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Credit and bankruptcy: Some information and frequently asked questions
What is credit?
Credit is, quite simply, your ability to borrow money. If a bank gives you a loan, the bank has determined you have enough credit to pay that loan.
What is a credit score?
The credit score is a calculation used to determine how much money you may borrow and on what terms. Credit scores are compiled by the three major credit reporting companies, Equifax, Experian and Transunion, using the information on your credit report. There are a variety of scoring systems, the most common being the Fair Isaac Corporation Credit Score, which is often referred to as your credit score.
FICO scores range from 300 to 850. The higher the score, the better your credit, meaning you will be able to get more favorable terms on loans and may be able to borrow more money. The scores are designed to rank potential creditors so lenders know which ones are the best risks and which ones are the worst risks. Just 20 percent of the population has a credit score above 780 while 40 percent has a credit score below 690.
What type of information goes on my credit report?
Credit reports contain a broad variety of information, including but not limited to: any home or car loans and whether you paid them off; any missed payments on loans, credit cards, utility bills or even rent; your current and past addresses; your current and former employers; your income level, you and your spouse’s social security number; anywhere you’ve applied for credit; and information on lawsuits, liens, foreclosures, repossessions and bankruptcies. Your credit report will also show how long you’ve held your credit cards and your payment history on most if not all of your bills.
Even if you are only a little late paying your bills, that information may be reported to the credit agencies and appear on your credit report.
Who uses my credit report?
Lenders look at it to determine whether to lend you money and how much and under what terms, but they’re not the only ones who may pull your credit report. Potential employers and landlords are among the others who may check it. No one can check your full credit report without your express permission, however.
Will a lender consider anything besides my credit score?
Yes. Lenders look at a variety of factors to determine if you will be able to repay a loan and how much you will be able to repay.
Some of these factors include:
- Your debt to income ratio, which is the amount of money you owe compared to how much you make. This can include not just money you actually owe, but money you are already able to borrow but haven’t, for example on high limit credit cards.
- The length of your credit history. The more information a lender has about you the more confident the lender can be in your ability to repay a loan. A short credit history can make it much harder to get a loan. And, in some cases, a good payment history over a long time can help mitigate a few late payments recently.
- Payment history. This shows how often you have paid your various bills on time.
- Other credit applications. A lender may be hesitant to lend you money if you have applied for credit at several other places recently.
What are some factors that aren’t on my credit report that a lender might consider?
Lenders often consider your level of education, the length of time you’ve been at your job and how long you’ve lived in the same place. A person with a college degree who has been in the same job for decades and lived in the same apartment for years may look like a much better risk to a lender than a high school graduate who has moved jobs and homes frequently. Lenders like stability. A lender may also be more likely to lend money to a homeowner than a renter.
How do I know what’s on my credit report?
You can review the credit reports kept by all three agencies by contacting them directly.
Equifax 1-800-685-1111 www.equifax.com
Experian 1-888-397-3742 www.experian.com
Trans Union 1-800-916-8800 www.transunion.com
Federal law entitles you to one free credit report from each company each year. It’s a good idea to check your credit report at least that often to make sure there are no errors on it that could affect you later.
Additionally, regularly checking your credit report is one way to guard against identity theft because you will be able to catch it relatively quickly if someone is using your identity to get loans.
If you are denied credit for any reason, you also have a right to review a free copy of your credit report.
What if there is an error on my credit report?
The credit agencies have a responsibility to correct any errors, but you must notify them in writing of the error. In some cases, you may need to explain why it is an error and include documentation. For example, if your credit report shows you haven’t paid off a car loan, but you have, you may need to send the credit agency a copy of your title showing you own the car, or copies of the loan documents that show it was satisfied.
What if someone steals my identity?
This can be a more complicated problem, but it can be resolved. The first thing you should consider doing is posting a fraud alert with the credit agencies. This will notify potential lenders that you belief someone may try to use your identity to get credit. A fraud alert can prevent further damage to your credit while you sort out the identity theft.
You should also contact each of the credit agencies and ask for help cleaning out the fraudulent information. You may need to contact the police.
How can I repair bad credit?
Fixing problems on your credit can take time. Beware of people or companies that promise to erase credit problems. It can’t legally be done quickly. You can improve your credit by paying all of your bills on time and reducing the amount of debt you have compared to your income. It’s important to build a positive credit history. The more responsible you are with your bills, the better your credit is likely to be.