By Stacy Francis, CFP®, CDFA
You sit down in your mortgage broker’s office because you can’t stand the news. Your credit is so bad you will not be able to secure a loan to buy the dream home you just bid on. Can you imagine? After months of taking time off work to run from one open house to the next, you forgot to check your credit report to make sure your credit was in order. What independent credit reporting agencies say about you and your credit can and will make the difference between your ability to buy a car, a house, or even a simple pair of shoes.
Your credit report contains everything about your credit history, including the good, the bad, and the ugly. Details you would never dream of sharing with even your closest of friends are listed neatly for all creditors to see. Your last residence, your employment history, your bill payment history, how many credit cards you have, how much you owe, and how much access to credit you already have are just a few of the juicy details contained within your report.
How Your Credit Score Affects Your Finances
Every time you apply for a new card, your credit score goes down. This can affect your finances in many more ways than you would think. Below are just a few.
- The lower your credit score, the more expensive it is to finance anything – from your dream home to that sweet new car. When you have a low credit score, banks and similar institutions consider you a high-risk individual, so if you want a mortgage, be prepared to pay for it.
- A low credit score can make it expensive at best, impossible at worst, for you to get a loan, should disaster strike.
- It might make it harder to lease a place. Many landlords will only lease their apartments or houses to people in good to excellent credit standing.
- You may need to put down a deposit – lock your money up without earning any interest – even for things as ordinary as, say, cell phone service.
- Your credit score may cost you that job you want — most notably any type of position where you work with money, be it in a bank or another type of financial institution.
So what hurts your credit?
Paying bills late, defaults on loans, too many credit cards, canceling your credit cards, large balances, medical bills that were lost in an insurance shuffle can all end up creating black marks on your credit report.
Many major life events, such as marriage and divorce, purchasing a home, or having a child are also financial changes that involve and can affect your credit.
Many credit files contain inaccuracies that can harm your credit rating. Just as reviewing your credit card statement can reveal charges you did not make, reviewing your credit report can reveal activity on accounts you don’t use or new accounts you did not open, alerting you to the possibility of identity theft.
FICO 8: Credit Scoring System
Even the most responsible borrowers slip up sometimes. Maybe a utility bill went unpaid after you moved and the missed payment went into collections. Or perhaps there are unpaid library fines or parking tickets in collections that are hanging on to your credit history and affecting your FICO credit score, which is widely used by lenders to evaluate your ability to repay debt.
With the newest version of the FICO credit scoring system, however, minor delinquencies are now overlooked in calculating credit worthiness.
Under the updated scoring model, called FICO 8, small missed payments lingering in collections with original amounts of $100 or less will no longer do damage to your credit score.
Consumers also are less likely to be penalized for any single delinquency if it occurred two or more years ago- and if their credit history is otherwise unblemished. There’s more flexibility with missing a payment. If you have a more habitual pattern of paying accounts late, you’re more likely to get penalized for that.
If a consumer’s credit usage is high, that will be more likely to hurt his or her score with FICO 8. But getting close to your credit card limits- even if you always pay on time- is penalized in some way in every FICO score, not only the recent edition.
Finding and Understanding Your Credit Score
There are three major credit-reporting agencies: Experian, Equifax, and TransUnion. The information on their reports tends to vary slightly. You can get your credit report for free from www.annualcreditreport.com
Once you have your reports, you should check them for accuracy. If you see anything that shouldn’t be there, make sure you contact the reporting agency/agencies to dispute it.
Looking at your reports for the first time can be something of a cold shower, as they will list every single late payment you have ever made in your life, as well as how late it was.
The actual score is a snapshot of your creditworthiness at any given time. It is calculated by a machine, and influenced by many factors such as available credit, outstanding debt, length of credit history, and late payments. As these variables vary, so does your score. So the good news is that when you clean up your report, make your payments on time, and reduce your outstanding debt, over time your credit score will be better and better.
Correcting Mistakes in Your Credit Report
Few Savvy Ladies know that they can fight an improper charge on their credit card. The Fair Credit Billing Act, which was passed in 1974, makes sure the law is on your side. In fact, your credit card company is required to investigate and either correct the mistake or explain why the bill is correct within 90 days. They must acknowledge your complaint within 30 days.
Make sure to put your complaint in writing and send it via certified mail to “Billing Inquiries,” which is listed on the back of your card statement. According to the law, your dispute letter must include your name, address, account number and a description of the problem. Visit Bankrate.com for a sample dispute letter to help you on your way. The deadline for notifying your credit card company of a billing error is 60 days from the date the bill was mailed to you. Keep in mind that the 60-day clock starts ticking on the day your issuer mails your billing statement, not the date you receive it. So by the time you receive your bill, you actually have 50-odd days to get a dispute letter back to your card issuer.