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Consumer Credit Information
Consumer debt has risen dramatically over the past few years,
so if you are in debt, you are not alone. Many people have
trouble paying bills and consumer debt drives millions of consumers
into bankruptcy every year. Some people don’t know how
to handle consumer debt, or are afraid to seek help when they
realize they are in financial trouble.
Merchants’ Credit Guide
offers the following advice on dealing with consumer credit.
As the United States becomes an increasingly credit-based
society where many financial transactions are done on credit,
a good credit standing has become one of the most important
assets a person can own. Your ability to purchase a home, an
automobile, or finance a college education may rely to some
degree on your credit rating. Many of the decisions that lenders
and creditors make concerning your needs rely on your personal
credit score, or credit rating. While credit scores may seem
complex or even scary, it’s important to remember that
no one controls your credit score but you.
CREDIT SCORES
A credit score is a number that is calculated using
a number of factors based on your credit and payment history.
Lenders use credit scores to estimate risk. Analysis of those
consumers with higher credit scores has shown that those with
higher scores are less likely to default on a loan.
Credit scores are determined by software employed by the three
credit scoring bureaus in the US, using data from your credit
report. The software uses 5 key areas of your credit report
to determine your score. In order of importance, the 5 key
areas are:
1) Payment History
Your Payment History includes the number of accounts
you have that are paid as agreed. It includes any negative
public records or collections. For delinquent accounts you
may have, it includes the number of past due items, how long
past due for each, and how long it’s been since you’ve
had a past due payment.
2) Amounts Owed
The types of accounts with balances and how much you
owe on each in included. Credit scores consider how much of
your revolving credit lines you’ve used to see if you
may be over-extended. They also consider installment loan accounts
to make sure you are making regular payments. This are also
includes zero balance accounts.
3) Length of Credit History
The length of credit history considers how long you’ve
actually had a credit history, as well as the length of time
since accounts were opened, and how long it’s been since
you’ve had activity. Scores are increased for longer
histories without problems.
4) Types of Credit
The types of credit you have are important in establishing
a credit score – installment loans, revolving credit
card or other charge accounts. Generally, a mix of different
types of credit accounts is reflected in a higher score.
Credit scores also take into account new credit accounts and
the proportion new accounts represent of your total accounts.
Scores look at recent credit inquiries and the time that has
passed since inquiries and newly opened accounts. The scoring
bureaus check to make sure you aren’t attempting to open
multiple new accounts.
Remember that credit scores are only one of the items that
a lender will use to determine if and how much they are willing
to lend to you. Lenders may also typically also consider income,
employment history, net worth, and the type and amount of credit
you are seeking.
HOW TO IMPROVE YOUR CREDIT SCORE
You can improve your credit score, and thus you ability
to borrow, by looking closely at your credit reports and planning
a course of action to correct and improve them. Five things
you can begin doing now can improve your credit scores over
time.
1) Credit History
It sounds simple, but pay your bills on time. Late
payments are a major factor in driving down your credit score.
Past due bills should be paid as soon as possible and try to
keep them current.
Often, you can contact your creditors and their collection
agencies to make a payment arrangement and negotiate with them
to keep late payment notations off your credit report.
If you are deeply in debt and can’t make any payments,
your best bet may be to see a legitmate, non-profit credit
counselor. There are many companies who promise to fix your
credit report for a fee – when their promise seems too
good to be true, it probably is.
2) Reduce Debt
Credit card balances should be kept low. The higher
the percent of debt you have compared to your credit limits,
the lower your score.
The lure of lower interest rates offered by other cards in
introductory offers is tempting but moving credit from one
account to another and having too many newly opened accounts
can also lower your credit score. When you pay off an account,
don’t immediately close it, as zero-balance accounts
can sometimes help your credit rating.
3) Length of Credit History
Obviously time is the only thing that can improve this
aspect of your credit score, but don’t attempt to open
too many new accounts in a short period, especially if your
credit history is not well-established, as this may signal
that you may not be able to handle credit wisely.
4) Manage New Credit Responsibly
Many credit inquiries on your account means you may
be trying to open multiple accounts, and that is not looked
upon favorably by the scoring software.
If you’ve had problems in the past, do open a new account
or two and pay them on time.
Note that checking your own credit report does not affect your
credit score.
5) Types of Credit Used
If you manage your credit wisely, you should have a
mix of installment loans, revolving credit cards, and loans
with fixed payments. Don’t try to open many new accounts
in an effort to create a better mix. Closing accounts does
not remove them from your report – these accounts remain
in your history and likely will be considered in your score.
HOW TO CHECK YOUR CREDIT REPORT
The United States 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, at your request, once every 12
months. The federal FCRA promotes the accuracy, fairness and
privacy of information in the files of consumer credit reporting
companies. The Federal Trade Commission (FTC), the nation’s
consumer protection agency, enforces the FCRA with respect
to consumer credit reporting companies.
Nationwide consumer reporting companies sell the information
in your report to businesses, creditors, insurers, employers,
and others that use it to evaluate your applications for loans,
credit, insurance, employment, or renting a home.
A summary of your rights under the federal Fair Credit Reporting
Act can be found at: http://www.ftc.gov/bcp/conline/pubs/credit/fcrasummary.pdf.
You can find more information about free credit reports at http://www.ftc.gov/bcp/conline/pubs/credit/freereports.shtm.
To order your free credit reports, see: www.annualcreditreport.com. |
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