Chapter 7 - Credit Worthiness

Establishing and maintaining your credit report and score is essential to your ability to effectively borrow money.

Credit Reports

Your credit report contains information about you that is collected by the credit bureaus. It contains information about your credit history. Your lender reports all your activities on their loan to the credit bureaus. This means if you make a payment on time, the bureaus know. they also know when you miss a payment or make a payment late. Lenders also report how much money you borrowed and the interest rate on the loan.

The credit bureaus are private organizations which maintain credit information on individuals. These bureaus make this information available to lenders for a fee. There are three major credit reporting bureaus in the United States: Equifax, Experian, and Transunion. These are private companies, not government organizations. They collect credit information about you and compile your credit report based upon your credit history.

What's in a credit report?

1. Your credit report contains identifying information, like your name, age social security number, and address.

2. Trade lines are all of your current and past credit accounts. The report lists the nature of the account (is it a bank card, an auto loan, a mortgage?), the credit limit or loan amount, the current balance, and your history of payments. Any late or missed payments are noted in this section of the report.

3. A credit inquiry occurs anytime someone pulls your credit report. This can happen whether you asked for the credit report to be pulled or not. For example, pre-approved credit card offers are issued to people because the credit card company has pulled their credit report and found it acceptable. This type of credit inquiry is called an involuntary inquiry. If you request that your credit report be pulled (such as when you apply for a new credit card), then the inquiry is called a voluntary inquiry.

4. Your credit report also shows any financially related public records and collection information. This section includes state and county court records on events such as bankruptcy, foreclosures, lawsuits, wage garnishments, liens and judgements. This section also records funds that have been sent to a collections company.

You do have certain rights in regards to your credit report and the credit bureaus. Recent research indicates that nearly 80% of all credit reports contain some form of outdated or inaccurate information. These inaccuracies may have a very large effect on your credit rating. That is why it is very important that you be proactive in reviewing your credit report and reporting any inaccuracies you find to the credit bureau so that they can investigate.

It cannot be overemphasized how important it is that your credit report be completely accurate. The law entitles you to one free copy of your credit report each year from each of the credit reporting agencies. This free credit report is available ONLY at www.annualcreditreport.com. No other website will provide this service for free.

Because there are three credit reporting agencies, it is generally advisable to review the report from one of them every four months. This allows you to keep an eye on your credit report on a regular basis. To get your credit report, go to www.annualcredireport.com, choose the state you live in and which credit bureau you wish to see. You then fill out the form and answer some questions to confirm your identity. Your credit report will then be provided in a printer friendly format.

What makes a person attractive as a borrower?

Suppose someone wanted to borrow some money from you. How would you decide if you wanted to give them a loan? You would surely want to make sure they were trustworthy. You also would want to make sure they actually have the ability to pay you back. Large lenders want the same security that you as an individual lender might want. They look for the exact same things you would look for in a potential borrower.

Each individual lender will have their own method of measuring credit worthiness. However, there are several common factors that are almost universally used. These are your credit score, the stability of your employment, the stability of your residence, and the condition of any collateral that you may be able to offer.

Common Factors Used to Determine Credit-Worthiness 1. Credit Score 2. Employment Stability 3. Condition of Collateral

1. Your credit score is a summary of your history with debt. It is your reputation as a borrower. It gives lenders an estimate about how likely you are to repay your debts. Credit scoring agencies, such as the Fair Isaac's Corporation (FICO), use the information in your report and convert it into a number. Lenders then compare your score to other people's scores. The people with the highest scores are considered the most likely to repay their loans on time. This means that they find it easier to get new loans and that they can qualify for the lowest possible interest rates. Credit scores are discussed in greater detail in chapter 8.

2. Employment stability is important because your job is the primary method for repaying the loan. People with history of losing jobs or working in economically unstable industries are less likely to have stable income. this means they are more likely to struggle to repay the loan. T hey are less attractive as borrowers, and will have to pay a higher interest rate than people with more stable employment history.

3. Collateral is an asset that the lender has a legal right to take as compensation if the borrower does not repay the debt as agreed. The lender can take the collateral from you if you fail to repay the loan. Collateral is legally established by placing a lien on the property. For example, when you borrow money to buy a car, the lender places a lien on the vehicle. This makes it so that they can take the car from you and sell it if you fail to repay the loan.

Definitions:

Credit report: information about you that is collected by the credit bureaus including information about your credit history

Credit score: your reputation as a borrower and provides information to the lender about how likely you are to repay your debts

Collateral: an asset or combination of assets that the lender has a legal right to take as compensation if the borrower does not repay the debt as agreed

Trade lines: all of your current and past credit accounts

Credit inquiry: when someone pulls your credit report

Involuntary inquiry: when a credit card company has pulled your credit report without you asking

Voluntary inquiry: a request by yourself to pull your credit report