Credit

How do I qualify for credit?

Your credit score, or FICO score, determines whether or not you qualify for credit, how much credit you qualify to receive and what interest rate you will pay for that credit. Credit scores are a numerical composite generated using standard formulas and based on how you have used credit in the past. Your credit score indicates how you will likely manage credit in the future.

A vast network of credit reporting agencies share information about borrowers with three major credit bureaus, which then calculate credit scores based on that information. Credit scores run on a scale of 300 to 850-the higher the number the better. Most people have scores in the range of 600 to 800. If you have a score of 720 or higher, you are considered a prime borrower and will receive the most favorable interest rates.

Almost every time you apply to borrow money, the lenders will check your credit score to gauge how risky it is to extend funds to you. Your credit score is a large determining factor in obtaining credit cards, car loans, mortgages, cell phone and utility service and apartment leases. Some employers even look at the credit scores of job candidates.

What factors determine my credit score?

  • Your payment history determines 35 percent of your score. Ideally, your credit report should read "paid on time" and "paid as agreed" on every account. Late or insufficient payments stay in your credit history for about 2 years. If your accounts have been sent to collection agencies or you have declared bankruptcy, this portion of your score will be hit hard.
  • The amount you owe and the amount of credit available to you determines 30 percent of your score. Ideally, you should keep the amount you owe low in relation to how much credit you have available to you.
  • The type of credit you have determines 10 percent of your score. Consumers who have a balanced mix of revolving credit, such as credit cards, and installment credit, such as mortgages and car loans, are less risky and therefore have higher scores.
  • New credit determines 10 percent of your score. That is, how much credit you have applied for recently. If you have acquired a lot more credit quickly, your potential to get into trouble is greater. Also, people who are already having financial problems tend to suddenly apply for a lot of credit.
  • "Time in the file" determines 15 percent of your score. That is, how long you have had various accounts. The longer your overall credit history, the better. Also, the longer individual accounts have been open, the better.

Credit scores are not determined by age, employment, income, length of time at your current address or marital status, but lenders may consider those factors in approving a loan.

What can I do to improve my credit score?

  • Pay on time and pay as agreed. Make sure all your creditors receive at least the minimum payment due on or before the due date.
  • Do not take on more or new credit. If you frequently transfer balances to other credit cards to get better rates, find a card with a good rate and keep your balance there.
  • Obtain a copy of your credit report and make sure everything is accurate. Report any errors to the credit bureau. Before applying for a loan, keep in mind that rectifying errors can take weeks to complete.

How do I get a copy of my credit report?

You can request a copy from the three major credit bureaus-Equifax, Experian and TransUnion. Copies of your credit report typically cost $9 each.

Equifax

Equifax Credit Information Services Inc.

P.O. Box 740241

Atlanta, GA 30374

800.685.1111

Experian

National Consumer Assistance Center

P.O. Box 2002

Allen, TX 75013

888.397.3742

TransUnion LLC

Consumer Disclosure Center

P.O. Box 1000

Chester, PA 19022

800.888.4213

You can get a free report if you applied for a loan and were turned down. You must request your free copy within 30 days of the rejection and include a copy of the rejected loan application. You can also get a free report if you are unemployed and planning to apply for jobs in the next 60 days or if you believe your credit report is in error because of fraud. And under the Fair Credit Reporting Act, you can receive a free report once a year from each of the three reporting bureaus.

How do I read my credit report?

Credit reports have four sections:

  • Identifying information includes your name, social security number, current and previous addresses, date of birth, driver's license number, employers and your spouse's name.
  • Credit history includes the name of each creditor and the account number, along with the date you opened the account, the type of credit it is, the total amount of the loan, the balance, whether the account is open or closed and if you have paid the account on time and as agreed.
  • Public records should, ideally, be blank. This section includes bankruptcies, judgments and tax liens.
  • Inquiries list everyone who has requested your credit report.

Once you get the report, check to see if all the information is correct. Make sure bankruptcies are taken off after 10 years and other unfavorable information, such as judgments and tax liens, are taken off after 7 years.

If I find errors, how do I get them corrected?

Credit reports frequently contain errors and it is important to get them corrected immediately. If you find an error, send a letter explaining the faulty information to the agency that is reporting the mistake.

Under the Fair Credit Billing Act, billing errors that must be fixed promptly and without damage to your credit score include purchases you did not make, amounts different than the actual purchase price, purchases that you did not accept on delivery, math errors and failure to show payments you made.

The credit bureau will investigate your claim, and creditors have 30 days to respond to the charge. If the creditors admit the error, the bureau will correct it on your credit report. You may sue credit reporting agencies or creditors for not correcting errors in your file.

What common mistakes should I avoid in trying to improve my credit score?

  • Do not close your oldest accounts. It shortens your credit history, which negatively affects your score.
  • Avoid opening numerous department store credit cards just so you can get a one-time discount. You want to keep new credit to a minimum if you are planning on applying for a big loan, such as a mortgage or car loan.

I have almost maxed out the limit on my credit card. Will that affect my credit score?

Yes. If the balance on your credit card exceeds 35 percent of your credit limit, your credit score will be adversely affected.

I have numerous credit cards with high credit limits and no balance on any of them. Will that affect my credit score?

It will not affect your credit score, but it might limit the amount you can borrow in the future. If you have low income and a great deal of unused credit available to you, lenders might reduce the amount they will lend to you, especially for a mortgage or car loan. The thinking is, if you used all that available credit, you could get yourself into a situation where you would not have the income to pay it all off. The smart move would be to close some of those credit card accounts or request that the credit limits be lowered.

What is an adequate score to qualify for a mortgage?

If your credit score is over 650, you should be able to qualify for a mortgage with competitive interest rates. A score below 620 indicates high risk and could make getting a loan difficult.

However, if you have a low credit score, you may still be able to get a mortgage, but you will pay a higher interest rate. Also, the bigger the down payment on a mortgage the more likely it is that lenders will overlook a weak credit score. The more you have invested in the deal, the less risk the lender is assuming.

What should I look for when shopping for a credit card?

If you pay off your entire credit card bill every month, look for the best terms because, as a high-quality customer, you can get them. Avoid cards with an annual fee. They offer lower interest rates in exchange for the fee, but if you are not carrying a balance, a card with an annual fee does not offer you any advantages.

If you only pay the minimum amount due every month, you need to investigate how your unpaid balance is calculated and what interest rate is applied to the balance-and do the math. It could take you years to pay off the balance while racking up thousands of dollars in interest rate payments. You need to find a card that will enable you to get rid of that balance as fast as possible and at the lowest cost to you.

Credit cards also charge fees for late payments and for charging amounts over your credit limit. If you have had problems in either of those areas in the past, you want to find a card that will penalize you the least.

If you have a weak credit score, you will have to look harder for a credit card company that will accept you. You will not get the best rates, fees or credit limits, but you can still find credit card companies that are willing to do business with you. Do not take on more of a credit limit than you can handle, even if they offer it. You can request a lower limit that will not tempt you to get into trouble.

Be careful with cards that offer discount introductory rates. Once the introductory period is over, or if you make one late payment during the introductory period, the rates can skyrocket. You can always transfer your balance to another card with a better rate when that happens, but too many balance transfers can negatively affect your credit score. Also, watch out for balance transfer fees-in some cases, they can be quite high.

When you receive credit card offers in the mail, keep in mind that not everyone qualifies for the offer stated, even if the letter says that you are preapproved. Do not assume anything when applying for the card.

While shopping for a card, do not apply for too many. Too many inquiries into your credit report can lower your overall credit score.

What is a secured credit card?

Secured credit cards are popular with those who have weak credit scores as well as young consumers who have not yet built up a credit history. Some parents like to give teenagers and college students secured credit cards to keep them from getting into trouble. With a secured credit card, you pay the credit card company a certain amount and that amount is how much is available for you to spend. If you give them $1,000, you have a $1,000 credit limit.

Everyone needs credit cards these days because so many transactions are conducted electronically now. If you have no other options, secured credit cards give you the ability to charge purchases, but not the leeway to spend more than you can afford.

How do I dispute a credit card purchase?

If you are dissatisfied with a poor product or service that you charged to your credit card and the vendor refuses to give you a refund, your credit card company can offer recourse.

Under the Fair Credit Billing Act, consumers can withhold payment on purchases made with a credit card. But you have to make a genuine effort to resolve the dispute before you ask your credit card company to withhold payment. You must contact your credit card company within 60 days after you received the bill with the disputed charge. Also, the purchases must be for $50 or more. The credit card company will investigate your charge and make a determination of whether to withhold payment or not. In the meantime, the credit card cannot apply interest to the disputed charge.

What liability do I have if my credit card is stolen?

Under federal law, if someone makes purchases on your stolen card, your liability is limited to $50. However, most credit card companies will not even charge you that if you report the card stolen within 24 hours.

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