Your Credit

Susan M. Hansen Ph. D. - St. George, Utah

Your Credit

Debt to Income Ratio
When you shop for a mortgage or other loan, one of the key factors a lender takes into consideration before granting approval is your debt-to-income ratio. This is the ratio between how much you owe each month on personal debt and how much you earn. This ratio calculates the percentage of debt you are carrying in relation to how much money you are making and gives lenders a good indication of how much additional debt you’ll be able to handle.

The arithmetic
In order to make the calculation, add up your fixed monthly expenses such as your car payments, minimum credit card payments and any other regular debt obligations such as monthly child support or student loans (you don’t have to include bills for things such as groceries or utilities). Add your expected housing payments (your mortgage payments plus, for example, private mortgage insurance, homeowner’s insurance and property taxes) and divide the total by your gross monthly income.

Standard rule of thumb
A common rule when shopping for a mortgage is that your debt-to-income ratio should be no higher than 36 percent. Anything above this could mean you’ll be denied credit or charged a higher interest rate on your loan. Lenders also like the total of your housing expenses alone to not exceed 28 percent of your monthly gross income.

Exceptions to the rule
Some lenders will accept loans even if your ratio is above 40 percent, and there are certain mortgages that allow a higher percentage as well. Federal Housing Authority mortgages and Veterans Administration mortgages, for example, allow a debt-to-income ratio of up to 41 percent. With any loan, however, you need to be sure you are comfortable with the amount of debt you are accumulating. Keep in mind, the lower your debt-to-income ratio the better, so pay down as much debt as you can before starting the mortgage process.

Use the following worksheet to calculate your debt-to-income ratio:

Minimum monthly credit card payments*: _____________

+ Monthly car loan payments: _____________

+ Other monthly debt payments: _____________

+ Expected mortgage payments: _____________

= Total: _____________

Your debt-to-income ratio:

Total ÷ monthly gross income = _____________

*Your minimum credit card payment is not your total balance every month. It is your required minimum payment -- usually between two and three percent of the outstanding balance.

Calculating Your Debt to Income Ratio
When you shop for a mortgage or other loan, one of the key factors a lender takes into consideration before granting approval is your debt-to-income ratio. Your debt-to-income ratio is the ratio between how much you owe each month on personal debt and how much you earn. This ratio calculates the percentage of debt you are carrying in relation to how much money you are making and gives lenders a good indication of how much additional debt you’ll be able to handle.

The arithmetic
In order to make the calculation, add up your fixed monthly expenses such as your car payments, minimum credit card payments and any other regular debt obligations such as monthly child support or student loans (you don’t have to include bills for things such as groceries or utilities). Add your expected housing payments (your mortgage payments plus, for example, private mortgage insurance, homeowner’s insurance and property taxes) and divide the total by your gross monthly income.

Standard rule of thumb
A common rule when shopping for a mortgage is that your debt-to-income ratio should be no higher than 36 percent. Anything above this could mean you’ll be denied credit or charged a higher interest rate on your loan. Lenders also like the total of your housing expenses alone to not exceed 28 percent of your monthly gross income.

Exceptions to the rule
Some lenders will accept loans even if your ratio is above 40 percent, and there are certain mortgages that allow a higher percentage as well. Federal Housing Authority mortgages and Veterans Administration mortgages, for example, allow a debt-to-income ratio of up to 41 percent. With any loan, however, you need to be sure you are comfortable with the amount of debt you are accumulating. Keep in mind, the lower your debt-to-income ratio the better, so pay down as much debt as you can before starting the mortgage process.

Use the following worksheet to calculate your debt-to-income ratio:

Minimum monthly credit card payments*: _____________

+ Monthly car loan payments: _____________

+ Other monthly debt payments: _____________

+ Expected mortgage payments: _____________

= Total: _____________

Your debt-to-income ratio:

Total ÷ monthly gross income = _____________

*Your minimum credit card payment is not your total balance every month. It is your required minimum payment -- usually between two and three percent of the outstanding balance.

Your Credit and the Fair Credit Reporting Act
Your credit record contains information about your income, debts, and credit payment history. Your credit payment history is recorded in a file or report. These files or reports are maintained and sold by consumer reporting agencies (CRAs).

One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job.

Your credit record contains information about your income, debts, and credit payment history. It also indicates whether you have been sued or arrested, or have filed for bankruptcy.

The Fair Credit Reporting Act (FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses that will use your credit report when evaluating your application for a loan or a line of credit.

Your rights under the Fair Credit Reporting Act:

You have the right to receive a copy of your credit report. The copy of your report must contain all of the information in your file at the time of your request.
You have the right to know the name of anyone who received your credit report in the last year for most purposes and in the last two years for employment purposes. Any company that denies your application must supply the name and address of the CRA they contacted, provided the denial was based on information given by the CRA.
You have the right to a free copy of your credit report when your application is denied because of information supplied by the CRA. Your request must be made within 60 days of receiving your denial notice.
If you contest the completeness or accuracy of information in your report, you should file a dispute with the CRA and with the company that provided the information to the CRA. Both the CRA and the provider of information are obligated by law to investigate your dispute.
You have a right to add a summary explanation to your credit report if the dispute is not resolved to your satisfaction.

Why Should I Check my Credit Report
Studies have shown that many credit reports contain inaccuracies that can harm your credit rating, leading to rejections when you apply for loans, insurance or even a job

1. To detect identity fraud early
We all know we should check our credit card statements every month for charges that we haven’t made. But that only catches the thief who uses an account you know you have. Scan for signs of possible fraud with your free credit report.

In the past few years, identity theft has risen dramatically. In this insidious form of credit fraud, a thief steals your good credit by taking over or opening accounts in your name, running up large balances and leaving you to deal with the collectors when they come calling.

New accounts opened with your identity will appear on your credit report, revealing identity theft to you. If you don’t check your credit report, it could be months before the credit grantor, fed up with nonpayment, turns the account over to a collector who tracks you down and demands payment for a loan you’ve never even heard of.

As with much less problematic inaccuracies, identity theft is something you can detect and remedy most effectively by checking your credit history thoroughly and on a routine basis.

2. To become an informed consumer of credit services
Your credit report can have a dramatic impact on your financial stability. With good credit, you can obtain benefits of all kinds -- a home mortgage or lease on an apartment, an auto loan, low interest credit cards and more -- with ease. But if your credit history is poor, many of these financial options may be unavailable to you. Either way, you have a right to know what to expect when a lender runs a credit check on you.

Aside from paying your bills regularly and on time, the single most important thing you can do to ensure that when others check into your credit they’ll find you to be a good risk is to be aware of the contents of your credit report. Check your report for free and approach lenders with confidence.

Studies have shown that many credit reports contain inaccuracies that can harm your credit rating, leading to rejections when you apply for loans, insurance or even a job. Often the result of simple human error, they can be caused by anything from a clerical error to a computer glitch in which your file is mixed with that of someone with a similar name.

That’s why it’s essential that you check all of your credit reports -- and monitor your credit regularly -- to protect your good credit standing, even if you always pay all your bills on time.

And if your credit is less than perfect now, checking your report will help you identify lingering problems so you can deal with them effectively and move on toward an improved credit standing. Whatever your situation, reviewing your report regularly is the only way to be sure that you will go into any credit conversations knowing everything lenders will know.

What to Look for in Your Credit Report
You've pulled a copy of your credit report and are now looking at a tangle of information. You’re looking at a document that shows your last three addresses, a long list of businesses that have checked your report and dozens of credit accounts. But what does it all mean? Which information should you look at first? Here’s a quick rundown of your credit report and the key information on it.

Why should I care about my credit report anyway?
A credit report is a factual record of your payment history and other credit-related items that lenders use to help determine whether to grant you credit. The information on your report is compiled by the credit bureaus, which regularly receive data on whether you make payments on time and how much you owe. Since creditors are constantly reporting new information to the bureaus, your credit report is always changing.

What should I be looking for?
In a word, inaccuracies. Mistakes are not entirely uncommon on credit reports. Sometimes they’re caused by simple human error, other times they occur when credit files of people with similar names are inadvertently mixed. Increasingly, unfamiliar or inaccurate information can also be an indicator of identity fraud -- when someone uses your name and accounts without your knowledge. Look closely at the following areas to catch mistakes or fraud:

Personal information. Are the names and addresses listed on your report accurate? Often, an incorrect address or unfamiliar suffix, such as Jr. or Sr., can be an indication that your file may have been mixed with that of another person. Additionally, a recent address change may indicate that someone is fraudulently opening accounts in your name, but routing the bills to their address.
Public records. If any bankruptcies, judgments or liens are listed in this section, make sure they are accurate and complete. Remember, some bankruptcies can stay on your report for up to 10 years while others cycle off after seven years.
Accounts. You will notice basic information such as your credit limit, current balance and date the account was opened. Also check out the detailed payment information by month for incorrect late payments or charge-offs. Remember to check for unfamiliar accounts or activity on accounts that you thought were closed. Someone besides you could be using the account.
Inquiries. This section shows you who has received information from your credit report and who was given your name during the recent past, as allowed by law. Often, credit grantors will "pre-screen" your credit file in order to offer you special rates. Additionally, inquiries are recorded when you apply for new credit or authorize an employer or insurance company to check your credit history.

What next?
If everything looks accurate, then you can breathe easy. Just remember to regularly monitor your credit to make sure everything stays accurate.

If you find a mistake, then you have the right to dispute the information free of charge. You should contact the credit bureau that provided the information and dispute the inaccurate information. You can also contact the creditor and ask that new, accurate information be provided to the credit bureau.

Finally, if you suspect fraud, contact the credit bureaus immediately and place a fraud alert on your report. Then, contact your credit card companies and bank to protect your accounts.

Personal information. Are the names and addresses listed on your report accurate? Often, an incorrect address or unfamiliar suffix, such as Jr. or Sr., can be an indication that your file may have been mixed with that of another person. Additionally, a recent address change may indicate that someone is fraudulently opening accounts in your name, but routing the bills to their address.
Public records. If any bankruptcies, judgments or liens are listed in this section, make sure they are accurate and complete. Remember, some bankruptcies can stay on your report for up to 10 years while others cycle off after seven years.
Accounts. You will notice basic information such as your credit limit, current balance and date the account was opened. Also check out the detailed payment information by month for incorrect late payments or charge-offs. Remember to check for unfamiliar accounts or activity on accounts that you thought were closed. Someone besides you could be using the account.
Inquiries. This section shows you who has received information from your credit report and who was given your name during the recent past, as allowed by law. Often, credit grantors will "pre-screen" your credit file in order to offer you special rates. Additionally, inquiries are recorded when you apply for new credit or authorize an employer or insurance company to check your credit history.

What is Credit Score?
A credit report score is a number that reflects your credit risk level, typically with a higher number indicating lower risk. Your credit score is generated through statistical models using elements from your credit report; however, your score is not physically stored as part of your credit history on the credit file. Rather, it is typically generated at the time a lender requests your credit report, and is then included with the report viewed by the creditors. Your credit score is a fluid number, and it changes as the elements in your credit report change. For example, payment updates or a new account could cause your score to fluctuate. There are many different credit scores used in the financial service industry. Your score may be different from lender to lender (or from car loan to mortgage loan), depending on the type of credit scoring model that was used.

Why are credit scores used?
Before credit scores, lenders physically looked over each applicant’s credit report to determine whether to grant credit. A lender might deny credit based on a subjective judgment that a consumer already held too much debt, or had too many recent late payments. Not only was this time consuming, but human judgment was prone to mistakes and bias. Lenders used personal opinion to make a decision about an applicant that may have had little bearing on the applicant’s ability to repay debt. Credit scores help lenders assess risk more fairly because they are consistent and objective. Consumers also benefit from this method. No matter who you are as a person, your credit score only reflects your likelihood to repay debt responsibly, based on your past credit history and current credit status.

Who uses credit scores and how are they used?
Banks, credit card companies, auto dealers, retail stores and most other lenders that issue credit or loans use credit scores to quickly summarize a consumer’s credit history, saving the need to manually review an applicant’s credit report and provide a better, faster risk decision. Although many additional factors are used in determining risk, such as an applicant’s income vs. the size of the loan, a credit score is a leading indicator of one’s basic creditworthiness.

What information impacts my credit score?
The information that impacts a credit score varies depending on the score being used. Generally, credit scores are affected by elements in your credit report, such as:

Number and severity of late payments
Type, number and age of accounts
Total debt
Recent inquiries

Credit bureau-based scores cannot use demographics prohibited under the Equal Credit Opportunity Act, such as race, color, religion, national origin, gender, age, marital status, receipt of public assistance, or exercise of rights under the Consumer Credit Protection Act. Scores used by individual lenders may use such elements as income, occupation and type of residence in determining their own custom credit score.

FAQ's about Credit Scores
A credit score is a number that reflects your credit risk level, typically with a higher number indicating lower risk. Your credit score is generated through statistical models using elements from your credit report. However, your score is not physically stored as part of your credit history on the credit file. Rather, it is typically generated at the time a lender requests your credit report, and is then included with the report viewed by the creditors.

Your credit score changes as the elements in your credit report change. For example, payment updates or a new account could cause your score to fluctuate. As well, many different credit scores are used in the financial services industry. Your score may be different from lender to lender (or from car loan to mortgage loan), depending on the type of credit scoring model that is used.

Why are credit scores used?
Before credit scores, lenders physically looked over each applicant’s credit report to determine whether to grant credit. A lender might deny credit based on a subjective judgment that a consumer already held too much debt, or had too many recent late payments. Not only was this time consuming, but human judgment was prone to mistakes and bias. Lenders used personal opinion to make a decision about an applicant that may have had little bearing on the applicant’s ability to repay debt.

Credit scores help lenders assess risk more fairly because they are consistent and objective. Consumers also benefit from this method. No matter who you are as a person, your credit score only reflects your likelihood to repay debt responsibly, based on your past credit history and current credit status.

Who uses credit scores and how are they used?
Banks, credit card companies, auto dealers, retail stores and most other lenders that issue credit or loans use credit scores to quickly summarize a consumer’s credit history, saving the need to manually review an applicant’s credit report and provide a better, faster risk decision. Although many additional factors are used in determining risk, such as an applicant’s income vs. the size of the loan, a credit score is a leading indicator of one’s basic creditworthiness.

What information impacts your credit score?
The information that impacts a credit score varies depending on the score being used. Generally, credit scores are affected by elements in your credit report, such as:

Number and severity of late payments.
Type, number and age of accounts.
Total debt.
Recent inquiries.

Debt Assistance Companies
If you are ducking debt collectors and using one credit card to pay off the next, you may be considering turning to a debt assistance company for help. There are hundreds of these debt assistance companies on the Internet and in the business pages of the phone book. They all promise the same things: to reduce your overall debts, work with your creditors to slash the interest you are paying and help you create a personalized debt management plan that will keep you debt-free permanently.

Can they make good on what they say they can do?
The answer is yes, if you’ve gotten to the point where you owe thousands of dollars in unsecured debt -- that is, debt that is not secured by an asset, such as a house. But it still takes hard work and commitment from you to get back on track.

Here’s what to expect from a reputable debt assistance company:

One-on-one credit counseling and advice on managing your debts and help with creating a budget.
Enrollment in a debt management plan that is approved by your creditors, if the measures above are insufficient to help you. Together, you and your counselor will figure out how much money you can afford to put toward retiring your debt every month. You then deposit that sum with the debt assistance company every month. It divvies up the money among your creditors and sends them the appropriate payments by the due dates.

Once enrolled in a debt management plan, you may pay far less interest on your debts than previously. Creditors may even be willing to waive late fees, because they work closely with reputable debt assistance companies. They are willing to negotiate terms of debt in return for the certainty of receiving monthly payments on time.

Typically, people who are in a debt management plan need three to six years to finish paying off their debts. During that time, a good debt assistance company offers free, ongoing budget counseling plus classes and educational materials about managing debt. Participants may be restricted from applying for new credit while fulfilling the plan.
However, as you repay your debts, your credit report will improve and you may be able to qualify for new credit sooner than the seven to 10 years you will wait if you declare bankruptcy.

Not all credit assistance companies are reputable. Some take advantage of people who are desperate for help, taking monthly payments but never paying back creditors. Here are two warning signs that the debt assistance company you are dealing with is unscrupulous:

Promises to clean up your credit report. This is illegal -- late or skipped payments stay on your credit report for up to seven years. Only time and a steady pattern of repayment can improve your credit rating.
Charges huge monthly service fees or demands a portion of your savings. Nonprofit debt assistance companies help for a minimal fee or for free, because they’re paid by the creditors who approve your debt management plan. Many also receive grants from government, private-sector and nonprofit organizations, and help pay their costs through fund-raising activities.

Finding a good debt assistance company
Before you sign on with a debt assistance company, check it out with your state Attorney General, local consumer protection agency and Better Business Bureau.

Make sure it’s a nonprofit firm that belongs to the Association of Independent Consumer Credit Counseling Agencies, the National Foundation for Credit Counseling (NFCC) or the American Association of Debt Management Organizations. NFCC members can use the name Consumer Credit Counseling Service (CCCS) or other names, but hold the NFCC member seal.

Avoid any company that promises to repair your credit problems in a hurry. The road to financial stability typically requires ongoing counseling and can take years.

Getting started
Once you’ve found a good debt assistance company, continue to pay your bills until your creditors approve the debt management plan. Then, before you start making payments, contact your creditors to confirm that they have accepted the proposed plan. Continue contacting them and reviewing your monthly statements to make sure they get paid on time by the debt assistance company and that you are receiving the benefits promised in your debt management plan, such as a lower interest rate.

Correcting Your Credit Report
Having a correct credit report is important because lenders use it as a basis to determine how much you can borrow. Under the federal Fair Credit Reporting Act, both the consumer reporting agency (CRA) and the organization, such as a bank or credit card company, that provided the information to the CRA have responsibilities for correcting inaccurate or incomplete information in your credit report. To protect all your rights under the law, contact both the CRA and the information provider.

Write the CRA, stating the information you believe is inaccurate. Include copies (not originals) of documents that support your position. In addition to providing your complete name and address, your letter should clearly identify each disputed item in your report and factually explain why you dispute the information, requesting deletion or correction of those items. You may want to enclose a copy of your report with the items in question circled. Send your letter by certified mail, return receipt requested, so you can document what the CRA received. Keep copies of your dispute letter and enclosures.

CRAs must investigate the items in question, usually within 30 days, unless they consider your dispute frivolous. They also must forward all relevant data you provide about the dispute to the information provider. After the information provider receives notice of a dispute from the CRA, it must investigate, review all relevant information provided by the CRA, and report the results to the CRA. If the information provider finds the disputed information to be inaccurate, it must notify all nationwide CRAs so they can correct this information in your file. The FCRA also requires that:

Disputed information that cannot be verified must be deleted from your file.
If your report contains erroneous information, the CRA must correct it.
If an item is incomplete, the CRA must complete it. For example, if your file showed that you were late making payments, but failed to show that you are no longer delinquent, the CRA must show that you are now current.
If your file shows an account that belongs only to another person, the CRA must delete it.

When the investigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the provider.

Also, if you request, the CRA must send notices of corrections to anyone who received your report in the past six months. Job applicants can have a corrected copy of their report sent to anyone who received a copy during the past two years for employment purposes. If an investigation does not resolve your dispute, ask the CRA to include your statement of the dispute in your file and in future reports.

In addition to writing to the CRA, tell the creditor or other information provider in writing that you dispute an item. Again, include copies (not originals) of documents that support your position. Many providers specify an address for disputes. If the provider then reports the item to any CRA, it must include a notice of your dispute. In addition, if you are correct and the disputed information is not accurate, the information provider may not use it again.

Improving Your Credit Score
To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change, but improvement generally depends on how that factor relates to other factors considered by the model.

Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application. Nevertheless, scoring models generally evaluate the following types of information in your credit report:

Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy.
What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that may hurt your score.
How long is your credit history? Generally, scoring models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at inquiries on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make prescreened credit offers are not counted.
How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.

Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.

To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It’s likely to take some time to improve your score significantly.