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Credit Reports & Monitoring
Computerization of credit information happened a few decades ago, but the sophistication of programs that analyze these data and the ability to tap into and share data has changed the face of the credit industry. A decision to grant you credit can be made in literally an instant, without the need for human intervention.
"FICO score" is a household term these days thanks to those commercials that tease "I'm thinking of a number between 450 and 850..." Actually, FICO scores range from the 300s to about 900, but anyone with a score below 500 or so is unlikely to get credit other than from their local loan shark. (By the way, FICO comes from the company that created the scoring system: Fair Isaac Corporation. That trivia might win you a beer someday.)
Some decisions regarding your credit are made strictly on your FICO score, like whether a credit card company mails you an offer for that low-rate, high awards Visa that you can transfer your high-rate credit card balances to. Most of the "instant credit" offers use your FICO score (or a competing credit scoring system) to make that "on-the-spot" decision.
All of this sounds harmless enough and certainly efficient compared to how it was in the good old days when we filled out multi-page credit card applications by hand and mailed them with hopes of getting that coveted Master Charge (the predecessor to MasterCard back when spaces between words were still in vogue). Yes, harmless and efficient. That is, until the information becomes corrupted with errors or a thief manages to intercept it or steal the unauthorized laptop with 100,000 names and credit details on it.
When I was programming computers in the 1970's (yes, they were real computers, although a bit heftier than they are today), we used to refer to GIGO. That stood for Garbage In / Garbage Out, a concept which highlighted the fact that computers produced results as good (or bad) as the data they consumed. That's still true today.
Errors in reporting transactions can be harmful to your credit rating. For example, late payments hurt you a lot, but sometimes payments get credited to someone else's account by mistake. Not your fault, but computers will dutifully process the errant information and your FICO score suffers. I recently read that consumers find some 13 million inaccuracies on their credit reports each year. Those are the errors people found! Might there be errors on your credit report you haven't yet discovered?
Honest mistakes are one thing. Theft of your personal information is quite another. Identity theft is one of the most damaging and frustrating crimes out there. You can't imagine how identity theft can turn your life upside down unless you've been through it.
Click here to get link to my recommended identity theft solutions.
What Can You Do To Protect Your Credit?
Step One: Check your credit reports. There are three major companies that gather this information and they have created a website where you can order one credit report per year at no charge (www.annualcreditreport.com).
Step Two: Take precautions to prevent inadvertently sharing your credit card information. For example, if you shop on the Internet, spend some time learning about PayPal. PayPal allows you to buy items from Internet merchants without giving them your credit card information. Also, use some common sense about where you use your credit card. Don't buy gas on credit from a non-branded station that looks like a homeless shelter. (No offense intended towards homeless individuals, operators of homeless shelters, or their families.)
Step Three: Never, ever give anyone your personal information just because they ask. There are so many scams operating over the phone, on the Internet, via email, at fairs and carnivals, that you will be a potential victim unless you suffer from agoraphobia. I have clients regularly tell me about the email they received from the IRS about their $287 refund. IT'S A SCAM!!!!!
Step Four: Sophisticated software can work for you to keep you out in front of potential problems with your credit information. The major credit history companies, Experian, TransUnion and Equifax, all have excellent credit monitoring programs at reasonable prices.
Click here for my list of recommended credit monitoring companies.
What Can You Do If Your Credit Is Already Damaged?
Your credit rating may be suffering because of unfortunate circumstances in your life. A divorce. Bad debts. A lost job. Foreclosure. Maybe you're the victim of identity theft.
Whatever the reason, a poor credit score can result in refused credit, less money than you need, and higher interest rates. Getting your credit score up will save you money and frustration. If your credit record contains inaccurate information, trying to correct the errors can be a very painful exercise. Laws have changed to provide better access to credit information and to assist consumers with correcting mistakes, but tackling the credit history companies can be a daunting task.
BAD CREDIT--YOUR FAULT: The approach for improving your credit score depends wholly on the reasons for your poor credit rating. If the information in your credit file is accurate and your credit rating is lousy, you likely need to focus on getting your personal finances in order. But don't overlook the importance of managing key elements of your finances that can help improve your FICO score while you work out of your predicament.
For example, if your credit score is low because of high credit card debt, transferring balances between cards and onto new, lower rate cards might reduce your overall interest rate, but it also can lower your credit rating. In another example, having one $5,000-limit credit card maxed out is generally worse than having two $5,000-limit credit cards with $2,500 on each of them.
You can get a lot of insight into how to manage the elements of your FICO score by purchasing a credit report with an accompanying analysis that highlights the good and bad points of your credit history along with tips for improving your score.
If you have or can develop the discipline to stay away from credit cards in the future, then a consolidation loan can be used to pay off your credit cards and reduce your interest payments dramatically. Too often, however, people take out equity loans and extinguish their credit card debts only temporarily. A bad situation gets worse.
BAD CREDIT--NOT YOUR FAULT: This is the really frustrating side of bad credit. From innocent (but damaging) errors in your credit history to fraudulent charges and outright identity theft, fixing bogus information in your credit record is a tall task. Start by picking up the phone and calling the credit history companies to report the problems, especially if you have discovered that you may be the victim of identity theft.
What about credit "fixit" firms? I haven't run into one yet that I would give my recommendation to. Spend the time to report inaccuracies in your credit history through the systems available from the three major credit history companies. Some people say that sending letters via return-receipt certified mail is more effective than using website reporting tools. Either way, first go to the websites of Experian, TransUnion and Equifax to find out how to report errors and what rights you have as a consumer.
Click here for my list of recommended credit monitoring companies.
Whether you're at fault or not, a poor credit score can cost you a lot of money and cause you plenty of frustration.