Credit ratings are necessary for people who want housing, mobile phones, cheap loans, and a fair market insurance rate in our computer connected world. To rent an apartment, purchase a home, get insurance, or buy an automobile, a credit rating will affect not only the ability to get these items, but also the price it will cost. Even to get automobile insurance a person needs a credit rating.
A person who desires to buy a home needs a good credit rating to get a mortgage on the home. A mortgage is borrowing from the bank with interest. The bank lends the person the money against the value of the home and that money is known as the principal.
If a person is renting an apartment, a credit rating is checked to see if a person can afford the rent and pay the bills on time. To get an apartment, many landlords look at the credit rating to judge a person’s ability to pay the rent on time.
The credit report lists all the loans that have been made in the last six years and how well a person did at paying their monthly payments on those loans. The credit rating is a single number of all those loans and payments, including insurance, house payments, rent, auto insurance, car payments. The credit rating is a single three digit number based on things like the length of time it took to pay a bill, the number of late payments, and about the potential debt to income ratio. A high credit score demonstrates that the person paid back their loans in regular punctual installments over a period of time.
Establishing a Credit Rating
The first step in establishing a credit rating is to open a savings account. The second step is to get things in the person’s name that require regular monthly payments like a newspaper subscription, a phone, utilities, and even rent. Some companies, like utilities companies, are now reporting your payment history to credit raters. These things establish proof the individual can pay commitments on a regular, monthly, long term basis. Proving one can make regular monthly payments by showing bills like phone and subscriptions are paid regularly for as extended amount of time is calleda non-traditional proof of credit.
A few people have taken on the credit rating more assertively. They have gone to a bank or credit union that knows them well and explained that they are building a credit rating. They asked to borrow a thousand dollars to put into a saving account. They paid the loan back at a hundred dollars a month for just under one year with interest. At the end of the loan, they have established a credit rating and have a thousand dollars in the bank. This is extreme, the thousand dollars and the credit rating cost the person $100 dollars if the bank charged them 10% interest and it requires discipline, but is a way to build a credit history or begin to repair a poor credit history.
Guardianship and Credit
It is possible for a person with a legal guardian to establish a credit rating. Guardianship means the individuals rights have been transferred to another person for protection of abuse because the individual cannot make informed decisions. These rights were transferred because this the person cannot legally enter into contracts. If a person with a guardian wants to rent an apartment the guardian must sign the lease. In no way is a guardian responsible for the monthly payments or rent.The Guardian is making an informed decision for the person. The Guardian is not guaranteeing the lease.
Revealing the Raters
People that pay cash for everything do not have credit ratings. People that get loans and pay all of them off much earlier than they promised are surprised when their credit rating is low. They complain that they have never been late on a payment and in fact pay businesses back the money much quicker than the loan terms. These people and their situation reveal something about credit ratings. These Credit ratings are not meant to be a communication about how smart the lender is with their money. Paying someone (interest) to use their money is not always the best use of the money a consumer has and is almost never the cheapest way to buy something. The credit rating is designed to tell other lenders which people are good customers. Which people pay the most for the money they borrow. This causes a friction. We want a good credit rating, we need a good credit rating to accomplish some things like getting low interest loans, but we want to be smart about the use of the money we have.
Three credit reporting agencies: Equifax, Experian, and Trans Union. These companies issue credits reports that are shared to companies that request them.
For example, if a bank wants to know how much to lend a person for a mortgage, money borrowed to buy a house from the bank and the interest on that money loaned, the bank will check their credit score.
Also, if a landlord of an apartment wants to know if the applicant can pay the rent on time before renting, the landlord will check the credit rating of the person.
Requesting a Report
The three credit reporting agencies do not necessarily report to each other, so what is reported on one of the credit reports may not be on the other two credit reports. It is your right under the Consumer Credit Act 1974, to write and get your files. The experts suggest requesting a free credit report once a year on-line. When checking a credit report look for mistakes, look for fraudulent activity, and look for credit that was not initiated by the specific consumer. This free credit rating may be requested to the Federal Trade Commission at www.annualcreditreport.com. Beware of impostor websites that misspell or mislead people looking for the annual free credit report. An individual may also request a credit report from each of the credit reporting companies: Equifax, Experian and Transition.
What’s Not on The Credit Report
Banks need a variety of information to make their decision, whether to lend to a person. Yet the info they have is by no means comprehensive.
There are many myths about what information is held on credit files. The credit reporting agencies hold an enormous amount of financial data, but this data does not report everything about you. The following things are not listed on a report:
- Fines. Any fines that have incurred, for example parking or driving fines. Even though they’re issued by the courts they aren’t credit issues so they’re not listed.
- Medical History. Medical problems you may have had in the past aren’t listed
- Criminal record. No criminal convictions are listed
- Information on relatives. Provided you don’t have any joint financial products there is no information about members of your family who live, or have lived with your or any other third parties.
- Student Loans. This information is not currently supplied to credit reference agencies, so whether you have a student loan or not, is not included in your file. The only exception is if you have a county court judgment against you for lack of payment, then that can be included.
Credit history over 6 years old will also not be on the credit report.
Once an error is found on a credit rating it needs to be corrected. On the credit report the agency or bank that gave out the loan will have an address. Write corrections that need to be made with an explanation and copies of documentation and mail them to the lender and/or credit reporting agencies. It is suggested that the person write a letter to all three companies as they do not share information with each other.