Read Part 1.
Few will go through life never needing or using credit. Christians use credit to finance education, acquire a vehicle or provide a mortgage for a new home. We are also every day credit users when we swipe the credit card for a minor or major purchase.
It wasn’t too many years ago that my wife and I would purchase traveler’s checks for a vacation trip. My wife would have the traveler’s checks in her purse; I would have the receipt for the traveler’s checks in my wallet. We would take several hundred dollars out of the bank and divide that between husband and wife.
Anymore, we use a surprisingly little amount of cash a year—perhaps as little as $80 per month. Everything else goes on a credit card.
Credit matters and credit is a valuable tool. Several examples from my own life highlight the value of credit:
- In 1989, my wife’s Mother passed away suddenly in Florida. We had to quickly buy airline tickets to fly from Denver to Florida, rent a vehicle, stay in a motel and provide meals. We used a credit card to pay for that emergency.
- Twice we have had sudden vehicle transmission failures. It doesn’t seem there is any way to really plan for that (but more on planning for auto repairs in a subsequent article). In both cases the credit card stood in place of cash and enabled us to quickly complete repairs and be on our way.
Behind the scenes in the credit business—even deeper than the bank—are the credit reporting agencies. Major credit bureaus are Experian, Equifax, and Transunion. Stealthily and relentlessly they track the borrower’s performance in paying back that debt. Like the proverbial elephant they never forget.
17 years ago we moved from Denver to Minneapolis. We applied for a mortgage as a step to purchase a new home. The credit bureau reported to the bank who asked me, “Why didn’t you pay that $200 bill to Sears ?” some years before. I had forgotten but they had not!
A credit bureau or consumer reporting agency…is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals’ borrowing and bill-paying habits.1
The general principle is that one’s past performance in paying debt is a predictor of one’s future ability and predilection to repay debt.
The Fair and Accurate Credit Transactions Act (2003) lifted the curtains on the credit reporting industry and provides important data for consumers.
It is a United States federal law, passed by the United States Congress on November 22, 2003, and signed by President George W. Bush on December 4, 2003, as an amendment to the Fair Credit Reporting Act. The act allows consumers to request and obtain a free credit report once every twelve months from each of the three nationwide consumer credit reporting companies (Equifax, Experian and TransUnion).
In cooperation with the Federal Trade Commission, the three major credit reporting agencies set up the website, AnnualCreditReport.com, to provide free access to annual credit reports.
The act also contains provisions to help reduce identity theft, such as the ability for individuals to place alerts on their credit histories if identity theft is suspected.2
It is important to note that AnnualCreditReport.com is the official site to provide the free credit report. Another a web service heavily advertised itself with a band whose leader was depicted as living in his in-laws’ basement, driving an old car and working in a fish restaurant. But the site, Free Credit Report.com, is not free (although there may be a free trial period). One of my children discovered this to his disappointment.
Credit Karma is another website that provides free credit reports. Non-free sites with additional services exist as well. We use MyFico.com, which provides quarterly credit reporting, a quarterly FICO score, and ID theft protection. A subsequent article will define and explain the significance of the FICO score.
What is on a credit report?
“Although each credit reporting agency formats and reports this information differently, all credit reports contain basically the same categories of information. Your social security number, date of birth and employment information are used to identify you. These factors are not used in credit scoring. Updates to this information come from information you supply to lenders.”3
Experian provides a sample.
- Credit lines: “Lenders report on each account you have established with them. They report the type of account (bankcard, auto loan, mortgage, etc), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.”4
- Credit Inquiries: “When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who accessed your credit report within the last two years. The report you see lists both ‘voluntary’ inquiries, spurred by your own requests for credit, and ‘involuntary’ inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.” 5
- Public Record and Collection Items: “Credit reporting agencies also collect public record information from state and county courts, and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens and judgments.”6
What is not on a credit report?
- One’s salary or the combined salaries of husband and wife
- One’s assets: the value of one’s home, cars, etc.
- An owner-financed mortgage
- Other private person-to-person loans
What are some causes of credit reporting errors?
- The person applied for credit under different names.
- Someone made a clerical error reading or entering name and address information.
- Loan or credit card payments were inadvertently applied to the wrong account.
- Fraud or identity theft is involved.
How to use a credit report
I have to admit that this is one of my wife’s least favorite activities. When we receive our quarterly credit report, I print the report out at the office (I don’t have a printer at home) then carefully review it. I bring it home and ask my wife to review it. We compare notes. Then we shred it. A credit report is valuable for:
- Informing you how creditors view you. We are not currently in the market for credit, but we expect to move soon into a condominium. Our plan is to use a mortgage to buy the condominium, move, prepare out house for sale, put the house on the market, sell the house and then pay off the mortgage.
- Providing a mechanism to detect fraudulent credit. See the previous article for our experience with identity theft and credit fraud.
- Helping one manage his finances.
Stay Current: Keeping up to date on what your credit report says about you provides a strategic opportunity for you to resolve any outstanding issues that could lower your credit score and undermine your ability to get credit approval the next time you apply.
Correct Mistakes: Errors sometimes occur on credit reports—a loan listed as active that you paid off years earlier, or a bankruptcy by someone with the same name and mistakenly listed on your credit report. Getting those problems corrected is much easier and less stressful when you’re not in the middle of negotiating a mortgage loan or trying to buy a new car.
Track Your Payments: Credit reports also show whether you make your payments on time. You may be extremely conscientious about on-time payments, but you can’t control what happens after you mail the check or hit the SEND button (if you’re paying online). If some of your payments have been delayed, your credit report may show delinquencies. If you call your creditors and explain, they may agree to adjust the information. But if you don’t check your credit report regularly, you won’t know about the late payments in your credit history.7
As a final note I advise that couples have a weekly “financial date”. We have ours every Tuesday night. I expect to write a separate piece on how our “financial date” is structured. But in summary we try to have complete financial transparency. I am an advocate of a married couple sharing all things financial. For us there are no separate accounts, no secret transactions or purchases. I not only want to have a complete knowledge of my own credit standing but I want my wife to know as well.
So if you have not already done so this year, log onto AnnualCreditReport.com to receive your credit report. Review it personally and, if married, review it with your spouse.