Don't Break the Bank: A Student's Guide to Managing Money (19 page)

Equifax

Phone: 800-685-1111 (toll-free)

www.equifax.com

Experian

Phone: 888-397-3742 (toll-free)

www.experian.com

TransUnion

Phone: 877-322-8228 (toll-free)

www.transunion.com

Your Credit Report

Your credit report is sort of like that notorious “permanent record” they always talk about in high school. The credit report is a detailed history of everything you’ve done in the past decade or so with regard to credit and finances. It includes information on your loans and credit cards. Just as your high school transcripts provide a good overview of what you did in high school, lenders (and others) can get a good idea of what you’ve done with your money by looking at your credit report. Each credit bureau differs in the information it gathers, so your report can look different from one bureau to another.

Your Credit Score

Often, lenders don’t want to bother looking through your entire credit report, so there’s a shortcut. Your credit report is “summed up” in the form of your credit score. Your credit scores are also known as your FICO scores. Just as colleges often judge you (at least in part) based on your SAT scores, lenders judge you based on your credit scores.

As we said before, each credit bureau collects different information, so your score can vary from one agency to another. Scores can range from 300 to 850.

There are five things that are considered when calculating your credit score:

1. Payment history (weighted 35%): Have you paid your bills on time? Have any of your accounts been late? If so, for how long?

2. Amount You Owe (30%): What is your total debt? How much of your available credit are you using? (In other words, are your cards maxed out?)

3. Length of Credit History (15%): How long have you had your accounts? Lenders like to see a long record of good payment habits, so the longer your history, the better.

4. New Credit (10%): How many times have you requested credit or opened new accounts recently? Lenders sometimes get nervous if they see you have taken out a bunch of credit all at once because they think you may take on too much debt that you won’t be able to pay back.

5. Type of Credit (10%): It’s good to have a mix of credit types: credit cards issued by a bank, department store credit cards, home equity lines of credit, installments loans, etc.

Checking Out Your Credit Report

It’s important to check out your own credit report so you know exactly what sort of shape your credit is in, and also so you can look for any errors. A lot of credit reports do contain errors and also frequently contain signs of identity theft or fraud.

It’s never too early to start monitoring your credit. Even if you’ve never had a loan or credit card, it’s still a good idea to check your credit report, just in case there’s a problem (see
Expert Advice
below).

By law, you are entitled to get one free copy of your credit report per year from each of the three credit bureaus. The official site where you can request your free reports is
AnnualCreditReport.com
. There are many other sites that promise “free credit reports” but then will try to sign you up for a monitoring plan or other services. Be careful.

Expert Advice

“The most important tip for teens right now is to have them pull their credit report at least six months or more before their 18th birthday. Too many kids are victims of identity theft, especially in this economy! Perhaps an adult put utilities or phone bills in a child’s name because they were struggling to pay the mortgage or other bills, etc.

Teens need to pull their credit reports long before their 18th birthday because once they turn 18, the debt is theirs, and it is difficult to have it removed. Prior to their 18th birthday, they are minors, and it’s is much easier to have these debts removed. When teens pull their credit reports, it should state something along the lines of “no report found.”

Many kids learn they’ve been victimized when they apply for a job, an apartment, and/or a car loan. By that time, they are over the age of 18 and strapped with debt that isn’t theirs. About two thirds of employers check credit as part of the employment screening process. Although the laws are scheduled to end that practice, employers will still be able to pull credit for jobs that involve finance, money, security, and other areas.”

~
Jennifer Matthews, MBA, Creating Financial Literacy, LLC, www.CreatingFinancialLiteracyLLC.com

How Bad Credit Can Hurt You

Bad credit can cause you problems in many ways. For one, it will make it harder for you to get a loan or other credit. And if you do get credit, you will probably pay a higher interest rate than someone with good credit.

Bad credit can also make it tougher for you to get a job or rent an apartment. As you’ll see later in this chapter, it isn’t just lenders who may check your credit.

How Is Your Credit Score Used?

Your credit score is used to make decisions about your credit worthiness. So, lenders check your credit score before deciding whether to approve you for a loan or credit account.

However, there are other people who might be checking your credit report, as well.

Landlords

Landlords check credit reports to help weed out deadbeat tenants. If you are trying to rent an apartment, the landlord may check your credit to see if you’ve skipped out on any previous landlords. He or she may also look for any court actions or other legal problems that might be red flags of a problem tenant. And, of course, landlords will look to see if you’ve ever been evicted from (kicked out of) a rental property in the past.

Employers

More and more employers are doing credit checks on people they are considering hiring. This is especially common if the position involves money (for example, a bank teller). Some employers believe bad credit means that the individual is irresponsible and cannot be trusted to handle money. They may also believe an employee with a lot of debt may be more tempted to steal.

Score vs. Report: Which Is Better?

As we said, your credit report provides a thorough, detailed picture of your financial history, while your score is just, well, a 3-digit number. If you have had credit issues, you are usually better off if the lender (or whoever is checking up on you) looks at the whole report. This way, the person checking can see if you just ran into a short-term problem that may have brought down your score. (Employers, for example, don’t see your score; they see your report. So, if you can explain any minor or temporary issues you may have had in the past, you may be able to do damage control.)

What to Do If Your Report Isn’t Perfect

So you’ve had a few missteps, and there a couple of things on your credit report that aren’t so great. What should you do? First, see if you can work with the creditor. Sometimes, the company will agree to remove the listing from your report if you pay what you owe.

Expert Advice

“My main tip for any young people is to pay their bills on time, particularly utility and cell phone bills. When we come out of high school, we generally have little to no credit rating. If people fail to pay a bill and allow it to become delinquent, such as a utility bill going unpaid for 90 days or more, it can become a collection on their credit report and drive down their good score or bury a minimal score!

A collection is an unpaid debt that will remain on a young person’s credit report for seven years. Remember, you can be late on a utility bill for 89 days and no one needs to know about it. These are not like Visa card bills, which are late after 30 days. If you are late, no one needs to know about it beyond you and the utility company. But if you are late more than 89 days, your credit score will suffer for seven years.”

~
Gregory B. Meyer, Community Relations Manager, Meriwest Credit Union

If not, you are allowed to add a personal statement to your credit report. (You would contact the credit bureau to do this.) You should take this opportunity to explain any special circumstances that might show people this was an unusual event. For example, if you lost your job or had medical problems, you would want to include that information in your personal statement.

If There Are Errors in Your Report

It is fairly common for credit reports to contain errors. A lender or creditor may have mistakenly reported your account as late, or your information may have gotten mixed up with someone else’s. (This sometimes happens if you have a common name.)

Of course, there is also the possibility that the incorrect information is the result of fraud or identity theft. If you see a listing for an account you’ve never had or a lender you’ve never heard of, try contacting the company to see what information it can provide.

If you do spot errors or potentially fraudulent information, you should file a dispute with the credit bureau(s) right away. You can do this right on their Web site. The credit bureau will contact the person or business that provided the information and ask for verification or proof of the situation.

If you have been the victim of identity theft or fraud (or suspect you have been), you can add an alert to that fact on your credit reports. This will let people know that the information may be a result of fraudulent activity, not your own actions.

You can also add an alert that will require lenders to prove your identity before opening an account or granting a loan in your name. This prevents someone else from getting credit by posing as you.

Deciding What to Pay First

Okay, so let’s say you run into a little bit of a financial dry spell, and you are having trouble paying all of your bills. What should you do? First, try calling you credit card companies or other service providers to see if they can offer you any options. Sometimes, they can change your payment due date or work out a payment plan to help you get back on track. Depending on the type of account, they may even be able to defer a payment or two.

After you do that, if you still don’t have enough money to cover all of your payments, you will need to decide which bills get top priority. Any secured debt should be at the top of the list. Again, this is a loan that’s secured by property, such as a house or car. If you are late on this type of loan, the lender can repossess your car or start to foreclose on your house.

Next, you should pay credit card bills. These are most likely to report late payments to credit agencies, which can hurt your credit. Utility companies are least likely to report late payments, so you usually have some wiggle room with them. However, keep in mind that they may suspend your service if your bill is past due, so you should always contact them to try and set up a payment arrangement to avoid that.

Building Good Credit

You don’t suddenly get good credit overnight. It can take time to establish good credit. (Remember, a portion of your credit score is based on the length of time you’ve had credit accounts.) And even once you’ve established credit, you need to work to keep it in good standing. If you’ve had a pitfall or two, you will need to work especially hard to get your credit back in shape and counteract the negative information.

The “secret” to building good credit boils down to this: Get credit, use it responsibly, and pay your bills on time. Of course, that’s easier said than done.

Here are some common pitfalls to avoid:

•
Going overboard on credit cards.
Be careful about opening too many credit cards, especially if you don’t have a lot of experience handling credit. It’s very tempting to want to use all those cards once you have them. A few shopping sprees later, your cards are all at their limit, and you have no idea how you will pay your bills.

•
Slacking off on the payments.
Even just one or two late or missed payments can really hurt your credit score. Do everything you can to make the payments on time, even if you can only pay the minimum.

•
Paying just the minimum.
If at all possible, you want to pay more than the minimum. Otherwise, it will take you a long time to pay off your balance, and you will end up paying a lot in interest fees.