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Heavy consumer borrowing is a reality for many Americans. So, it's more important than ever for every consumer to be smart about his or her credit habits and ability to borrow. And the main way that lenders measure this ability: credit scores.
Credit scores are the results of programs that lenders use, based on information that other lenders report to central information clearinghouses, to make decisions about how you're likely to pay.
Credit scoring systems award people points for having credit, using it and making payments on time. The more points you have, the better your credit. Every time you use a credit card and pay the balance on time, your score goes up; every time you go over your credit limit and pay late, your score goes down.
We're not trying to give you guilt. We're simply pointing out the places where you may be able to save substantial money, simply by paying attention to a few "little details."
One way you can save serious money is by improving your credit score, since it's directly related to how much you pay for credit. For instance, people with great credit scores (above 700) can pay tens of thousands of dollars less, over the life of a 30-year mortgage, than people with just okay credit scores.
And they can be related to other seemingly unrelated things, too, like your ability to get a job or even get insurance. That's right. Insurance companies and even potential employers may check out your credit history to try and determine your level of personal stability.
Whether you have good credit or lousy credit, the first step is to find out what your credit score is. Then take the steps we recommend in this book to improve that score. Your wallet will feel the difference. So will you.
How did all of this get started? In the very early days, when people bought things on credit at the general store, the store clerk wrote the purchase amount on a piece of paper that was then put into a "cuff." A cuff was a paper tube that merchants wore on their wrists. (This is also the origin of the term "buying on the arm"-another way to say buying on credit.)
Ironically, the newer system took on some of the traits of the original mutual protection societies. For one thing, a consumer couldn't access his/her own credit history. Only lenders, credit card providers and other businesses had access to credit reports.
Modern credit bureaus were created to service lenders, not borrowers. Lenders want to be repaid, and the credit bureaus help them figure out which consumers are most likely to do so on a timely basis.
According to the FTC, the FCRA-which went into effect in 1971-was designed to ensure that consumer reporting agencies, or CRAs, "furnish correct and complete information to businesses to use when evaluating your application."
To help ensure the information is correct and complete, the Act ensures that consumers can check their own reports and make changes to them, if necessary.
The first thing you should know is that your three credit reports probably are not the same. Lenders, credit card companies and other businesses supply information to the credit bureaus on a voluntary basis. So they may only provide your information to only one agency, or to two or three or none. That’s why it is so important to check all three of your credit reports.
In each case, you’ll find that the credit report is divided into four sections:
identifying information;
credit history;
inquiries; and
public records.
We’ll go through each section and let you know what to look for.
The identifying information section on your credit report is straightforward. It is compiled using the information you provide when you apply for credit.
This section lists the accounts that you have with different lenders, retail stores, credit card companies and other businesses, including accounts on which you are listed as an authorized user (such as your spouse's credit card) and which will not be counted in your credit score.
It includes the account numbers for each account, although these may be scrambled for security reasons. Sometimes, you'll find more than one account number for the same creditor. This could be because you moved or because the creditor assigned more than one account number to you. This isn't necessarily a cause for concern.
Credit bureaus keep a record whenever someone views your credit history. These inquiries are made by lenders, landlords, credit card providers, service providers and insurance companies. A record of these inquiries will remain on your credit report for one to two years.
There are actually two kinds of inquiries: hard and soft. The consumer version of a credit report includes both kinds, but the version that is provided to businesses shows only hard inquiries.
Many types of events are a matter of public record—that is, the kind of information you can find out if you pay a visit to your local courthouse.
These types of events may appear in this section of your credit report. They can include:
bankruptcy or bankruptcies;
tax liens;
foreclosures;
court judgments; and
overdue child support.
This information usually will remain on your credit report for seven years.
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