Credit Basics Course
Lesson One: The Value of Your Credit
Chapter One: How Good Credit Benefits You
Using and building consumer credit can either benefit your life or damage your finances, depending upon how you use it. Let’s first look at the benefits of having good credit. Above all, a positive credit reputation can mean that the cost of borrowing money is lower, making home ownership, for example, much more affordable.
Additionally, good credit can mean that you are more likely to be hired over an equally qualified candidate who might have poor credit.
Good credit can lead to qualifying for a more affordable apartment lease than you might otherwise get.
Good credit can be the difference in qualifying for a utilities account without a security deposit.
Good credit can qualify you for a monthly cell phone service plan that comes with a lower monthly cost and with perks not available to those with poor credit.
Your good credit can even mean you pay smaller monthly premiums on your car insurance than your neighbor with a similar driving record and vehicle but who has poor credit.
As we share information about consumer credit, its benefits and its challenges, keep in mind that your credit history and rating are not reflections of who you are as a person nor of your value to society. Do not get hung up on building credit for credit’s sake. Using credit inappropriately, like the improper use of a simple hammer and a nail, can also lead to great pain and frustration.
Let’s go over some of the downsides to consumer credit, particularly for those who abuse it, neglect it, or use it unwisely.
Chapter Two: How Poor Credit Affects Your Life
The improper use of credit includes purchasing goods and services you cannot afford, missing payments, maxing out credit and store cards, applying for too many accounts, and having accounts go to collections or be charged off by the creditor. Filing for bankruptcy, trying to settle your debts for less than what you owe, and doing anything else than paying according to your agreement with the creditor will lead to a poor credit history.
So, how might poor credit negatively affect your life? Obviously, failing to qualify for a home loan or a start up business loan could be devastating both financially and emotionally. What’s more, poor credit can mean you do not get the job you wanted in law enforcement, government, finance or other industries that use credit in their hiring processes. Poor credit can mean you pay much higher premiums on your car and homeowners insurance.
Fortunately, poor credit is not forever. There are many ways to build and rebuild your credit, which we will share in chapter #3 of this video series. For now, let’s make sure to differentiate between your credit report and your credit score.
Chapter Three: The Difference between a Credit Report and a Credit Score
What is the difference between a credit report and a credit score? It’s a common question. Simply put, your “report” lists all the information related to your debts and credit activity over the past seven to ten years or more.
Your credit “score” on the other hand, is a rating or a grade based upon the information found on your credit report at the time your score is generated. The credit score attempts to predict your future credit behavior. After all, the best predictor of future behavior is past behavior. This is why credit scores are based upon patterns of behaviors over nearly a decade, and not on a snapshot of your current financial situation.
Look at it this way, if you were a lender and saw two potential borrowers, A and B, with similar numbers of accounts and amounts of debt, you would be tempted to believe they present equal risk to you as a lender. However, if you looked at their past 7 years of debt behavior and noticed that borrower A has reduced her debt by more than half during that time while borrower B has more than doubled his debt during the same period, you will likely feel more comfortable with the direction borrower A is headed than borrower B.
Your credit report is your history of borrowing that can reveal your debt’s direction. Your score may look like a snapshot of where you are, but it also uses your history to predict future direction.
What kind of information is listed on your credit report that would show such patterns and directions?
Find the answers in our next chapter.
Chapter Four: What Is on Your Credit Report
While each of the three consumer reporting agencies (Equifax, Experian and TransUnion) vary their credit report formats a bit, they all include six general sections:
Your identifying information (Name, social security number, addresses, phone numbers, possibly your current or past employers).
Your debts and credit accounts from the past seven to ten years, also known as your Trade Lines.
Your trade lines might be split into two or three sub-sections, including Potentially Negative or Adverse accounts (such as collections, charged off accounts, and accounts with late payments listed), Accounts in Good Standing and possibly a stand-alone section listing collections.
The Public Records section, which, since 2018, only lists any bankruptcies you have filed in the past seven to ten years. It used to list judgments and tax liens, but this is no longer the case.
The inquiries section lists all organizations that are looking at your credit reports and is divided into two main sub-sections. The Active or Hard inquiries section lists all creditors with whom you have applied for a loan, line of credit or account in the past two years. The Soft or Passive inquiries section lists anyone else who has looked at your credit report in the past two years. The soft inquiries might be divided into two additional subsections: the account review inquiries section lists companies with whom you have a business relationship (such as a lender or insurance company), while the promotional inquiries section lists companies who might consider sending you a promotional offer in the mail (such as a credit card or car insurance offer). Companies listed in the soft inquiries sections are not visible to anyone other than you.
The Consumer Statement section allows you to add a very brief explanation of anything on your report. We usually recommend that you only explain inaccurate information that you may struggle to get removed. Examples include issues resulting from identity theft or recurring name confusion.
Credit reports include a section at the end that explains your legal rights and how to dispute inaccurate information.
Have you ever wondered about other information that seems like it should be on your credit report? Find out if it is based on myths or not by sticking with us for the next part of this video on items that are not on your credit report.
Chapter Five: What Is NOT on Your Credit Report
Many myths exist about information included on your credit report. Some myths would be frightening if they were true. Here is the credit report reality:
Your income is not listed on your credit report or gathered by the credit bureaus.
Whether you are employed or unemployed is not listed. Your report might list current or former employers, but such information is never a factor in your credit rating.
Discriminatory factors such as race, ethnicity, gender, disabilities, country of birth, sexual orientation, religion and primary language are NOT listed anywhere on your credit report.
Criminal records, traffic violations, parking tickets, judgments, wage garnishments, evictions, and tax liens are also nowhere to be found on your credit report.
However, if at any time an account ends up in collections, it will show up as a collection account on your credit report.
Who cares, though, what is or is not on your credit report? Other than potential lenders, does anyone really look at your credit history? Absolutely. Keep watching to learn just who is making decisions that affect your life and base those decisions on your credit report.
Chapter Six: Who Is Checking Your Credit
Only organizations with a legitimate business purpose can check your credit report. Usually, this involves getting your permission before they can look at your information, but not always. The main organizations looking at your credit report might include:
Potential home, auto, personal, private student loan, and even some business loan creditors.
Property management companies.
Potential employers during the application and hiring processes.
Car insurance companies. (almost all)
Utilities and cell phone providers.
Some of the less common situations where an organization will look at your credit might involve:
financial planners if you want to trade on the margin through their brokerage, private schools for your children, providers of elective medical procedures, and some government agencies including some courts as well as agencies involved with child support and other familial obligations.
If you didn’t hear a description of someone you are worried might be viewing your credit, check out our next video segment to find out definitively who is NOT looking at your credit.
Chapter Seven: Who Is NOT Checking Your Credit
You might easily assume that companies not listed under those which check your credit must by default be listed with those that do NOT check your credit. And you would be correct. However, there exist multiple myths about who is checking and who is not checking your credit, and some that might even lead you to believe that you can build or rebuild your credit by using the services or products of businesses who do not actually check your credit. Let’s get this out there right here: if an business does not check your credit, then they will not report your activity either, which means it will neither help nor hurt your credit.
When it comes to businesses involved in lending you money or items, you should expect to pay much higher fees if they do not use your credit history as a basis for their services. These higher fees has much less to do with your income and everything to do with their inability to predict whether you will pay as agreed based upon your history of credit activities.
Businesses that do not check your credit and, consequently, will charge you extremely high fees for loans and contracts include payday lenders, automobile title lenders, vehicle equity lenders, pawn shops, rent-to-own companies and even many car dealerships, particularly those advertising ”buy here pay here” options.
Before using any such business, be doubly sure of the fees and interest rates they will charge you for the “convenience” of not checking your credit.
Is there a way of identifying specific businesses who have looked at your own credit report? There is.
Coming up next is a video about how to pull your own credit report and explains where to find the names of companies who have looked at your credit history in the past two years.