FCS 5049 Fixing Bad Credit and Solving Credit Problems 1 Mary N. Harrison 2 When you want to buy a car, a house, or other expensive items you probably expect to use credit. For smaller purchases, your credit card enables you to buy now and pay later. This way you can take advantage of a sale before you get your pay check, you can handle an unexpected emergency and you can shop without carrying cash. Imagine how different things would be if credit were not readily available. Today it is a simple process to obtain credit. Just go to a store or financial institution, fill out an application and credit is extended -- or denied -- within a few days or sometimes within minutes. If you are denied credit at one location, you can apply at another. Why would a business or financial institution lend money to a person it does not know? How can the lender know if the borrower will repay the loan? Would you loan money to a person you do not know, based only on what this person tells you? information necessary for lenders to make informed decisions about extending credit. What is a Credit How Important is It? Your credit report is very important because it is a major factor in determining if you will get credit and what it will cost you. Your report can also be a major reason for refusing to extend credit to you. The report is a record of your use of credit and your payment history. When you apply for credit the lender reviews your credit report to decide if you are a good credit risk. The report tells if you pay your bills on time and how much money you already owe. Where is My Credit Report Your report is compiled by the credit reporting agency (credit bureau) where it is kept on file for review by those authorized to see and use the information. If you have ever used credit or been issued a credit card you have a file in one or more reporting agencies. The prompt extension or rejection of credit is made possible through credit reports and credit reporting agencies (credit bureaus). They provide the 1. This document is Fact Sheet FCS 5049, a series of the Department of Family, Youth and Community Sciences, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Publication date: August 1999. First published: January 1996. Revised: August 1999. Please visit the EDIS Web site at http://edis ifas.ufl.edu 2. Mary N. Harrison, professor, Consumer Education, Department of Family, Youth and Community Sciences, Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville FL 32611. The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service/Institute of Food and Agricultural Sciences/University of Florida/Christine Taylor Waddill, Dean.
Fixing Bad Credit and Solving Credit Problems 2 What is a Credit Reporting Agency or Credit Bureau? The names credit bureau and credit reporting agency are used interchangeably. Credit bureau is an older term. Credit reporting agency is a more recent term and usually means expanded services, such as the sale of mailing lists. Credit bureaus and credit reporting agencies are membership organizations for businesses. They collect and compile information on each person who uses credit. Businesses that extend credit become members of one or more credit reporting agencies and routinely provide the credit reporting agency with names of consumers who apply for credit, whether credit is extended, and the repayment records of those using credit. Thus, each person's record lists the different places he/she has credit and how much is owed. When a consumer applies for credit, the member merchants contact the credit reporting agency for a copy of the applicant's credit report. This report is used to determine if credit will be extended or denied. How Many Credit Reporting Agencies are There? In earlier times each community and city had its own credit bureau. Each kept a file on consumers living in the surrounding areas. If a person moved from one region of the county to another, information had to be requested from the previous location, which took time. Today, consumers are mobile, moving, traveling and shopping nationwide. Information is transmitted instantly from one location to another. Credit reporting agencies have also changed. There are several hundred area and regional credit bureaus and three major nationwide credit reporting agencies. Anyone who has used credit will have a record in one or more credit reporting agency. Do Consumer Credit Reports Kept by Different Credit Reporting Agencies Contain the Same Information? Credit information services are competitors. Each collects and compiles its own information, therefore the information in their files is not identical. This is because the information found in an agency's records is provided by the financial institutions and merchants that are its members. Most financial institutions and businesses are members of one or more credit reporting agencies, but not all. What Kinds of Information Does A Credit Reporting Agency Collect? Credit reporting agencies collect information that will help lenders determine the credit worthiness of applicants. This includes five types of information: Identifying information: name (including nickname), Social Security number, year of birth, address and spouse's name if applicable. Capacity: present employment and how long, position, previous employers, number of dependents, whether rent or own home. Credit information: a list of the stores and financial institutions where you have credit, types of accounts (for example: mortgage, student loan, charge account), dates when accounts were opened, the amount of original debt and the unpaid balance; credit cards, their limits and amount owed on each; whether bills are paid on time; delinquent accounts; and repossessions. Public records: information including state and court records related to bankruptcies, tax liens or monetary judgements. Inquiries: the names of everyone who obtained a copy of the credit report for any reason during the past 6 months and for certain reasons up to two years. Your credit report does not include information about your race, religion, medical history, personal lifestyle, political or criminal record.
Fixing Bad Credit and Solving Credit Problems 3 Who Determines My Credit Rating? No person or organization assigns you a rating. Credit reporting agencies keep a record of your credit history. Under federal regulations these records are to be accurate and up to date. Most credit reporting agencies use a code to designate manner of payment. For example: a 1 means bills are paid within 30 days or as agreed, a 4 means payments are made late, 8 means repossession and 9 is a bad uncollected debt. When you apply for credit, the lender reviews your record and decides if you are an acceptable credit risk. If you have a good record, credit will be easy to get. If your bills are not paid you are a high risk and credit may be rejected. How Do I Find What is in My Credit If you are denied credit based on information in your credit report you must be notified. You have 30 days to request a copy of your credit report from the credit reporting agency. It must be provided without cost to you. You may also obtain a copy of the information in your credit file at any time by requesting it from a credit reporting agency and providing proper identification. You may be charged a small fee. Since credit reports are ever changing it is a good idea to occasionally check your report for accuracy. With so many credit users and the similarity of names, errors can occur. Also, a retailer may have neglected sending the latest information to the reporting agency. For example, if a past due bill is paid late, the merchant may not report the bill paid. How Do I Correct Errors in My Credit If you find an error in your report you may call the credit reporting agency but always follow up with a letter. Explain what the error is and how it is incorrect (for example: the bill was paid in full and the last payment was not credited). The credit reporting agency will reinvestigate and notify you of its findings. If you still do not agree or there are extenuating circumstances you may write your side of the situation in 100 words or less and send it to the credit reporting agency to be included with the credit report. Who Has Access to My Credit Credit reporting agencies provide the credit history of those applying for credit. Thus, retailers, financial institutions and other credit sources have access to the applicant's credit record. Also, employers use credit reports in screening applicants for jobs with high salaries. Insurance companies use them for applicants for large insurance policies, and some landlords for screening potential renters. Special efforts are made to protect the privacy of credit reports. Information is provided only to those authorized by Federal regulations to receive it. How Will Divorce Effect My Credit Rating? A divorce does not change a credit contract. If husband and wife both signed the credit contract, each is liable for the total debt. If one person does not pay, the creditor can collect from the other. Non-payment will show up on both credit reports. If possible, negotiate with your spouse to pay off debts and close the accounts. Keep payments current to avoid damaging your credit record and making it more difficult to obtain credit later in your individual name. When there is an indication of marital trouble it is wise to close joint accounts immediately and if possible, pay them in full. If the account is in one person's name with the spouse as an authorized user, immediately notify the creditor to remove the spouse's name from the account. (Remember, you are liable for all charges to an account in your name.) Any agreement to assume responsibility for joint debts should become part of the divorce settlement. If debt is substantial, each spouse should obtain a consolidation loan in his/her name to pay his/her share of the debt. This provides each with credit in his or her name and avoids the problem of one person being held responsible for the other's debts.
Fixing Bad Credit and Solving Credit Problems 4 Why Am I Turned Down for Credit? Your first step in solving your credit problem is to know why you are rejected and to correct the situation. When you are rejected for credit, you must be told why. If it is because of information in your credit report you must be given the name and address of the reporting agency. You must be given a copy of your credit report without cost if you request it from the credit reporting agency within 30 days. Get a copy of your report. Make sure it is correct. If there are problems work to correct them and build an acceptable record. There are many reasons for being denied credit, such as not being a U.S. citizen, not being employed long enough, already owing too much money, having too many credit cards with high credit limits, insufficient income or having no credit record. Other reasons include repossessions, bankruptcy, unpaid debts or slow payment of debts. How Do I Repair A Bad Credit Record? Adverse information remains in your credit record for 7 years and bankruptcy for 10 years. If there are reasons beyond your control that made it impossible for you to pay your bills (such as serious illness or job loss) ask to have this information included in your record. It does not remove the debt but does help explain the reason. Also, contact the creditors, explain the situation and try to work out a plan for you to make reduced payments until the debts are paid. This will help rebuild your credit record. Most creditors only want payment and are willing to work with those who sincerely try to meet their obligations. Make sure the payments you make are credited on your credit report. If you are seriously overextended and not able to resolve your problem contact the Consumer Credit Counseling Service. This non-profit organization can help you with your credit problems. Do Credit Clinics or Credit Repair Companies Really Work? No one can repair your credit record for you. Credit repair clinics and/or companies charge a fee, often a high one. There is nothing they can do to get correct adverse information removed from your file. Only time can remove this information. Retailers look very closely at the credit use and payment records during the most recent two to three years. To rebuild your credit record make sure bills are paid on time during the most recent one or two years. Remember, you alone can rebuild bad credit. If I Have a Purchase Reposessed is the Bill Considered Paid? When an item is repossessed it is sold. If it sells for enough to pay the costs of repossession plus the amount due, then the debt is considered paid. In most situations if the selling price is not enough to pay these costs, then you owe the difference between the selling price and indebtedness plus repossession costs. Repossessions do appear on your credit record. Any balance due will also be shown on your report. If I Find I Can't Pay for a Purchase and I Return it to the Merchant Does This Show on My Credit Rating? When you have used an item and it is returned because you can't make the payments, it is called voluntary reposession. It does show on your credit records and is detrimental to your report. How Do I Stop Bill Collectors from Calling Me? Bill collectors are either employed by the creditor or by a credit collection agency which is collecting for the creditor. Debt collection is a function of the creditor, not the credit reporting agency. When contacted by a bill collector, verify that the bills are accurate and unpaid. Then, if there is a problem request the bill collector not contact you at your place of employment and at home during specified periods of time. Try to negotiate a repayment schedule with the credit grantor, or the
Fixing Bad Credit and Solving Credit Problems 5 collector. (The collector gets a portion of the bill as a collection fee.) Remember, the creditor extended credit to you with the belief you would pay the debt. How Do I Rebuild Bad Credit You must rebuild trust that you will pay your bills. Start by paying your current bills. Make at least the minimum payment if possible. If not, negotiate a lower payment with the creditors. Try to pay off the lowest bills first, then increase payments on larger bills. It will take time and effort to rebuild bad credit. TRW Information Service, 12 Common Questions About Credit and Direct Marketing, Orange, CA, November 1995 TRW Information Service Division, Reports on Credit and Other Financial Issues, Allen, TX, June 1995 Fair Credit Reporting Act Be careful to avoid becoming a victim of credit repair scams. A bad credit record can be rebuilt. It takes time and effort but it is worth it. Credit is an integral part of the American economy. Remember, credit is much like fire. It serves you well when you are in control. Out of control it can destroy you. References Association Credit Bureaus Inc., What You Should Know About Your Credit Report, Houston, TX Association Credit Bureaus Inc., You and Your Credit Bureau, Houston, TX Bureau of Consumer Protection, How to Dispute Credit Report Errors, FTC, Washington, DC Consumer Reports, What Price Privacy, May 1991 Lewis, Gerald, Comptroller of Florida, Money and Consumers, Tallahassee, FL, May 1992 Mastercard, Building a Credit History That Works For You, 1993 Mastercard, Credit Card Options, November 1993 Merchants Association Credit Bureau, Inc., Florida's Premier Statewide Credit Reporting Service, TRW, Tampa, FL