Credit Education

Credit Report Information Collection Accounts
Credit Scores Charge-Off Accounts
How to Obtain Credit Repossessions
Types of Credit Foreclosures
Revolving Agreement Types of Negative Public Records
Installment Agreement Liens
Financial Habits Judgments
Payment History Bankruptcies
Credit Card Protection Types of Bad Credit Situations Child Support Defaults
Types of Bad Debts Government Student Loans
Late Payments  
Credit Report Information

Credit reports contain all of your personal information. Your name, maiden name, social security number, date of birth, address, telephone, spouse, work history, your previous addresses, names and other information are included. You must keep your personal information accurate on your credit reports as failure to do so may result in information pertaining to another individual listed on your reports. Most of the time accounts listed on your credit reports that belong to some one else will be bad debts. This type of thing happens more than people realize. Statistics show that two out of three credit reports contain errors ranging from an incorrect address or employer to incorrect credit accounts and public records.

Your credit is one of your most important assets. Most people only find out they have credit problems when they need their credit and cleaning up credit reports takes time. Therefore, make your payments on time, check your credit reports often and if you find an error, don’t wait. Do something about it.

Credit Scores

Credit Scoring is a difficult thing to determine, but it is basically calculated by good and bad credit with additional factors considered. There are three major credit bureaus involved in determining your score. Each of these bureaus utilizes a different method of computing a credit score and reports different creditors; therefore the end result is three credit reports that each shows a different credit score. Most creditors utilize the median credit score, which means they don’t use the highest or the lowest score but the middle score.

How to Obtain Credit

If you do not have credit, it is absolutely imperative that you begin to establish a credit history, as it is nearly impossible for an individual to apply for a loan or even rent an apartment without it. Obtaining credit may be somewhat difficult to begin with as you usually have to have a good credit standing in order to obtain credit. Therefore, one has to start on a small scale.

If a person has virtually no credit history whatsoever, the best way to start establishing credit is by applying for a credit card. Usually, introductory cards have low maximum limits ($500 or less) so that the customer’s credit worthiness can be established while minimizing the credit card company’s risk. Once the customer makes purchases on the card and pays in a timely manner, a credit foundation will be put into place.

If you have trouble getting a credit account with a major provider such as Visa, MasterCard or Discover, apply for a department store card from places like Target or Wal-Mart or a card from Exxon Mobil or another oil/gas company that you can use to purchase gasoline. Once your credit foundation is set up, you can apply for more credit cards to help improve your score. Once a consumer’s credit report shows enough significant trade lines and payment history it will be easier to get into a rental property, be approved for insurance or be approved for a loan.

When establishing credit for the first time, it is important to know the difference between an unsecured credit card and a secured credit card. An unsecured credit card is one where a credit card company sets a maximum limit, which the consumer can borrow by purchases and cash advances. As they establish a history of paying bills on time, the credit grantor will usually raise the maximum loan amount and may even lower the interest rate.

A secured credit card operates differently and is a good choice to use in starting a credit history if one cannot obtain an unsecured card. Secured cards are backed by collateral as security against nonpayment. These cards are usually opened through a bank where an individual deposits a sum of money (the collateral), which backs the card in case of non-payment. The card is then used as any normal credit card. If the individual proves to be responsible with the use of the card and the timeliness in repayment of debts, obtaining a future unsecured card will prove to be much easier.

Types of Credit

Credit grantors generally issue the following types of accounts:

Revolving Agreement

With a revolving agreement, you may choose to pay your balance in full each month or make a partial payment based on the outstanding balance (minimum payment established by the creditor). If you make a partial payment, you will be charged interest (a "finance charge") on the portion of the balance you do not pay. Department stores, gas and oil companies, and banks typically issue credit cards based on a revolving credit plan. One needs to be careful in making minimum payments as the interest occurred will be added to the total balance of the account making it longer to pay the account in full.

Installment Agreement

The consumer signs a contract to repay a fixed amount of credit in equal payments (installments) over a specific period of time designated at the time of the contract (i.e., 36 months, 48 months, etc.) These types of agreements normally include automobiles, furniture, major appliances and personal loans.

Financial Habits

It is important that one looks closely and honestly at their financial habits. If you typically carry a balance at the end of each month you should find a credit card with the lowest annual percentage rate (APR) for interest charges. The higher the rate the more interest charges will be applied to your balance, so it is important to choose a lower rate card. This will result in savings each month. However, be aware that many credit cards offer a low introductory rate for a certain amount of time, but will then raise the rate after that time has expired.

Another important thing to remember is to stay under your credit limit and allow finance charges and cash advance fees into this figure. Cash advance fees can be steep and will be added to your finance charges. For example, a $5,000 credit card limit in use with additional finance charges and cash advance fees of $200 will put you $200 over your credit limit. Going over the credit limit can result in additional over-limit fees.

Lastly you may wish to consider the different rewards credit card companies offer. For instance, if you travel you may want to look for a card with travel or airline miles. If you have a business, many business credit cards offer office supply rewards.

In any event, it is important to find the features of a credit card that fit your pattern of spending and paying.

Payment History

The payment history shown on your credit report includes account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgages, etc.), the dates the accounts were opened, high credit amounts, balances, number of accounts paid as agreed and number of past-due accounts, the length of time of delinquencies, frequency of past-due items, past-due amounts on delinquent and collection accounts and negative public records, such as bankruptcies, tax liens and judgments.

It is important to note here that you are not responsible for accounts listed on your credit reports as “authorized user accounts”. An authorized user account belongs to the person who opened it and who added your name to the account.

Credit Card Protection

People who use their credit card for almost everything instead of using cash or checks should look into credit card protection. The more the credit card is removed from your wallet, the more likely it is to be lost or stolen. By utilizing this protection, you will not be liable for any purchases made on your card if it is lost or stolen.

Types of Bad Debts

The following are types of bad debts, which are listed on credit reports:

Late Payments

Late payments add to a lower credit score. A late payment is classified as a bad or negative debt. A late payment made a few years ago is considered negative but less negative than a late payment made a month ago.

When you are trying to obtain a major loan, for example a mortgage, late payments listed on your credit report can mean the difference of a ¼, ½ or 1 point of interest, which can cost you several thousands of dollars. If a late payment is made on such a large loan, it is considered a major bad debt especially if combined with other negative items. The length of delinquency is also important (i.e., 30 days, 60 days, 90 days or more). A debt listed more than 30 days late can be considered as negative as a collection or charged-off account. The more late payments made the more negative an account becomes.

Late payments score as a "2", "3", "4", "5" ... the higher the number the more negative the late payment.

Collection Accounts

A collection account is a bad debt. While late payments score as a "2", "3", "4", "5", the credit scoring system categorizes collection accounts, charged-off accounts, profit and loss accounts, repossessions, foreclosure, liens, child support and almost any other negative credit item (except late payments), into a category of a "9". A score of "9" is the most negative score you can get on a credit report. The more collection accounts you have the more negative the bad debts are. In addition, it does not matter how much money is owed on the debt. If you owe a collection in the amount of $5.00 and you owe a collection in the amount of $500 they both score "9".

Additional information regarding collection accounts is that paying one off does not necessarily help your credit scores. Even though we know it is the right thing to do, many times paying off a collection account will not help your credit at all. In fact it can actually make it worse by starting a time frame that is used to make a bad debt obsolete causing the bad debt to remain seven years from the date you paid it instead of from the date it was closed (last date of activity). Before making the decision to pay off a bad debt you should understand the results of what could happen if you do and consult with a company who specializes in credit problems because once the damage is done it is hard to undo.

Charge-Off Accounts

A charge-off account is simply a collection that the creditor is charging off as a loss. By doing so the company is stating to the government that they had a loss of money on your account, which means a tax break for them. However, note that this does not mean that the creditor will stop collection efforts in order to recoup their money. If they can scare you in to paying the debt all they have to do is report to the government that they now have income from this debt. The same rules apply to a profit and loss account, which is the same thing as a charge-off account.

Repossessions

When one thinks of repossession, they usually think it is on a vehicle because payments have not been made. However, additional items can also be repossessed. For example, furniture can be repossessed if you were using it as collateral or if you purchase furniture on a payment plan from a furniture company. If you default, they can take back the furniture and list repossession on your credit report. It scores a "9" like all the other bad debts. repossession like this may prevent you from qualifying to purchase a new vehicle even though the repossession was not that of a vehicle.

Foreclosures

A foreclosure, usually thought of for a home loan, can also be for other types of loans. Most people will file a bankruptcy before allowing their home to be taken from them. Bankruptcy was devised to prevent creditors from taking your possessions. With the new bankruptcy laws it is very important that you consult with an attorney when anything affects your ability to maintain payments on your credit accounts, as you should do whatever is necessary to protect your assets. A foreclosure is a "9" rated account.

Types of Negative Public Records

The following items are negative public records, which appear on credit reports:

Liens

A lien is normally something a government entity issues for non-payment of taxes. A lien can actually halt all credit activity even if your credit is otherwise in good standing. In other words, a new creditor is not going to feel secure giving you a loan when you have a lien that could take your property from you, especially if you are applying for a home or auto loan. Even if you are able to remove a lien from your credit reports, there will be another posting of the lien in a government lien search, which means if you are trying to get a government loan, such as a student loan, FHA loan, VA loan, a small business loan, etc., it will be found when they do this search.

Judgments

A judgment is usually a bad debt taken to the next level. For instance, your creditor or a collection agency to try and retrieve money will file a suit with the court. Some creditors are now taking cases to arbitration (it is stated in your card agreement that they can allow a mediation company to decide the fate of a bad debt). You will first receive a notice of either arbitration or of a court date. These notices are sent via certified mail or other verifiable methods. In either case you need to follow the directions and respond if it is arbitration or show up in court if it is a suit so that your creditor does not win the case by default judgment (if you show up at least you have a chance, if you do nothing you have no chance at all).

Judgments are rated as a “9” and negatively affect your credit. Some creditors will not grant loans to those with judgments on their credit reports.

Bankruptcies

Bankruptcy is another negative public record item. However, individuals who have filed bankruptcies can obtain a fresh start with their credit if they clean up their reports after filing the bankruptcy. If this is accomplished, an individual can score just about as high as someone who has never filed a bankruptcy and has no bad debts.

Bankruptcy was devised to give people a way out of debt. By giving you a way out of debt you have also been given the way out of a low credit score but only if your credit reports are cleaned up. If you do not clean up your credit reports, you may not be able to obtain credit for seven years or more. However, the average person who files bankruptcy and cleans up their credit reports gets credit within six months to a year. This is the little-known fact of bankruptcies but those who figure it out are buying homes and cars after basically filing bankruptcy just a few months ago.

Types of Bad Credit Situations Child Support Defaults

One of the worst bad debt situations is unpaid child support payments. Not only can your wages be garnished (money taken directly out of your pay checks by your employer before you are paid), you can be arrested and put in jail for failure to pay child support. In addition, defaulted payments are never removed from your credit reports until they are paid and, even then, this process can take seven years.

Government Student Loans

A student loan from the government is probably one of the most destructive loans you can have once you default on them. Not only do defaulted student loans remain on your credit reports for life if unpaid; they can multiply. The student loan company reports student loans in semesters, so each semester shows as an individual student loan and will be reported as negative information on each loan even if you pay only one of the loans late. Each defaulted student loan will now become negative. If you continue to default to the point of collection status then all student loans will go to the same status. It becomes even worse once you have defaulted for a few months as the student loans will now become negative through another student loan company and by more down the road if left unpaid. When a new company picks up the defaulted student loans they will report them all again as defaulted student loans, so you could end up with 20 collections for four student loans.

The best way to resolve student loan debts is to call the student loan company and asks to be put on a student loan rehab program. If you get on a student loan rehab program and make your payments on time they will remove all negative information about your student loans, which will get you out of the cycle of collection accounts.