Credit — What You Need to Know
Credit plays an important role in our lives. Without it, life gets complicated. You might even miss money-saving opportunities. For example, few can afford to buy a home or car with cash; most take out a loan to do that. Some employers run credit checks on potential employees as a way to screen them, especially if they are handling cash or working with sensitive customer information.
Why Having a Credit Card is Considered Having a Loan
Your credit limit is the maximum amount a credit card company will let you spend. For example, if your credit limit is $5,000, you may not let your credit card balance exceed $5,000 without be charged “over the limit” fees.
With revolving credit, such as the kind offered by credit card companies, every month you automatically get a “loan” for the amount of your credit limit, whether or not you need it or use it. Every time you use your credit card, you borrow money because you “buy now and pay later.” In other words, when you make a purchase with your credit card, your credit card company pays for it. In essence, your credit card company loans you money for a purchase until you pay back the money you borrowed, which you do when you pay your bill.
What Is Credit and Why Do I Need It?
Credit is buying today and paying later, by a specified date. Lending institutions and credit card companies will consider you credit worthy if you can demonstrate a history of routinely paying back borrowed money on the date it is due; less so, if you occasionally pay back borrowed money on the date it is due. The cost to use credit is in the form of an interest rate charged against the amount of borrowed money you owe the creditor.
How you use credit reflects how you manage your money. You will qualify for the best rates on loans and credit cards when you are considered credit worthy, or considered most likely to pay back borrowed money on time, every month. The opposite is true if you are considered less credit worthy, or less likely to pay back borrowed money on time, every month.
Why Do I Need Credit?
People usually use their good credit to:
- Buy large, expensive items, such as a car or appliance
- Finance an education
- Buy a house
- Purchase items online
Having credit is important for several other reasons. Employers, landlords, utilities, and insurance companies may want to look at your credit as well. Here is why:
Employers sometimes view job applicants’ credit reports as a screening tool to:
- Confirm a person’s identity
- Determine a person’s future job performance; employers may consider a person responsible with money likely to also be responsible while on the job
- Determine if a person’s debt payments would require too much take-home pay and cause financial hardship
- Take precaution when jobs require employees to use cash or confidential information
Landlords and utility companies need to know if you will pay your bills on time. Your credit report shows whether or not you routinely pay your bills on time.
Insurance companies may view your credit to help predict if you will file a claim. Sounds odd? Car insurance companies find that people who manage their money well tend to get in fewer accidents and take better care of their health and home. Insurance companies view your credit information to decide if they will insure you and if you will be able to pay your monthly premium.
Who Can View My Credit Report Without My Permission?
Any company to which you’ve applied for credit has the right to review your credit without your permission. For example, if you’ve applied for credit at a credit card company, bank, or credit union, they can legally look at your credit to determine whether you are credit worthy before granting you credit. Also, anyone, except employers, with a legitimate business need—a need based ethical business practices and not a scam—can look at your credit report without your permission. Both current and potential employers need your written permission before they can look at your credit report. Other entities that may look at your credit report without your permission:
- Insurance companies
- Credit card companies with which you have an existing account
- Government agencies
- Agencies considering an application for a government license
- Child support enforcement agencies. See Privacy Rights Clearinghouse. “Fact Sheet 6: How Private Is My Credit Report?” September, 2010. Retrieved from http://www.privacyrights.org/fs/fs6-crdt.htm on November 10, 2010.
Get and Read Your Credit Report Every Year
Your credit report is a snapshot on how you manage your money—how timely you pay your bills and the amount of your debt, if any.
What Kind of Information Is on my Credit Report?
Identifying Information: your name, address, date of birth, and social security number.
Credit Information: all the financial institutions that have approved you for credit, and for how much; and whether you have paid back borrowed money on time, every month.
Public Record Information: charge-offs, foreclosures, and bankruptcies.
Inquiries: a list of financial institutions that have requested your credit report to determine whether or not to approve you for credit.
Like regularly checking the oil in your car as part of maintaining it, you need to regularly check your credit as a way to maintain it. Reading your credit report should become an annual “to-do.” Here are three good reasons to do that:
- Look for errors, such as late payments or a collection notice, that could negatively affect your credit.
- Look for credit activity you didn’t authorize, which could be a sign of identity theft.
- Stay informed on the type of information that creditors can view about you.
How to Correct Credit Report Errors
If errors appear on your credit report, you have the right to have them corrected at no charge to you. The credit report itself will provide information on how to correct errors. Instructions on how to do that may be listed under “How to file a dispute” located at the end of your credit report. You will have to provide evidence, such as a copy of a canceled check as proof of payment, that supports your request to fix an error.
If a credit-reporting agency refuses to correct information you believe is in error, initiate another “dispute.” If the credit card company still does not correct the error, you have the right to insert a written explanation of the error into your credit report. You may want to contact your state’s attorney general’s office or the National Foundation for Credit Counseling (NFCC) for assistance. If you believe your identity has been compromised, in that you notice credit activity on your credit report that you know you didn’t authorize, see the section on reporting identity theft.
How to Order Your Credit Report
Untrustworthy individuals would love to get a hold of your personal information. To avoid the risk of fraud committed against you, do not order your credit report from any sources other than the ones listed below.
The three credit reporting agencies:
Trans Union Corporation
AnnualCreditReport.com is the official site that collectively represents the three credit reporting agencies listed above. You are entitled to a free credit report once every 12 months. Order your free report from AnnualCreditReport.com.
Write Annual Credit
Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
Information to have ready when you order your credit report:
- Social Security number
- Date of birth
- Current and previous addresses for the past three years
- Maiden name, if applicable