Financial Education
Are you a good investment?
There is an undeniable fact about modern life: How well you pay your bills determines the interest rate you pay on credit accounts. Interest rates on credit cards, auto loans, installment loans, and other credit-related products, including furniture, appliances, and jewelry, are based on your credit history. Companies investigate your past credit history in order to discern whether or not you're a good investment.
Even insurance companies now utilize credit history in addition to underwriting criteria to determine the premiums assessed on insurance products. Your auto insurance company most likely calculates your insurance premium by taking into consideration not only your driving record, but your credit record as well.
Credit and insurance companies derive your interest rates based on a formula. Because interest rates equate to your past credit history, your credit report is extremely important to your financial well-being. For example, the pricing (interest rate) is determined by the risk (your credit history).
If you have a proven track record of paying your bills on time, usually your interest rates will be low. However, if your credit history reflects late payments, then interest rates begin to increase. If you have past-due credit obligations, charged-off accounts, uncollected accounts, repossessions, or bankruptcies, the interest rates can be outrageous. Extremely high-interest rates may seem unjust, but are allowed by federal and state regulatory agencies if the rates fall within the limits established.
So how does a company know whether your credit is good or bad? Three major reporting agencies maintain your credit report: Trans Union, Experian, and Equifax. Each credit agency keeps a record of your payments' timeliness and includes information such as credit limits, current balances, monthly payment amounts, past-due amounts, and payment history for the past twenty-four months.
Your report also includes a list of companies that requested your credit report in the past twelve months. These are called inquiries. Excessive inquiries relay to a potential lender that you are very "credit active." If you apply and are approved for multiple credit accounts, you could slide into debt quickly and declare bankruptcy. If this happens, the lender might not only lose the principal but also the amount charged in interest. Excessive inquiries are a red flag for companies when evaluating risk, possibly increasing the rate.
At least once a year, you should check your credit report to see what it says about you and for any inaccuracies. But verifying your credit report with just one reporting agency is not enough. Make sure you order reports from all three agencies. Each agency has its own guidelines as to what information it collects and how long it will stay on the report. Unfortunately, these reporting agencies can make mistakes.
Your report may reflect a late mortgage payment even if you've always paid your loan amount on time. This can drastically affect your creditworthiness, as a lender or insurer may decline an application based on a false report. If you find inaccurate information on your report, contact the appropriate credit-reporting agency. Remember, only inaccurate information can be corrected or removed. Once you establish your payment history, it remains on your credit report. Delinquencies, uncollected accounts, and bankruptcies can linger on your credit report for up to 10 years or more.
By reviewing your report, you can also protect your identity from theft and fraud. "Identity theft" is when a person hijacks your financial and personal information and assumes your "identity" to open accounts, apply for loans, rent cars, and more. According to USA Today, in 2002, approximately 43 percent of roughly 380,000 complaints to the Federal Trade Commission were for identity theft.
Luckily, you can safeguard yourself from this type of victimization. In addition to reviewing your report annually, keep your personal information and social security number confidential. Don't give out your personal information on an unsecured Internet web site and limit giving it out over the telephone. Also, shred all credit card receipts before you throw them away. Identity hijackers prey on credit card numbers easily obtained from receipts. And again, contact the appropriate credit-reporting agency immediately if you suspect fraudulent activity on your report.
When you need credit-related products, there are a multitude of companies that can help. However, do your research, become a knowledgeable consumer, and shop around to determine which option is best for you.
How to Avoid Bad Credit.
If you're experiencing financial difficulties, there are steps that you can take to protect your credit rating.
- 1. Contact your creditors, and let them know you are having problems fulfilling your credit commitments. Most companies welcome the call and are willing to alter your credit obligation until your circumstances improve.
- 2. Contact a reputable, non-profit company that offers financial counseling and assistance with creditors.
- 3. Resume regular monthly payments as soon as possible to begin the process of repairing any damage done to your credit history.
Credit Reporting Agency Contact Information
You can obtain a free copy of your credit once a year from annualcreditreport.com, or by contacting one of the three bureaus.
Experian 1-888-397-3742
www.experian.com
TransUnion LLC 1-800-888-4213
www.transunion.com
Equifax 1-800-685-1111
www.equifax.com
There may be a fee to order more than one copy of your report, and also to see your credit score. And if you request your report by mail, expect at least 8-10 business days for a reply.
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