Understanding The Credit System

A Better Understanding About The Credit Bureaus

Automated credit reporting has enabled us to apply for credit no matter where we decide to live. For example, if a consumer with good credit history moves across the country to take a new job, he or she typically can obtain credit instantly in that new city. Of course the opposite is also true, no one can run away from bad credit. The person with negative information in his file has the unfortunate experience of seeing the face of credit death no matter which door he chooses. No matter where he moves, the same information is already waiting.

When working properly, the automated credit reporting system used in the United States enables lenders to either avoid consumers who do not pay their bills or lend to them on special terms. This lowers the cost for those with good credit similar to the way a safe driving record will yield a lower insurance premium. Overall, credit losses, which are ultimately passed on to consumers who do pay their bills, are thereby minimized. The bottom line: Without consumer credit reporting, few businesses could afford to extend credit to their customers.

There are many times, however, when good citizens get ensnared in a sticky web which threads are linked with transposed numbers, coincidental similarities, unethical collection agents, just plain bad luck and a host of common, human errors. The rest of this report will empower you with the knowledge you will need to untangle yourself from an imperfect system.

You Are Out Of The Loop

The credit reporting system is a business relationship between two parties:

· Independent Agencies that collect credit information called credit bureaus.

· Merchants who pay for a copy of this credit information on an as-needed basis.

Credit bureaus refer to merchants who pay a fee for their service as subscribers or customers. As with any business, the main focus of the bureaus is to meet the needs of their customers, the merchant subscribers (not you). When you apply for credit with a local merchant, the merchant turns to a credit bureau to obtain a copy of your "credit reputation" to help him evaluate the risks in extending credit to you.

The bureau doesn't actually approve or deny your credit, but rather supplies the merchant with your payment history as reported by other subscribers with whom you have received credit. However, the bureau will use a closely guarded secret formula to assign a credit score to each individual based on the information in the file.

This information is the most significant factor in the merchant's decision regarding your "ability and willingness" to meet your future financial obligations. The merchant is counting on the credit bureau's information to serve as a filter to help separate good credit risks from poor risks. The shortfall of this system is that the product -- YOU, have little clout in this relationship. The merchant's primary motivation is to avoid bad credit risks, and the bureau makes a profit by charging the merchant for helping him do that. The consumer has no positive financial impact on the bureau. Thus, while you are out of the loop, you are surrounded by it.

If that weren't enough, you also have to compete against human nature. Without documentation of errors, the bureaus are inclined to report information as reported by subscribers, assuming the negative. After all, the merchant/subscriber is not going to complain because he didn't like what he saw on your file and thus didn't extend credit and did not lose any money. Any losses for not taking a risk are speculative and argumentative, certainly not tangible.

The only decisions that might draw criticism from the merchant are the losses as a result of the bureau omitting some negative information that would have caused the merchant to, have declined extending credit. This is not intended to make the credit bureaus appear the “great evil empire" that some have made them out to be. They are huge bureaucratic companies whose policies have evolved from simple business economics and human nature.

Every credit bureau desires to maintain as accurate information as financially feasible, but at the same time they realize the quality control limitations dictated by competition and operating costs. And they realize that if they do err, it is better to err on the negative side rather than the positive, if , they mean to serve their subscribers' best interest. Although they want to develop as truthful a portrait of your credit history as possible, human nature compels them to give highest priority to recording any remarks that might be true and might keep their customer-base from entering into a risky credit arrangement. After all, that is their service, and nothing directly impacts their bottom line any greater.

It's much like having a mechanic check out an automobile before you make a decision to purchase it. The mechanic is put on the spot. If he tells you that it’s a good car, and it breaks down on you, then he will look bad. He'll never be burdened with your complaints about the three he blackballed, only the one he approved - if it should break down on you.

Human nature compels him to go into the situation looking for what's wrong, not what's right. You are about to make a major financial decision based mainly on the information your mechanic gives you. Similarly, the merchant may be making a comparable investment based on the information provided by the bureau.

Respectfully, Regis Sauger www.yurcredit.com Article Source: http://EzineArticles.com/?expert=Regis_Sauger

14 Common Credit Mistakes

Establishing credit and wisely managing your credit becomes easier when you know how. You'll feel empowered by taking knowledgeable steps towards good credit, and you'll be on your way to purchasing real estate and greater financial freedom.

If you plan to finance real estate, either as a home buyer or an investor, avoiding these common credit mistakes will help you with your credit score and save you money in loan costs.

14 Common Credit Mistakes

1. Using expensive or undesirable types of credit costs too much and is negatively scored.

2. Accumulating too many lines of credit or too many credit cards causes credit report remarks like "too much consumer credit."

3. Only paying the minimum due keeps balances too high.

4. Being maxed out on any credit card or line of credit causes deep drops in scores.

5. Taking cash advances costs higher interest and extra fees.

6. Exceeding limit and having to pay over-limit fees is a negative with creditors and causes "high proportional amounts owed" remarks on credit reports and subtracts credit score points.

7. Paying a day or more late causes unnecessary late fees and often increases interest rates.

8. Charging more than you can afford causes a snowball effect of amassing debt with no easy way to pay it off.

9. Letting someone else use your credit, such as co-signing a loan, raises your debt-to-income ratio and possibly adds "too many consumer accounts" on your credit report, which lowers your score.

10. Ignoring credit problems causes unnecessary negative impact. Talk to creditors before being late and make arrangements. This action heads off negative reporting to credit bureaus.

11. Failure to report address changes to creditors causes misplaced bills and late payments.

12. Using partial name, different names, initials instead of whole name, or forgetting Sr. or Jr. causes mix-ups. Use your full legal name to protect you from confusion with similarly named borrowers.

13. Failure to report name changes to creditors also causes confusion.

14. Not checking credit report frequently is one of the most common mistakes consumers make.

You can buy real estate with poor credit, but you will save thousands in loan costs if you maintain good credit. A bad credit report leaves home buyers with sub-prime loans which have higher point charges, prepayment penalties, and higher interest charges, which therefore cost more money.

For instance, a mortgage loan of $150,000, 30-year, fixed interest rate of about 5.72 percent costs around $870 a month. Poor credit scores raise the interest rate over 9 percent and the payments over $1,200.

As you see from these payment differences, good credit means that you can finance a more expensive house with the same income, or save $330 each month.

Credit Requirements for Mortgages

Credit needed to buy real estate is not the same as good credit. Besides your credit score, mortgage lenders consider your debt-to-income ratio and other credit matters, unlike other credit grantors. Your debt-to-income ratio is the comparison of mortgage payment, including taxes, interest, and insurance to your total gross monthly income. Real estate lenders also consider your employment qualifications and your overall debt ratios. Understanding the difference between good credit and the credit needed to obtain real estate financing helps you buy houses!

Avoiding credit mistakes helps you get strong credit and keeps your credit scores up.

Copyright © 2005 Jeanette J. Fisher. All rights reserved. (You may publish this article in its entirety with the following author's information with live links only.)

Jeanette Fisher helps first-time home buyers and beginning real estate investors build strong credit for mortgage financing. Get your free "Credit Tips for Mortgage Financing" report at http://www.recredithelp.com

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5 Ways To Raise Credit Score

It's not as hard as you think to raise credit score. It's a well known fact that lenders will give people with higher credit scores lower interest rates on mortgages, car loans and credit cards. If your credit score falls under 620 just getting loans and credit cards with reasonable terms is difficult.

There are more than 30 million people in the United States that have credit scores under 620 and if you’re probably wondering what you can do to raise credit score for you.

Here are five simple tips that you can use to raise credit score.

1. Get a copy of your credit report

Obtaining a copy of your credit report is a good idea because if there is something on your report that is incorrect, you will raise credit score once it is removed. Make sure you contact the bureau immediately to remove any incorrect information.

Your credit report should come from the three major bureaus: Experian, Trans Union and Equifax. It's important to know that each service will give you a different credit score.

2. Pay Your Bills On Time

Your payment history makes up 35% of your total credit score. Your recent payment history will carry much more weight than what happened five years ago.

Missing just one months payment on anything can knock 50 to 100 points off of your credit score.

Paying your bills on time is a single best way to start rebuilding your credit rating and raise credit score for you.

3. Pay Down Your Debt

Your credit card issuer reports your outstanding balance once a month to the credit bureaus. It doesn't matter whether you pay off that balance a few days later or whether you carry it from month to month.

Most people don’t realize that credit bureaus don’t distinguish between those who carry a balance on their cards and those who don’t. So by charging less you can raise credit score even if you pay off your credit cards every month.

Lenders also like to see a lot of of room between the amount of debt on your credit cards and your total credit limits. So the more debt you pay off, the wider that gap and the better your credit score.

4. Don’t Close Old Accounts

In the past people were told to close old accounts they weren’t using. But with today's current scoring methods that could actually hurt your credit score.

Closing old or paid off credit accounts lowers the total credit available to you and makes any balances you have appear larger in credit score calculations. Closing your oldest accounts can actually shorten the length of your credit history and to a lender it makes you less credit worthy.

If you are trying to minimize identity theft and it's worth the peace of mind for you to close your old or paid off accounts, the good news is it will only lower you score a minimal amount. But just by keeping those old accounts open you can raise credit score for you.

5. Stay Out Of Bankruptcy

Bankruptcy is the single worst thing that will destroy your credit score. Bankruptcy will lower your credit score by 200 points or more and is very difficult to come back from.

Once your credit score falls below 620, any loan you get will be far more expensive. A bankruptcy on your credit record is reported for up to 10 years.

The reality of a bankruptcy is it will limit you to high-interest lenders that will squeeze out high interest rate payments from you for years.

It is better to get credit counseling to help you with your bills and avoid bankruptcy at all costs. By getting credit counseling instead of declaring bankruptcy you can raise credit score over a much shorter period of time.

Copyright © 2005 Credit Repair Facts.com All Rights Reserved.

Gary Gresham is a mortgage loan officer and the webmaster for http://www.credit-repair-facts.com He offers you credit information, debt elimination programs and informative facts that give you the knowledge to correct your own credit and credit report. For more credit related articles go to: http://www.credit-repair-facts.com/articles_1.html

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Credit Reports Unmasked

Normally, credit reporting agencies, which are private companies, sell your credit scores and reports to lenders who request copies in the event that you apply for a loan. The first thing that lenders will check when you apply for credit whether a loan, mortgage, or a credit card is your credit score. That’s because before they decide to lend you money, they want to know what type of risk you will be.

Credit score scales are calculated through a complex mathematical algorithm using factors generally involved in making credit decisions. These factors include payment history, credit history, credit available, existing or current debts, bankruptcies if any, among others.

The most widely applied credit score calculator by United States three major reporting agencies, Equifax, TransUnion and Experian, is the one developed by the Fair Isaac Corporation called FICO. Fico is considered very significant because it is among the factors to acquire appraisal in the United States.

Since each of the different credit bureaus use different evaluation systems for their credit score ratings, each based on different factors, it is highly likely that your credit score issued by one bureau is different from those issued by the other two. The cost savings of a non-FICO score are tempting to some banks and credit card companies, who need an accurate risk assessment on millions of accounts every year.

Lenders using your credit score, now base their decisions on facts, not on personal feelings or factors like gender, race, religion, nationality, and marital status, thus reducing discrimination in credit approval processes. Lenders are still allowed to check your score when you apply for a loan or a mortgage with them, but now, you can also see your own score.

If you make your request directly with the credit bureaus, there may be a small fee involved. Checking your credit score regularly will avoid any complications but don't check more than once a year. When you want to purchase a car or acquire a land through mortgage, it is wise to know your credit score. When you request your free credit report and score, you will need to provide the following information: Name, Address, Social Security Number (usually just the last four digits), and Date of birth. The information will be used to verify your identity and to protect your free credit report and score from would-be identity thieves and con artists.

Once you get your free credit report sit down and figure out what areas need improvement. Having a long credit history will positively impact your credit scores while short credit history usually means you are a risky borrower. Moving the balance to other accounts and closing a previous one can just hurt the points you have. The easiest way to increase credit scores is to pay your bills regularly and always on time. If you open a lot of new accounts in a very short time, this could actually lower your score down and make you appear like a risky borrower. People have been wanting things to be quick but you can't rush a good credit score. Take the time to make the credit score high.

Knowing how to get your credit score and improve your credit score will help you succeed in today’s world. If you want to succeed financially in today's society it is almost imperative that you know how use credit wisely.

Jim Banks helps consumers understand their credit reports through education and by resources to help eliminate credit difficulties. For more information on where to get your credit report and how to improve your credit score visit: http://creditcardmonitor.org/creditreports.php

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How Your Credit Score Is Calculated

You probably know already how your credit score is calculated. Things about you like payment history, available credit, and existing debts are all factored in. Credit scores used to be a top secret number and only lending professionals were allowed to take a peek at it. The most widely applied credit score calculator, used by Equifax, TransUnion and Experian, is the one developed by the Fair Isaac Corporation called FICO. FICO, acronym for Fair Isaac Corporation which is the brain-child behind the software has been applied since the 1960’s.

The credit reporting agencies are Equifax, Experian, and TransUnion. You may think nothing of the three-digit credit score but just ask any lender if they would give a favorable loan term to anyone who does not have a good credit score and you will realize how important it is to maintain a good credit score. Now, with the passage of the new law governing credit scoring, a vital change has been made on how your credit score is to be released.

When lenders let you borrow money, this actually translates to an investment on their part. They collect from the interest as well as the principal. However, like all investments, lending money involves certain kinds of risk. Financing institutions never fail to review your accounts for them to determine if you are still qualified of receiving incentives that come along your application.

Only one website is authorized to fill orders for the free annual credit report you are entitled to under law (annualcreditreport.com). This law was established in 1995 to provide fast, simple and cheap access to your personal appraisal history. Checking your credit score regularly will avoid any complications but don't check more than once a year. To guard against inaccurate information or fraud more often than yearly, one can request a report from a different credit reporting agency each four months. When you request your free credit report and score, you will need to provide the following information: Name, Address, Social Security Number (usually just the last four digits), and Date of birth. The information will be used to verify your identity and to protect your free credit report and score from would-be identity thieves and con artists.

One of the ways to improve your credit score is to faithfully meet the deadlines of your bills. If you open a lot of new accounts in a very short time, this could actually lower your score down and make you appear like a risky borrower. A Credit report is detailed information of all your credit activities. Every application you make for a credit card shows up on your credit report, and multiple applications can hurt your credit rating. Credit scores are also checked to see how much interest should be placed on your loan or even how much loan can you get.

Although credit terms and scores can be confusing learning to navigate your way through the credit language will help you maintain great credit. Learning how to get and keep good credit is an important skill that can be learned.

Jim Banks has provided consumers with valuable information for years on how to improve their credit score and repair their debt problems. For more information checking your credit score, improving your credit history or repairing you debt problems go to: http://www.creditcardmonitor.org/creditreports.php

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Credit Card Debt Solutions - Start Before It Is Too Late

Are you looking for a credit card debt solution? If you in desperate need of a credit card debt solution, but do not want to spend big dollars or hours to get the job done, here are a few pointers to help get you started.

In the world of credit cards, credit debt is all too common. Debt from credit cards can be very stressful, and lead to a very crippling situation. No one is immune to credit card debt, as even students can experience debt with their credit cards as well. With people using their credit cards more these days, more and more people continue to take the plunge into debt. Debt is never good, as it leads to bankruptcy and the destruction of your credit report.

Even though getting in credit card debt is simple to do, getting out of it is something that takes a lot of work. Even if you go to an agency or company that specializes in helping people out of debt, it won’t happen overnight. To get out of debt, it will take you quite a bit of time and effort as you get the debt under control and begin the long process of rebuilding your credit.

To properly defend yourself from credit card debt, you will need to know quite a bit about credit, managing your money, and finances in general. Normally, you can stay out of debt by creating an ideal budget and saving money whenever you can. If you stick to this plan and avoid steering away from it, you’ll normally have no problems staying out of debt.

If you have other credit cards that you don’t use, such as store credit cards that are known for high interest rates, you should dispose of them. If you have a lot of open accounts, you should look into debt consolidation, which will combine all of your debts into one payment so you can get them out of the way quicker. By using debt consolidation services, you will only have one bill to pay.

When you receive your credit card bill, you should always strive to pay more than just the minimum. If you only pay the minimum amount, you could very well end up being in debt the rest of your life - as you could be paying nothing but the interest. Every month, you should strive to pay the minimum amount and then some. Paying more than the minimum amount will also help to pay offer your credit card bill faster as well.

No matter how much credit card debt you are in, you can always find debt management services and agencies that will help you fight back. Credit card debt is very common these days, something many of us have experienced. Although there are ways out of credit card debt, the best way to get out of it is to avoid it all together. If you pay your bills on time and never miss a payment - you’ll always live a debt free lifestyle.

So, there you have it. Now that you have been given at least five ways to improve your credit card debt solution, the next step is up to you. Take this information and make use of it. It is easier to do nothing, but in the end you will thank yourself for having taken action on a credit card debt solution.

Deanna Mascle shares more advice at her site Credit Repair at http://answersaboutcredit.com where you can also download the free ebook "What To Do When Your Credit Goes Bad"

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