Last night, a coworker asked me about Greece. He had been reading all of the dire reports out of Greece, and he was curious why so many people are worried about economic problems in Greece. After I explained it the best I could, I gave him some comparisons of the financial situations in Greece and the USA (that’s an article for another forum, but suffice it to say, the USA is not that far behind in percentages). He kind of shook his head in disgust and commented that people need to understand the credit situation in this country. I agreed, but then his comment made me wonder, “Hey, do most people even know their own credit situation?”
So, this month, we’ll look at credit.
What is credit?
When you boil it all down, credit is a loan from someone else. You can have installment credit, which is debt that is paid off in a fixed time at a fixed rate. The most common installment debts are home mortgages and car loans. You borrow a set amount of money, say $150,000 to buy a house, and agree to pay it back over the next 15 years at $1,100 a month.
You can also have revolving credit, which is credit that does not have a fixed duration, loan amount or payment amount. The most common revolving credit is a credit card. One month, you may charge $500 and pay $500; the next month you may charge $80 and pay $80. And as long as you don’t hit your credit limit and you keep paying your bill on time, the card company keeps your credit open indefinitely.
What’s a credit score?
A company called Fair Isaac Corporation developed a mathematical formula that evaluates your payment history, how long you have had credit, the percentage of available credit you are using and how much total debt you have. It also considers how much new credit you have requested. The formula then generates a score, called the FICO score, with anything over 750 being considered “prime” and anything over 800 considered “excellent.” The credit agencies (Trans Union, Experian and Equifax) have also developed their own scoring formula, but the FICO score is the original.
Why should you care about your score? Because it affects how much you pay for your debt. Mortgage companies use it to see if you qualify for the posted rates; credit card and car loan companies use them to see how much to lend you and at what rate. Also, more and more non-financial companies are using credit scores to determine rates. The most notable example is insurance companies; they have found a direct correlation between your credit score and the likelihood you will file a claim. That means if you have a poor credit score, you could be paying more for your auto or home insurance.
Monitoring your credit
Over the past few years, Congress has given you a little more power to monitor your credit history. While you still cannot get your official credit score without paying for it, you can look at your credit report to verify its accuracy. The credit agencies have an official website, www.annualcreditreport.com, where you can log in to view your report. You may do this once per year, for each agency, at no charge.
The process is pretty painless and the nice part is, with three agencies, you can actually check your credit every four months. Just choose a different agency each time during the year. The credit report will list every loan you have ever had. If you bought a new washer and dryer on “12 months no interest” from an electronics store, chances are you actually received a credit line to do that and the loan will be listed. If you refinanced your home, your current and prior mortgages will be on there.
The purpose of checking your credit report is twofold. First, you want to make sure the report is accurate. If you have no late payments, yet one of your creditors says you do, you need to challenge it because it is lowering your credit score. Second, you can see if you have old accounts you have forgotten or if someone has stolen your information and opened a new account in your name. Personally, I found a few old accounts (such as a Goodyear credit card I opened in youthful ignorance) that I had long forgotten. I sent a letter to the address for the account and asked that it be closed, since I no longer needed or wanted the account.