Last week, I made some modest New Year’s resolutions suggestions. This week, I’m covering the big papa, the thing you’ve been meaning to do for years. The credit report. Everyone tells you it’s important to have good credit. But how can you have good credit if you haven’t even seen your report? You’ve got to apply to get a report. I know it sounds miserable, but here’s some news: You can obtain the report quickly, easily and for free. So suck it up and do it.
Your Credit Score can range anywhere from 300 to 850. The higher the number, the better. Anything above 700 is excellent and anything above 620 is decent. Much lower than that and I’d start to get worried. Something in the 400s will cause you real problems.
What goes into your credit score?
Basically, it is an assessment of how well you pay people to whom you owe money, as well as the amount of debt and responsibility you are able to successfully take on. Things that will increase your credit score include: paying your credit card bills in full every month (which is a good idea anyway), having a low proportion of credit used to credit available (i.e., keeping a low credit balance on your credit card), having previously paid off (or making regular payments to) loans, such as student loans, car loans, home loans, etc.
Other factors in calculating your score are the length of time you’ve had successful credit – so for young people, it may be harder to have a stellar score – as well as the number of credit accounts you have. For example, if you owe money on seven credit cards, your score will be lower than if you only had three credit cards. Also, your score will be negatively effected by going bankrupt (duh!), missing payments on a regular basis, carrying high balances and owing more money than you seem able to pay. So, basically, if you pay all your bills and don’t have ridiculous credit card debt, you should be fine.
Why does this sort of thing matter?
Reason one: Loans. If you ever want to buy a house or a car, you’ll likely need a loan. Loans are based on risk, and if you have bad credit, you’re perceived as a risky person to lend to. Which means that you will have to pay a higher interest rate in order to secure a loan. Which means that, if you have bad credit, your cost for obtaining a loan is quite a lot higher – several percentage points higher, which can add up to thousands of dollars in extra payments.
Reason two: Apartments and Jobs. Many landlords screen their potential tenant’s credit score. If it’s too low, they won’t rent the place to you. Same with some employers: no matter how much they like you personally, if your credit score is too low, they won’t give you the job. It stinks, I know.
So how do you fix this?
First, get the report checked. It’s very easy. Each of the three main companies that tabulate your credit score is required by law to provide you with a report every twelve months. These companies are: Experian, TransUnion and Equifax. So, go to one of the three and get your report checked. Don’t check your score with all three – since each report should be roughly the same, you want to have an ace in the hole in case something comes up and you need to check your report twice in the same year – and if you’ve only gotten a report from one of the three companies, you can always go back to the other two. This website will get you started.
Mind, obtaining this report won’t include your actual credit score – it will only include all the information that goes into creating that score. You’re welcome to buy the score for a small fee, but – if all the information looks correct, it might not be worth it. If everything is on the up-and-up, and you have no red flags on your report, knowing the exact score isn’t nearly as important as knowing that there is no incorrect or bad information on the report.
What do you do if there is incorrect information in the report? Dispute it. It may be unpleasant, but it’s usually worth it – for example, I once had a friend whose name was on her father’s credit card when she was younger (in high school) and she had a copy of that card for emergencies, but never actually used it. After she moved out and lived on her own, the family never bothered to take her name off of the card, so, when she was twenty-four, she was all of a sudden denied a lease for an apartment based on her bad credit. What had happened was this: her dad had fallen on hard times, maxed out their shared card, was carrying absurd amounts of debt and she was given much of the blame despite having never once used the card. She was able to correct the inaccuracy and now has good credit once again. But it cost her an apartment.
One last thing – if adverse action is taken against you, the company or organization that took action against you is legally obligated to furnish the report they used in making the adverse decision. So, if you’re denied something because of bad credit, you should, for free, be able to see exactly why and (if the information is wrong) take corrective action. More information about credit scores is available here.
And, if you have a justifiably low credit score, it may be time to change your habits. It will take years to correct the score (seven to ten years, actually), and is too involved a subject to get into here – basically, it will likely require a lifestyle and attitude-about-money adjustment that is far outside the scope of this column. But, you can get help by speaking to a financial counselor or a trusted loved one who is good with money.
Well, so that concludes our New Year’s broccoli – and it wasn’t so unpleasant after all, was it? You’re still standing and now you know far more about your financial fitness…. Happy 2012!