The Basics of Money and Credit

In this series, Our team shares their thoughts on the basics of Money and Credit. These topics are typically covered with new customers.

First, let’s start with the basics of credit.

What is Credit?

Credit is other people’s willingness to let you use their money that you will repay sometime in the future.  It is a privilege, not a right. By “other people,” we typically mean banks, credit unions, and credit card companies.

“Credit” can be used interchangeably with “loan.”

How do you earn credit?

To earn the trust of the lenders in the form of “credit, you need to demonstrate you can borrow money and pay back on time. Check out a good article by Nerd Wallet: How to Build Credit

What are the types of credit?

Categorized by how the credit is extended and how it is paid back, credit falls into the following three categories:

Installment Loan: require regular payments, usually monthly, until the principal is paid off. Car loans, student loans, and mortgage all fall in this category.

Revolving Credit: includes bank credit cards, store credit cards, and home equity line of credit. You are required to pay at least the minimum payment by the due date. You can pay the minimum amount, the full payment or anything in-between. You can keep using the credit as long as you pay the minimum and stay within the credit limit.

Service Credit: used for monthly utility bills, such as electricity, gas, and yes, your cell phone bills. You set up an account, use a service and get billed by the service provider.

What Are the Advantages of Credit

You can get instant gratification, “buy now and pay later”;
Usually, no interest is charged when credit card bills are paid in full by due date;
Credit cards are safer to carry around than large sum of cash around;
Keep record of how you spend money so you can analyze your spending habit;
Some credit cards offer “bonuses” such as cash back or frequent flyer miles.

What Are the Disadvantages of Credit

Interest costs can be very high. How high? 15-20% for unpaid credit card balance is very common.
If you only pay the minimum each month, then the pay-off period will extend to very long
Since you owe so much money to other people already, you may not have much buying power left in the future

What is a Credit Report?

Lenders do not take your word for it when they come to determine whether to extend credit to you; instead, they pull your “credit report”.  It is kind of like your “school report” but lists different things. It describes your past use of credit, such as being on time in paying back debt, types of credit accounts opened, number of loans applied for, and a number of outstanding balances.

Three companies, called credit bureaus, gather information about you and give it to lenders. These three companies are:

Equifax (www.equifax.com)
Experian (www.experian.com)
Trans Union (www.transunion.com)

You can order your credit report once a year to check for errors or see if your identity has been stolen. Following the directions that come with the report, you can fix the errors.

What are Credit Scores?

Sometimes referred as a FICO score, a credit score is a three-digit number that describes your trustworthiness, or your future bill-paying behavior. It ranges from 300 to 850.  Lenders look that the number and decide whether to give you a loan and on what terms if any (interest rate, down payments, etc.).

These factors affect your credit score:

Previous payment history
Amount money owed
Number of recent credit inquiries
Length of credit history

These are only a few of the money basics we go over with new clients. If you have any questions or need help in any of the areas we discussed here, please don’t hesitate to reach out for a Free Initial consultation with one of our counselors M-F 9am-5pm pst at 854-888-0321

Experian, TransUnion, and Equifax Announced Major Changes That Could Give You a Better Credit Score

Some Americans may see a boost in their credit scores this summer thanks to new policies adopted by credit report agencies Experian, TransUnion, and Equifax.

The big three credit bureaus will eliminate some negative information from appearing on credit reports, according to the Consumer Data Industry Association, a trade association that represents them.

But before you anticipate more credit approvals on the horizon, it’s important to keep in mind that these changes will likely affect only a small portion of the population. Here’s how these credit report updates may impact you this year.

Policy Changes Address Consumer Complaints
Experian, TransUnion, and Equifax will exclude tax liens and civil judgments from credit reports if the data does not include the borrower’s full name, address, and either a Social Security number or date of birth.

The credit bureaus say the new policy will take place on July 1, 2017. It will apply to new tax lien and civil judgment data added to credit reports, as well as existing data.

Many debt collection firms that take borrowers to court do not have all of the above identifying criteria when suing for unpaid debts. Therefore, the credit bureaus may eliminate most civil judgments resulting from unpaid debts from the credit histories of some borrowers.

This change springs from regulatory concerns raised by the Consumer Financial Protection Bureau (CFPB) earlier this month.

According to the CFPB, there have been 185,700 complaints related to credit report disputes since February 1 of this year. Consumers often complain that the credit bureaus include damaging inaccuracies on credit reports or disproportionately lower credit scores because of non-loan related debt.

And even after they dispute inaccuracies or issues and the credit agencies resolve them, consumers say their credit scores do not improve.

Since 2015, the three credit report agencies have reached settlements with more than 30 states over how they handled credit reports. They also now remove non-loan related items such as unpaid gym memberships and traffic tickets.

Additionally, all three credit bureaus will remove medical debt collections accounts that have been paid by a patient’s insurance company from credit reports by 2018.
How it Will IMpact Credit Scores:
Removing tax leins and civil debts could potentially cause credit scores to raise. Some consumers will appear more creditworthy tanks to these developments.

But even for those who will benefits, an increase in their credit scores will be modest. FICO projects that just under 11 million people will experience a score improvement of fewer than 20 points, according to The Wall Street Journal.

What’s more, lenders will still be able to check public records on their own to find information about tax leins or other debts, even if the credit bureaus don’t report it.

Still, lenders may be nervous about this change. Even a modest bump can make formerly ineligible borrowers suddenly eligible for loans or other forms of credit they would not otherwise receive. And that means lenders will be shouldering more risk when it comes to debt.
Will You See a Change?:
While some people will see an increase in their credit scores, the updates from the credit bureaus will not affect the majority of the population. Experts expect 12 million people in the United States to be affected. That’s only six percent of the population.

This is because the changes do not impact how the credit bureaus report common debts such as missed bill payments for rent or utilities, credit card debt, or student loans. These common forms of debt will stay on your credit report as they are today.
What Can you do to improve Your Score?:
Before the changes go into place on July 1, you can take action now to ensure your credit report is in good shape and that your credit score is accurate.

One of the best ways to maintain an excellent score is to monitor your credit report regularly. Remember, you are entitled to a free credit report from each of the three credit bureaus once every year.

You can collect all three credit reports at once or stagger reports and take out one every four months. The latter option allows you to check your credit throughout the year without having to pay for an additional report.

During your credit report review, look for any inaccuracies or fraudulent activity. It’s possible to find a simple mistake, such as an account belonging to someone else with a similar name listed on your report. If someone fraudulently took out a loan in your name, you can catch it early this way, too. By reaching out to the reporting credit bureau, you can have these items removed and boost your scores.

Make sure you also keep up with the minimum payments on all of your debts, including credit cards, student loans, and car payments. Making payments on time significantly impacts your credit score in a good way.
Managing Your Credit Score:
While the changes made by the three credit reporting agencies are a huge shift in the industry, it is unlikely that these updates will dramatically affect many people.

So before getting excited about your credit score improving  overnight, take stock on your current situation and identify areas for improvement. By taking an active role now, you can set yourself on the path to a more secure financial future.

How to Fix Your Credit Score After Bankruptcy

When you undergo a bankruptcy, you don’t only have to deal with your strained financial conditions, but it affects your credit score as well. When your credit score is poor or bad, the consequences are not good because you might face troubles like getting a rented house and often fail to get bank loans for purchasing a new car or a house.
Improving the poor credit score is importantDo you know a bankruptcy can remain on your credit score for several years? Thus, it is extremely important to improve your credit score. How will you improve the poor state of your credit? There are some real and practical means to improve your credit score and get back on a better financial track.
Give importance to the following steps

Check what your credit score is and then review the credit report. You should firstly obtain a copy of your credit report and check it properly so that there aren’t any mistakes or errors.
Do you know paying bills on time is one of the easiest and simplest ways to fix your credit score after a bankruptcy? Almost 35% of your credit score depend on your payment history. Therefore, make sure that you are paying all your bills (electricity, phone, internet, gas etc) on time.
Don’t indulge in unnecessary expenditure. You must understand your limits and therefore purchase things accordingly. Buy only those items and products that are extremely essential. Curtail down your expenditure on luxury items.
There are several credit repair services available today. Before you enroll yourself to any such services it is important to investigate properly because they are quite expensive and instead of repairing your credit score you might end up in a poor condition.
You have to make sure that you keep your credit cards balances’ low. If you can keep your credit card balance low without exceeding the limit, there is every possibility in the improvement of your credit score rapidly.
If you are applying for a new credit card account, you have to be very cautious and careful.
Don’t rush to fix your credit. Go slow and rebuild your credit score. If you rush on things there are possibilities of making errors and mistakes. Don’t invite new problems and gradually and slowly achieve the credit score that you have been longing for so long.

Be patient and follow these steps to fix your credit score. You have to understand that you cannot improve your credit score overnight. It will take months and maybe even several years to fix everything.
By following the guidelines you will be inviting a better and improved financial condition and exceptionally good creditscore. That day is not far away when you will be free from all kinds of debts and poor credit score will be history.
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