

2.2.4  Negative Information

rejectedlatterA credit report contains information about delinquent accounts — those that are up to 180 days past due — and derogatory accounts, with past-due periods in excess of 180 days.

Delinquent and derogatory information hurts your credit score. Key derogatory items are the most damaging — they include bankruptcies, lawsuits, liens, garnished wages, property seizures, foreclosures and court judgments against you. The credit bureaus receive public record information from courts regarding key derogatory items.

The bureaus also report data from collection agencies detailing overdue debt that they have tried to collect. Creditors and lenders often sell overdue debts to collection agencies at a substantial discount. The agencies make money by collecting the debt, and they can be very persistent.

Key derogatory information can devastate your credit score, and may remain on your report for 7 to 10 years or longer. Unpaid IRS bills remain on your credit report indefinitely.

2.3  Summary

In this chapter, we described how credit reports are prepared and the kinds of information they provide. We also introduced the concept of credit inquiries, which we discuss further in the next chapter. Finally, we explained the types and sources of negative information that can show up on your credit report. In Chapter 4, we’ll lay out ways you can monitor and correct negative information.

3  Credit Scores

In This Chapter….

  • Why is your credit score so important?
  • What are FICO Scores?
  • What factors affect your credit score?

A credit score summarizes your creditworthiness into a single number that easily communicates your Credit Risk a borrower. Your credit score can rise or fall over time. It can take a long time to build a good credit score, but you can ruin your score pretty quickly by failing to pay your bills on time.

3.1  Importance

loanapprovedFor better or worse, your credit score is the primary information that most lenders look at when deciding whether to extend you credit or a loan. It plays a role in how much credit you can get and the interest rates you’ll have to pay. A low credit score may force you to make bigger down payments on loans. If your credit score is too low, you may not be able to get any credit at all. Employers, landlords and others who have a genuine interest in your ability to reliably pay your debts may hold a low credit score against you. A good credit score adds convenience and flexibility to your financial planning and can get you better rates from lenders, but a poor score can hamper you in all sorts of ways.

Credit scores have several important benefits:

  • They allow for almost instantaneous access to credit. Many credit card issuers and other lenders promise decisions within minutes or hours. This is possible, in part, due to modern technology that allows immediate delivery of credit scores to lenders.
  • officepeopleThey are objective, which means that your request for credit is less likely to be rejected on personal or emotional grounds. Credit scores are not influenced by your gender, race, religion, age, marital status or nationality. Scores also ignore where you live, your salary and employment history, your child support obligations and your rental agreements. 100 percent of the score derives from information contained in your credit report. Seeking advice from a credit counselor doesn’t affect your score, nor do Error! Reference source not found. about your credit.
  • They prevent past mistakes from haunting you forever. The credit bureaus take several considerations into account, and one is the age of previous credit problems. The effect of credit problems on your credit score fades with time, especially if your recent payment history is good.


  • They increase the pool of available credit, by allowing creditors to identify the riskiest borrowers. Creditors may then raise interest rates or simply deny credit to those who pose the greatest repayment risk, leaving more loan money available for folks with good credit scores. In addition, lenders may construct different credit “products” to fit different ranges of credit scores, perhaps allowing credit access to those with marginal scores.
  • Credit scores are an efficient way for lenders to get critical information. The cost of obtaining these scores is relatively small, which means creditors have more money to lend and can charge lower interest rates.

3.2  FICO Scores

About 90 percent[1] of the top lenders use FICO scores to determine your credit risk. FICO scores — a product of the Fair Isaac Corporation — range from 300 to 850 for consumers and 250 to 900 for specific industries. While there is no “magic” number that separates good scores from bad, persons with credit scores below 600 have significant difficulties accessing credit. Each of the three credit bureaus calculates a FICO score for you, so you can have three different scores.

There are three common types of FICO Scores:

  1. FICO Score 8 is the most popular version in general use.
  2. FICO Score 2 is widely used by mortgage lenders.
  3. FICO Auto Score 8 is a version used for auto lending. There are also other varieties of these scores in use.

3.3  Factors Affecting Your Credit Score

Five factors affect your credit score. Each factor contributes a certain percentage to the overall score. However, the precise percentages may vary for certain individuals. For example, a credit bureau will adjust the percentages if a person doesn’t have a long credit history.

All five factors are based on information in your credit report. A credit score contains only information that helps to predict your likelihood of repaying creditors and lenders in the future.


3.3.1   Payment History (35 Percent)

Creditors and lenders want to know whether you’ve paid your past accounts on time. An occasional late payment may not substantially hurt your score, especially if your credit report is otherwise spotless and you made the payment fairly soon after the due date. The impact of late or missed payment depends on:

  • How quickly you paid them
  • How much money was involved
  • When this occurred
  • How often this occurred

Your payment history covers accounts from credit cards, retail charge card, mortgages, installment loans and accounts with finance companies. It also includes negative items such as bankruptcies and foreclosures derived from public records and collection items (see Section 2.2.4 above). Generally, having many credit accounts that show no late payments will help improve you credit score.

3.3.2  Amounts Owed (30 percent)

The actual amount you owe is less important than the amount of your debt as a percentage of your available credit — for example, the maximum amounts of credit on your credit cards and revolving credit lines. The credit bureaus figure that if you are using a high percentage of your available credit, you’re more likely to miss a future payment. The types of loans you have, such as credit card balances and installment loans, may have an impact on your score. One interesting aspect of this factor is that having multiple credit cards with small balances may lift your credit score more than would cards with zero balances. Also note that closing credit accounts does not improve your credit score.

Other considerations include:

  • What’s the number of credit accounts with balances?
  • How many accounts are you “maxing out?”
  • How much do you still owe on your revolving credit lines and installment loans, compared to their maximum or original amounts?


3.3.3  Length of Credit History (15 percent)

Consumers with long histories of reliably paying their debts on time are going to have higher credit scores than will folks just establishing a credit history. However, even if you don’t have a long credit history, you can still obtain a good credit score. A lot depends on how you’ve handled each credit account, including:

  • The ages of your oldest and newest credit accounts, and an average age of all your credit accounts
  • The length of time you’ve had certain specific credit accounts
  • The time elapsed since you last used certain credit accounts

Before you close credit accounts that you no longer use, consider the effect on your length of credit history. If it reduces your average, it might hurt your score. In addition, keeping unused credit accounts can help with 30 percent of the score derived from the amount you owe (Section 3.3.2 above), because it reduces the percentage of available credit you are currently using. Closing unused accounts does nothing to lift your score, so unless dormant accounts are charging you annual fees, keeping them open is better for your credit score than is closing them.

3.3.4  New Credit (10 percent)

Credit bureaus may downgrade your credit score if you open many credit accounts within a short period, especially if you don’t have a long credit history. Even if you aren’t approved for all of your new accounts, the credit bureaus keep track of inquiries from lenders for report and scores, and a large number of these over the past 12 months might also count against your score. However, the effect is usually small, and the credit bureaus excludes many types of inquiries, such as shopping around for the best interest rates, from its score calculation. You should feel free to rate shop when looking for the best mortgage or auto loan.

Note that requests for your credit report that you personally make to credit bureaus and report services don’t affect your score. Although inquiries remain on your credit report for two years, the credit bureaus use only the number from the last 12 months to help calculate your credit score. The bureaus might take into consideration how long it’s been since you last opened a credit account.

Opening a large number of credit accounts too rapidly will also lower your average account age, which can reduce the 15 percent of your score based upon your credit history (Section 3.3.3 above). It is also not helpful to open a bunch of new credit accounts and immediately use them, substantially increasing the percentage of available credit in use. (See Section 3.3.2 above).

3.3.5  Types of Credit in Use (10 percent)

The credit bureaus look at your “credit mix,” which includes your credit cards, installment loans, store/gas charge cards, mortgages and finance company accounts. The mix isn’t as important as is the bureaus having enough information to create an accurate score. The bureaus actually give higher scores to consumers that handle their credit mixes well than they do to those with no credit accounts. In general, your score will get a little boost if you do have wide mix of credit experience. Credit bureaus sometimes score negatively consumers who have “too many” credit accounts, but this number varies depending upon your overall credit history. Closing an account in which you had some problems won’t cause the negative information to be dropped from your credit history.

3.4   Summary

In this chapter, you learned how important credit scores are to your financial health, how the scores work and factors that affect them. If your credit score is not as high as you’d like, you can take steps to boost it. We’ll cover those strategies in the next chapter.

4  Strategies to Protect and Improve Your Credit Scores

In This Chapter….

  • What are the wisest ways to use credit?
  • What actions can hurt your credit score
  • How do you ensure your credit report is error-free?
  • How can you rebuild your credit score?

Your quality of life depends on a number of factors — your health, your work and your family, for starters. Your financial condition touches on all other aspects of your life and deserves important consideration and planning. The way you use credit, and your credit score, can have a critical impact on your finances and therefore on your lifestyle.

4.1  Using Credit Wisely

Many books have been written on the best ways to manage your credit as a positive tool for improving your lifestyle. On the other hand, bad credit can cause financial (and personal) turmoil. The best way to avoid a bad credit score is to adopt common sense spending habits. Here are some quick tips for using credit wisely:

  1. Put together a budget and stick to it.
    Your monthly budget should list your income from all sources, your mandatory expenses — food, clothing, shelter, utilities, insurance, taxes, interest on your loans and credit cards, etc. — and then the amount left over that is available for saving and for discretionary spending. Use this as a road map to tell you how much credit you can comfortably pay back each month. Keep track of your actual spending and modify your budget (and your spending) accordingly.
  2. Limit your borrowing to what you can pay back.
    As a general rule of thumb, you should try to limit debt payments to about 1/3 of your take-home income. This includes the monthly amounts you shell out for your mortgage, consumer loans and credit card balances. Try to keep your spending within your budget.
  3. Pay your monthly bills when due.
    This should be your top priority — only bad can come of missing a payment, and you can do enormous damage to your credit score if you are habitually late paying your bills. Paying bills on time demonstrates your reliability to lenders and creditors should you ever need to apply for a loan or a new credit card.
  4. Manage your credit cards wisely.
    If you have one or more credit cards, make sure you carry balances that:

    1. You can pay on time
    2. You can make at least the monthly minimum payment due, and hopefully pay more than the minimum amount so that you can eventually pay off the balance Don’t exceed your credit limit
    3. Keep your credit card balance below 25 percent of your credit limits at all times, even if you pay the full balance at the end of the month. Having a daily balance near your credit limit might hurt your credit score (see Section 3.3.2 above).
    4. Pay your existing balances as quickly as you can. You’ll save on interest expense, have access to more credit and demonstrate your ability to manage your credit well.
  5. Monitor your credit reports for errors (see Section 4.3 below).

4.2  Actions That Damage Your Credit Score

It’s pretty straightforward — you will damage your credit score if you don’t pay your debt on time. The occasional forgotten payment or temporary money crunch will hurt a little, but a chronic habit of late payments will quickly destroy your credit score and probably cut off access to future credit. Sometimes, you experience a life crisis that prevents you from paying your bills. Whether fair or not, this will lower your scores and remain on your credit reports for many years.

4.2.1  Missed Payments

Negative information about missed payments remains on your credit report for the seven years following the initial missed payment.

By the way, positive information about your bill paying can remain on your credit report for 10 years or longer, even if you close the account.

4.2.2  Bankruptcy

When you can’t pay your bills, you can have the courts declare you bankrupt. The type of bankruptcy determines whether your debts will be wiped out or must be partially repaid. Expect your credit score to drop at least 100 points if you declare bankruptcy.  Chapter 7 Bankruptcy

Called a liquidation bankruptcy, the court “discharges” you debt, meaning you know longer have to pay it back. However, the court will allow lenders to seize and sell most of your property. You can keep certain items, called exempt property, but the rest goes to help retire your debts. If you own little property, you’ll probably undergo a Chapter 7 bankruptcy. This bankruptcy remains on your credit report for 10 years.   Chapter 13 Bankruptcy

This is a reorganization bankruptcy, in which your regular income is sufficient to pay back at least some of your debts, usually over a much longer time period. You get to keep your property and have the opportunity to get current on your debts. This bankruptcy remains on your credit report for 7 years from date of filing if you complete the program. However it will stay for 10 years if you do not complete your payment Chapter 11 Bankruptcy This is a corporate bankruptcy. Some of the debt must be paid. This bankruptcy would remain on your credit report for 10 years if you personally guaranteed corporate debt

4.2.3  Foreclosures

foreclosureForeclosure occurs when your mortgage lender repossess your home because you failed to make timely mortgage payments. Upon foreclosure, you lose your home and will be evicted if you still live there. Your credit report will carry foreclosures for seven years. However, the effects on your credit score will begin to diminish after two years if you maintain a good credit record thereafter.

4.2.4  Collections

When a lender or collection agency attempts to collect money you owe, it reports the event to credit bureaus, where it will pollute your credit report for seven years.

4.2.5  Other Public Records

Other derogatory information is available from public records and remains on your credit report for extended periods:

  • Seven-Year Retention: All court judgments and paid tax liens.
  • Indefinite Retention: Unpaid tax liens.

Note that some states, including California, have stricter retention periods.

4.3  Monitoring Your Credit Reports and Scores

It is extremely important for all consumers to periodically check their credit reports. Why? Because errors crop up that can hurt your credit score. It also may alert you to identity theft. You have the ability to have a credit bureau and/or a creditor investigate and correct invalid information. Even if you can’t get a derogatory item removed, you are permitted, within limits, to give “your side of the story” on your credit report.

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4.3.1  The Fair Credit Reporting Act (FCRA)

fcracomplianceThe FCRA gives you important rights regarding your credit reports, including:

  • Free, complete copies of your credit reports at least once a year
  • The names of report recipients for the last year, and employer recipients for the last two years.
  • The name and address of a credit bureau that provided information leading to a rejected credit application.
  • The right to dispute the accuracy or completeness of information on a credit report. The bureau and the creditor must investigate your claims.
  • Your right to append an explanation to your report for disputes not resolved in your favor.

4.3.2  Credit Report Sources

freecreditreporticonFederal law names the website AnuualCreditReport.com as the official source of free credit reports. You can get one free copy of each report once a year using this site, which is sponsored by the three major credit bureaus. These reports do not include credit scores.

If you want your credit score with your report, you can pay a fee to the three credit bureaus: Equifax, Experian and TransUnion. Equifax offers a package of all three bureau reports and scores.

There are several other websites that offer free credit scores and/or reports, but none are officially authorized by the government. Most require a fee for credit monitoring.

4.3.3  Disputing Mistakes

No one suggests that the information on credit reports is always accurate and complete. Here are some common ways for errors to crop up:

  1. You applied for credit under a different name, or the name was transcribed incorrectly.
  2. The Social Security number is incorrect.
  3. Credit card and loan payments were applied incorrectly or to the wrong account.
  4. Someone steals your identity.

This is why it is important you periodically examine each of your credit reports.

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To dispute the information in a credit report, draft a dispute letter and send it via mail or email to the credit bureau and the creditor/lender. Make sure to include you’re:

  • Complete name
  • Address
  • Telephone number
  • Report confirmation number, if available
  • Account number for any account you may be disputing

For each item in dispute, clearly identify the mistake, lay out the facts as you believe them, explain why you disagree with the report and request the misinformation be corrected or removed.

Provide copies of all relevant receipts and any other documents pertinent to the dispute. You can include the portion of your credit report that contains the disputed item — circle or otherwise mark the item. If you send your material via the USPS, use certified mail with return receipt requested.

Alternatively, you can file an online dispute at each of the three credit bureaus:

Credit bureaus must investigate disputes (unless they are frivolous) and provide you with answers, usually within 30 days. The credit bureau must tell you the source of the disputed information. They must also communicate your dispute to the creditor or lender, which also will investigate the problem.

If you win your dispute, the bureau will correct or remove the misinformation and send you an updated report. They will also recalculate your credit score. You can have the bureau send out notices of corrections to anyone who received the credit report in the last six months, though this may require a fee.

If you lose your dispute, you can send the credit bureau a short summary of why you disagree with the resolution — this will be appended to your credit report.

The Consumer Financial Protection Bureau has a webpage that can help you file and track credit-reporting complaints directly with your lender or creditor.

4.3.4  The Role of the Credit Counselor

Credit counseling encompasses a number of related areas:

  • HUD Mortgage Counselor: Someone approved by the Department of Housing and Urban Development to help you work out your finances, apply for a mortgage or mortgage insurance, and tell you about various programs and resources that can help you.
  • dmpbenefitsCredit Counselor: These are typically non-profit organizations that provide budget counseling and debt s-gotdebtmanagement plans (DMP’s) to consolidate credit card and other unsecured debt. Creditors thru non-profit agencies offer DMP’s; the plans typically lower interest rates, stop late and over-limit fees, and may lower over-all monthly payment. Variety of tools to manage your finances, as well as advise you on housing, reverse mortgages and student loans. If you’re having trouble keeping up with credit cards, a debt management plan offered by non-profit agencies like Delray Credit Counseling can be a really good solution. These programs are only designed for people struggling with minimum payments. If you have enough to pay extra payments on your own, that’s what you should do. But if you’re in a real financial hardship a debt management plan can typically get you out of debt in 3-5 years, as opposed to making minimum payments to the credit card company for the next 18-25 years. Contact delraycc.com for help with credit card debt.
  • Debt Settlement settles outstanding debt for less than the full amount owed. This is a solution that should only be taken if you cannot afford a debt management plan. For-profit companies, some with “questionable” backgrounds, tactics and fees, typically offer these plans. There are some good settlement companies and law firms that provide this service. Just do your homework. Your credit report will be noted as “settlement accepted” and you may have to pay tax on the “amount forgiven” in the settlement. Consult a CPA to verify if you have a tax liability.
  • Credit Repair Organization: A private company that helps you recognize and dispute errors on your credit report. It can save you some time and work, but bear in mind that a creditor is not obligated to investigate a dispute that was submitted on the organization’s forms. Any incorrect info on your report should be reported to all three credit bureaus. Under the Credit Repair Organizations Act, a credit repair organization must provide the following to clients:

o   A written statement of your legal rights under the FCRA

  • Under the Credit Repair Organizations Act, a credit repair organization must provide the following to clients:

o   A written statement of your legal rights under the FCRA

o   Accurate disclosure of what the organization can and can’t do

o   A written contract, which you can cancel in writing within three business days

o   Deferral from collecting any money from you until it performs all promised services

o   Individual states may offer additional protections

  • IRS Representative: If you owe back taxes to the IRS, you may be served with a legal notice of impending action, such as an interview, audit, levy, lien or wage garnishment. You can meet with the IRS to work out a settlement, and you can bring a qualified representative — a lawyer, CPA or enrolled agent — to help you negotiate a deal. Make sure that you choose someone who has representation rights with the IRS.

4.4  Rebuilding Your Credit Score

By now, we hope we’ve convinced you how important it is to maintain a good credit score. If you’ve experienced credit problems that have hurt your score, do not despair. You can take a number of steps to help your score recover. Remember that in credit scoring, as in life, time heals most wounds, and after seven to 10 years, even the worst problems will fall off your report and no longer drag down your score. Even before then, credit bureaus begin to discount derogatory information after a couple of years as long as you maintain a good credit record.


4.5  Steps To Rebuild Your Credit Score

The activity on your Credit Report in the last 24

Here are a few things you should do to help rebuild your credit score:

  • Make sure your credit report is error-free and, if not, dispute the incorrect information. Check all three reports at least annually and monitor your credit score for any sudden changes.
  • Use automated reminders for payment due dates. One of the biggest problems people get into is forgetting to pay their bills on time. You can use an old-fashioned paper calendar, but in the 21st century, solutions that are more effective exist, such as online calendars and personal finance software.
  • Set up automatic payments with your credit card companies, in which they draft funds from your bank account each month to make a minimum payment, in case you forget to do it.
  • Reduce you indebtedness. You might be able to arrange a free balance transfer from all of your credit cards to just one. In this way, you have only one minimum payment a month. Hopefully, you can pay off more than just the monthly minimum and get rid of your remaining balance. Don’t close your old accounts, however (see Section 3.3.2 above).
  • Live within your budget. If you can’t pay your balances every month, you will end up with negative credit history. Living with a budget means first doing one. If you have not done a budget, you are setting yourself to FAIL. Write down Monthly Expenses on one side of the paper, Monthly Income on the other. Subtract Expenses from Income. That’s what you have left over. If you’re coming up short, find ways to cut expenses or bring in additional income. This step will ensure on-time payment history and if you live within your budget it will and don’t run up significant balances on your charge accounts, you’re on your way to a good credit score.
  • creditchart3Always remember the 5 factors of the credit score in section starting in section 3.3. Payment history accounts for 35% of your score; amount you owe (the percentage of the credit line you have used) on your revolving charge accounts is 30% of your credit score. These two things alone account for the majority of the score. Keep your credit cards under 35% of the credit line.
  • debtworryReduce you indebtedness. You might be able to arrange a free balance transfer from all of your credit cards to just one. In this way, you have only one minimum payment a month. Hopefully, you can pay off more than just the monthly minimum and get rid of your remaining balance. Don’t close your old accounts, however (see Section 3.3.2 above)
  • Stop Worrying About Negative Information On Your Report

When you need to rebuild or improve your Credit Score, follow the tips above and make sure you have a clear understanding of what it’s going to take. First stop worrying about the negative information on your report. If the information is correct then the damage is done. Swallow the pill and move on. Don’t fall into the “credit repair” scam. There are companies that claim to be credit repair services that charge significant fees to consumers only to flood the credit bureaus with bogus challenges to correct information. It’s non-sense and it’s a scam. It’s called “jamming”

If you have incorrect negative information on your report, then provide proof to the credit bureau that the info they are reporting is wrong. In most cases they will remove the info. If they don’t start complaining. As long as you have done your job, and you know for a fact the credit bureau has the proof that the negative info on your report is wrong, complain to everybody starting with the CFPB http://www.consumerfinance.gov the OCC (Office of the Comptroller of the Currency) then your Congressmen. People forget their congressmen are there to serve them. Congress makes the laws. If you’re truly being run over by a Credit Bureau, then fight back. I’m talking about legitimate complaints; this is not advice for those people that complain about everything always. The “everything is someone else’s fault crowd” You might be surprised what happens when you complain to your congressman, your senator, the CFPB, The OCC simultaneously, follow up with phone calls, and send it all to your local media. Who knows, they might pick up your story. Just make sure that you have done everything properly to provide the information to the Credit Bureaus that documents that the negative information on your report is incorrect.

Don’t waste your money with “Credit Repair” it’s one big fraud of an industry. There are a few exceptions, but just do your homework and pay your credit cards on time, don’t run up the balances. If you do that, your credit should be in good shape.

4.5.1  You Need Positive Information Reporting Every Month

What’s important to understand with rebuilding a credit score is that you need positive history reporting every month? (Revolving credit accounts such as credit cards, personal loans, department store cards, and gas cards) and other accounts like auto-payments, mortgage payments, student loans, all help credit score IF YOU HANDLE/MANGE THE ACCOUNTS PROPERLY.


Many people think if they pay-off collection debt and charged off accounts listed on their credit report, they will have a huge jump in score. NOT TRUE. If you don’t have any positive, on-time payment history being added to your credit report every month, even if you pay off all collection debt/charge offs, your credit score is not going to improve at all. The damage is already done. Paying off any and all collection or charged off accounts does not un-do the damage.

4.5.2  SECURED CREDIT CARD (The Single Best Tool to Build or Re-Build Credit Score)

lockcreditcardIf you don’t have any revolving credit accounts, then open up secured MC/VISA accounts. Many banks offer these cards. If you open a savings account with the bank, they issue a VISA/MASTERCARD in the amount of your savings account. The beauty of these cards is that they cannot be distinguished from a “traditional” credit card. Be sure to open the accounts with banks that have the lowest fees and interest rates. Open a secured credit card savings account with as large a deposit as possible. Having 2 or 3 accounts with as large a credit line as possible will go a long way in re-building your credit score. Keep adding funds to the savings account(s) you opened to obtain the secured Credit Card. KEEP THE BALANCES of the credit cards UNDER 35% OF THE TOTAL CREDIT LINE. If you open secured accounts and max out the cards, it’s a waste of time. If you are not sure why go back to section 3.3.2 of this guide. 30% of your score is based on the amount you owe on your revolving charge accounts.

Let’s pretend we are back in grade school for a moment. You remember the tests that graded from 0-100. If you open up 3 secured credit card accounts each with a $500 savings deposit. That would give you a minimum credit line of $500 each. Then you max out balances max out the cards; YOU HAVE JUST FAILED REBUILDING CREDIT SCORE 101. Why? You know why, 30% of your score is based on the amount of the available credit you use. Since the percentage of available credit owed makes up 30% of your score, even if everything else on your credit report is A+ /Perfect (which is never ever the case)

Your grade is a 70. That’s six points above failing. When it comes to credit scores, look at it this way, anything below an 85 is no good.

4.5.3  Secured Loan

You rarely if ever hear the “financial guru’s talk about a secured loan. Just like a secured credit card has cash as collateral for the card, a loan can work the same way. I would recommend meeting with a loan officer at your bank, tell them you are trying to rebuild your credit. You would like a personal loan you will secure with “cash”. Not all banks will do this, but many will. If you have the cash to put up, and are willing to pay them back with interest, what’s the downside to the bank? There is not one.

Do a little research first. Find out what type of loans your bank offers, and the minimum loan amount. You want to get a loan with a revolving credit line. Of course have the cash ready to deposit with the bank to secure the loan. Having a loan and a secured credit card reporting every month.

4.5.4  Final Word on Rebuilding Credit Score

climbcreditscoreRebuilding your credit score is going to take some time, but you can do it. All you have to do is make the decision that you are going to manage your credit score and 24 months from today you should have a much better score than you do now. You are going to be in control of what your credit score is. You are going to do that by first UNDERSTANDING your Credit Report. Take the time to learn how to read of the 3 Major Credit Bureaus reports. Know what is on each one of them. Update any incorrect negative information. Take the steps needed to improve your score (paying down current open accounts / opening secured credit cards) you have all the information in front of you to know how your credit score is determined. LIVE BY THE RULES. Remember there are only 5 PRIMARY FACTORS that determine your score, a fact repeated in this guide over and over again. Learn them, know them, and live them. If you want a good credit score, you have to pay on time and you cannot max out your credit cards. It’s as simple as that.

4.5.5  Last Word on Credit Monitoring

OK, so you take some steps to increase your credit score. Monitor your credit score, I think it’s a good idea. Not all financial advisors agree on whether a credit monitoring service is worthwhile. I believe it is. I personally use Life Lock, (this is not an endorsement of LifeLock) I’ve just used their service for years. Check around for the best deal, and here’s a little secret on saving money on credit monitoring. Find a service with a “free trial” (most give a week free) you pay a monthly fee if you don’t cancel after the free week. Here’s the tip, a day or two before your free week is going to expire, call the company and tell them you want to cancel. Tell them “I like the service, but it just doesn’t fit in my budget” Most of these companies will drop the monthly fee to keep you as a client. Check your report and score once a month. That may seem a little obsessive, but to my thinking, it will take you a few minutes to review your report. Be sure you review your report, NOT JUST the SCORE. Know what’s on the report, look for any changes.

4.5.6  Applying For New Credit

When you are going to apply for new credit, make sure you are very likely to be approved for the credit you’re applying for. You can do that by researching the Bank or Finance Companies requirements for the financial product you’re applying for. The chart below shows what credit score range is needed for the some of the best cards available, and what credit score range will likely be denied.


You can always contact the bank or finance company and tell them your score, and debt to income ratio is. They will not give you an approval or denial, but they may very well tell you if you are “in the range” of what the requirements are. I did this very thing with Wells Fargo. I went into the bank, with my Credit Reports and scores, along with an income and expense sheet. It took some arm-twisting, but I finally got an answer out of them.

If you explain that you don’t want to apply for a financial product you are not likely to be approved for, a reasonable loan officer or credit manager will likely tell you if you’re in the ball park. Don’t apply for credit you don’t need. Don’t apply for too much too fast.

So that’s it, and Congratulations on finishing this consumer credit guide e-book. You now have the knowledge to obtain and maintain a good credit score. If you have questions or comments, by all means send them our way.



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