Why Is Good Credit Necessary?
The U.S. is known for its focus on data, metrics, and standardization. We create conventions to help define our lifestyles, our work ethic and our personal lives. These include numbers and systems of measurements such as mileage or temperature and even behaviors, social norms, symbols. Among these conventions, several have been formalized to become official rules by which we and the system we’re a part of can function. One such convention is our credit score and history which substantiates our personal financial viability and helps us access funds for our plans in life.
These instruments to assess whether a person is a financial risk or not were not created in a vacuum. They arose out of a need to determine the average American’s chances and eligibility for credit, and their financial well-being. For as long as they’ve populated this planet, human beings have used personal credit, i.e. their reputation, to borrow tools, funds, workers, etc., in exchange for another thing or simply a promise to pay. In the U.S. the standardization of one’s credit worthiness and reliability happened in the 1950’s when credit scores were invented by what would later become FICO, the foremost credit data analytics firm in the country.
Designed with impartiality in mind, the credit score has become one of the main factors by which our society operates. At any given point, we may have several credit scores based on our financial history, as measured by companies such as FICO or VantageScore Solutions, another credit analysis company. Borrowing money from a bricks-and-mortar bank, an online lender or a peer-to-peer marketplace and then paying it back has become a way of life for most, if not all, Americans.
Individuals, like you or I, have a credit history which determines our eligibility for home and car loans, ability to rent an apartment, obtain insurance, find a job and even maintain long-term romantic relationships. Forbes writes that the younger generations pay more attention to a potential partner’s credit score and history than their predecessors, and they factor that into their decision to continue the relationship or even marry. I’ve never done that myself but given the multiple and complex ways credit scores affect our personal and financial lives, you can hardly blame them.
The Highest and the Lowest Credit Score
According to Experian, one of the three nationwide reporting companies alongside TransUnion and Equifax, “for a score with a range between 300-850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent”. Now we know what a good score is, but how bad can it get? Experian reports that the lowest FICO credit score is 300, but no one really stays at such a low score once some financial history has been established. And that’s encouraging to think about.
What about the ‘invisibles’? The National Credit Union Administration defines ‘credit-invisibles’ as “consumers whose documented credit history is so limited that they don’t have credit scores or their credit scores are not based on a complete history of debt repayment”. This doesn’t mean they have a bad credit history, because some of them may pay all their bills on time. What it means in practical terms is they will have more difficulty getting approved for a credit card, auto loan or mortgage, insurance, and basically anything else that requires a credit history.
Where to Look for Your Credit Score
If you’re not an ‘invisible’ but rather someone who has a credit history and monitors it regularly, it’s good to keep in mind that you are entitled to a free credit report from all or any of the 3 national consumer reporting companies every 12 months from annualcreditreport.com. I check my credit score at least once every 6 months through my bank and even more often when I set my eyes on a big price item like a laptop I’d need to pay for in installments.
Lenders like Discover or Citibank indicate your credit score on their statements and their online portals provide breakdowns of how your credit score evolves over time. It’s important to keep in mind that your score is calculated using both positive and negative information on your credit reports. CreditKarma.com boasts to offer even more detailed information once you sign up for your credit score and credit updates on their portal, but they base their information only on TransUnion’s data:
For FICO scores, the following 5 categories of information are the most important when assessing your individual rating:
- Payment history: 35%
- Amount you owe: 30%
- Length of credit history: 15%
- New credit opened: 10%
- Types of credit you have: 10%
If you’re able to maintain a good score, all of this may not be very relevant to your day to day life. However, knowing this becomes a priority when your credit score drops below acceptable levels, and you’re no longer approved for loans or unsecured credit cards.
How to Dispute and Remove a Negative Item on your Credit Report
When should you worry? Being denied for new credit is a sign that something is wrong. Any fraud alerts from your bank, your credit card company or a credit monitoring company should be taken seriously. If you’re not in the habit of checking your credit score every month, you can hire a credit monitoring company to do the tracking for you. There are some reputable players in the industry, and some are mentioned here.
The first step is to identify what the problem is. To that end, the three consumer credit reporting companies, TransUnion, Equifax and Experian, offer extensive information and assistance to pinpoint the problem on their websites. Each of them has a dedicated page with instructions on how to file a dispute, what you need to present and how long you need to wait for a resolution:
How to file a dispute:
- A sample letter that can be used to send your dispute letter credit bureaus is on FTC’s website, located here.
- Along with it, mail the copies (not originals) of supporting documents and a copy of your credit report highlighting the errors.
- Send your documents by a certified mail.
- Credit bureaus take about 30 days to investigate after which they will mail the results of their investigation back to you.
- If credit bureaus have made any corrections they will include a free copy of your latest credit report as well.
Common Reasons for Credit Report Errors
In some instances, there is no need to panic and think that something nefarious is at play. Here are some common issues caused by human error which end up mixing the information from two or more people, creating what is rightfully called ‘mixed files’:
- During the data entry process, someone enters your information incorrectly by misspelling your name or accidentally switching around the digits in your Social Security number
- Some lenders may mistakenly report a financial transaction under your name, instead of reporting it under the very similar name of the actual applicant.
- If your name changes or has variations, make sure that you’re consistently using your official name and that you notify the three credit bureaus of any changes as soon as possible.
- You may have paid your debt to a collection agency, but they still reported it by mistake.
- Same debt listed twice or incorrect balances.
Other items on your credit report require more attention and follow-up. Identity theft and negative items which are past the statute of limitations, meaning the deadline by which they could have been reported, are two of the more complex issues to bring to the attention of the credit bureaus. Fortunately, they see such issues often and have a standardized process to deal with disputes. The generally accepted approach is to submit a copy of your credit report with the disputed item highlighted, accompanied by supporting documentation showing or stating why that item should be removed from your credit report.
In the event of an identity theft, the Federal Trade Commission states that you can “block those charges from appearing on your credit report. Start at IdentityTheft.gov, an FTC website that will give you a personal recovery plan that walks through each step. It will provide you with an Identity Theft Report that you can use only for debts that are the result of identity theft”.
Like Margaritaville, Some Could Be Your Fault
The examples above show how your credit score can drop due to reasons out of your control, and how to fix that. Below are some ways that your own actions can negatively affect your credit score:
- Late Payments
- Skipped payments
- Collection Accounts
A lender has the right to report unpaid debt to credit reporting agencies. Generally, utility companies don’t report when you pay a bill but they do report when you don’t pay it. Any unpaid debt that’s sent to collection can, and most likely will, appear on your credit report. Experian’s website indicates that collections of unpaid debt “can stay on your credit report for up to 7 years from the date the debt first became delinquent and was not brought current”. If a dispute is unsuccessful in getting the debt removed from your credit report, then a written acknowledgement by the creditor that the debt has been paid will generally be accepted and reviewed by the credit bureaus for the purpose of removing that debt from the report.
Improving Your Credit Score
Two well known, and dreaded, causes of a falling credit score are bankruptcy and entering debt relief programs. FICO indicates that a person entering a debt settlement program will lose between 45 and 160 points, while a person applying for bankruptcy will lose between 130 and 240 points.
This looks catastrophic but don’t fret, there are ways to recover.
Even though you may not be able to apply for credit, you can always get added as a co-signer on someone else’s credit card. Be careful though since if that person is not reliable or you don’t intend to fulfill your own obligations as a co-signer, it will lower the little credit you have. Paying non-bankruptcy accounts on time will look good on your credit history as well as keeping your balances low.
If you do want to apply for new credit, you can try secured credit cards which require a refundable deposit. You can find pros and cons of applying for various secured credit cards at nerdwallet.com or by simply googling ‘secured credit cards’.
Before doing all that though, make sure you do some research on whether you can remove a record of bankruptcy from your credit history earlier than the standard 7-10 years. Such records are removed automatically once that time has passed, but why wait that long if you can do something about it? Lexington Law describes several ways of getting rid of that eyesore early.
Understanding your credit and how it can affect your life can be the difference between struggling to keep your financial situation from spiraling out of control and feeling empowered to improve it. If you want to stay in control, do the research, read more articles available online that indicate how and why your credit score increases or decreases, listen to advice and be proactive. Your credit score and credit history are a living thing: they fluctuate, following your choices in life, modeling your attitude and becoming an expression of your behavior. For that reason, your actions really can improve your credit record. Take care of it as you would your health, and then, just like your health, you will have maximized one of the factors that determines how sweet life will be.