Good Credit. THE BASICS OF CREDIT. Part 1.

CHAPTER 1: HOW DOES CREDIT AFFECT YOU?

Joanne’s Story

Joanne is a 45-year-old former homemaker who is recently divorced after 22 years of marriage. She and her ex-husband had always lived in apartments and paid cash for most of their belongings, including all of their cars, clothes, furniture, and supplies for their two children. Her ex, Bob, had always handled the money and Joanne has never even written out a check in her life. Joanne finds a full-time job in a daycare center to supplement her small alimony payments. One of her girlfriends, Cindy, invites Joanne to a party where “There will be lots of handsome men.” Excited that life just might get interesting again, Joanne’s hopes are dashed as she stands before her closet. She hasn’t bought a new outfit in five years, and money is tighter than last year’s jeans. She goes clothes shopping at Today’s Trends Clothing, where she has shopped for years. She selects three outfits, but has no cash and no credit card since the divorce. Confidently, she applies for the store’s credit card, but is astonished when she is turned down. Listing off the credit cards she had with her ex only seems to bore the clerk.

Joanne has no credit in her own name.

Everyone Has a Credit History/Rating

Yes, everyone has one of these, even if you have never had a credit card or a loan. Your credit history is compiled in reports made by credit bureaus and provided to lenders, landlords, and utility companies at their request. When you apply for a credit card, mortgage, or other loan, the fine print on the application gives the lender permission to check your credit history. The lender usually requests a credit report from one of the “Big Three” credit bureaus. In theory, the bureaus merely report the raw data of your credit history and don’t assign you any kind of “credit rating.” In reality though, credit companies do provide a credit rating in the form of a credit score. The lender looks at your credit score and decides whether to grant you the credit you are requesting. Of course, lenders also look at your total outstanding debts, your minimum monthly payments, even your credit limits to see how far into debt you could go if you max out your existing accounts. Primarily, though, they are concerned with your record of delinquencies, accounts paid unsatisfactorily, and anything else that suggests how much of a credit risk you might be, all of which is used to calculate your credit score. Like Joanne, you may be surprised to know that part of what figures into your credit rating is a lack of credit history. If you have no credit history, you have no track record of payment and your rating is very low. Believe it or not, you’re a bit of a credit risk.

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Three Big Filing Cabinets—The Credit Bureaus

Most people think that credit bureaus are branches of the government. In actuality, credit bureaus are for-profit corporations that provide a service: storing and maintaining credit records. The three major bureaus, or Credit Reporting Agencies, (CRAs) are:

— Experian (formally TRW);
— Equifax; and
— TransUnion.

There also are local credit bureaus and reporting agencies, although their databases are not as extensive as those of the “Big Three.” The local bureaus are, however, worth noting because they are used by some who may judge your credit worthiness. An example of a local agency is a Residential Mortgage Credit Reporting (RMCR) firm that provides a bureau-merged credit report. In addition, all of the “Big Three” send your disputes to what are known as “third party databases”, to determine their validity. More about these in Chapter 25.
To report information to the credit bureaus, creditors must fill out an application and pay a fee to each bureau to which they wish to belong. Membership is completely voluntary. No creditor has to report anything to any bureau. The more “thrifty” creditors may expend the time, trouble, and money to report to only one credit bureau. Given the fact that each bureau has its own separate, private database and, because the credit bureaus generally don’t pass information back and forth to each other, you actually may have up to three divergent credit histories.
So who subscribes to the credit bureaus for their services? Banks, finance companies, department stores, taxing authorities, landlords, and other “credit grantors” all subscribe to the CRAs. Once a creditor subscribes to a CRA’s services, the creditor is allowed to report information on your account history. This information is stored by the CRA in a national database, and contains the following:

— Your payment history;
— Where you work and your employment history;
— Your age;
— Whether or not you’ve been divorced;
— Your address history; and
— In some cases, your salary.

Credit bureaus also search public records for:

— Bankruptcy information from the federal government; and
— Judgment and tax lien information from courts (district, circuit, justice,
municipal, superior, magistrate, probate, and state), town clerks, and
registers of deeds.

Just how current is the public records information? From Experian’s website:

The currentness of data collected from courthouses depends on the size and/or location of each court. Data obtained from courthouses serving large metropolitan areas is updated frequently. In most cases, bankruptcies are collected on a daily basis. Almost all other courthouse data is collected monthly or weekly, with some information (usually from courthouses serving less-populated areas) collected quarterly.
Experian also states that once it receives information, that information is added to its database within 24 hours. Records on tax liens, judgments, and bankruptcies are available nationwide.

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Who Regulates the Credit Reporting Agencies (CRAs)?

CRAs are governed by the U.S. Fair Credit Reporting Act (FCRA) of 1971. The FCRA was amended in 1997, and again in December 2003, and includes protections for consumers by increasing the responsibility of credit bureaus to investigate consumer disputes. The Federal Trade Commission, an organization responsible for enforcing federal credit laws, also governs credit bureaus.



© Copyright 2001,2004, 2005 by Kristy Welsh