Understanding Credit Files

You balance your checkbook and check your portfolio, but how frequently do you check your credit files?


Credit files are windows into your private life. Lenders look at your credit history to assess your creditworthiness. It’s to your advantage to know what your credit report says before you apply for credit so you can correct any inaccurate data. It can take up to six months for credit reporting agencies to make a change in your credit report, so give yourself at least that long before you start shopping for a mortgage, car or any other large purchase.


It’s also important for you to understand that with the rise in identity theft and credit card fraud, you may not know that someone has assumed your identity or opened new accounts until they default on loans, or collection agencies start calling you.


What should I look for in my credit report?


It is important to frequently review your credit file to verify the following:

  • Name

  • Address

  • Social Security Number

  • Date of Birth

  • All accounts listed are your own

  • Credit/charge accounts

  • Outstanding balances/limits on the accounts

  • Payment histories

  • Derogatory credit information has been deleted after seven years (non Chapter 13 bankruptcies after 10 years).

  • Inquiries

Why should I review my credit files from all three credit reporting agencies?


Each credit reporting agency records information it receives from your creditors. You can’t control which credit reporting agency (Equifax®, Experian® or TransUnionSM) your lender uses, so prepare yourself by checking all three agencies for accuracy.


What is a credit score?


A credit score is based on variables in your credit file that help determine your creditworthiness. The number is based on various factors, including the number of trade lines you have open, the number of late payments, delinquencies, etc. Lenders look at your credit file and other factors to determine your creditworthiness.



Why is my credit score so important?


Lenders carefully consider your credit score because it provides them with an objective measure of your creditworthiness. Your score can be impacted by many factors such as late payments, delinquencies, or high amounts of debt. Lenders may deny your loan or charge you a high interest rate if you have a low score. If you have a good credit history, you may have more options available to you resulting in lower interest rates and big savings.


Lower loan rates can mean thousands of dollars in your pocket over the years. If you purchase a home for $250,000 at 8.3% interest you will pay $679,306 over the course of a 30-year mortgage. At 6.5 % interest, however, you will pay only $568,861—a savings of $110,445.


6 Steps to Better Credit


1. Pay your bills on time. Creditors scrutinize your credit history. If you pay your bills on time, this reflects well on you. If you have a record of delinquent payments, you might want to consider credit counseling on how to better manage your finances.


2. Manage your debt. Your debt/income ratio — the percentage of your income that goes to paying off debt — is another gauge of your financial health. You can calculate this ratio by dividing your monthly minimum debt payments (excluding mortgage) by your monthly take-home income. If your debt payment absorbs:

  • Less than 20% of your income, you are doing well

  • Between 20% to 35%, consider reducing your overall debt

  • More than 35% consider credit counseling or some type of aggressive debt-reduction strategy

3. Don’t over-apply for credit. Limit the number of loan applications you submit. Each bid shows up as an inquiry in your credit report. Even if you’re just comparison-shopping for the best rate, too many inquiries can be viewed as a desperate bid to obtain credit to get out of financial trouble.


4. Shred your documents. Be sure to destroy any piece of paper with Social Security or credit card numbers. Thieves often go through garbage retrieving people’s identification so they can use this information to commit fraud.


5. Don’t give information away. Never include your Social Security Number your checks, driver’s license or health insurance card. Be extremely cautious how you use your Social Security Number, it is your key personal identification number that is a gateway to your personal identity. If required to provide this information, always ask if there is another option.


6. Check your credit reports on a regular basis. The only way to protect your name and credit is to be proactive. With the rise of identity theft cases, it is important to review your credit files, and to report any inaccuracies to the major credit reporting agencies.

Courtesy: Costco IdentifyGuard Solutions

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