Credit Lesson 2

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Lesson 2 Agenda

In Lesson 2, you learned the fundamentals of credit and the key factors that impact your credit score.

Part 1

Intro To Credit Reports

 

Welcome to Lesson 2 of your Credit Explorer e-course! Let’s continue building upon your foundational understanding of credit and financial literacy.

By the end of this lesson, you’ll know:

What a credit report is
Who the credit bureaus are
How to review your credit reports
How to dispute inaccuracies on your credit report

What Is a Credit Report?

Your credit report is a comprehensive record of your credit behavior and financial history. Imagine your credit report as a portrait that captures the essence of your financial life.

It contains information about:

Your credit accounts
How you’ve managed them
How others have inquired about your credit

What’s The Difference Between a Credit Report and a Credit Score?

People tend to use these two terms interchangeably, but there is a difference!

As mentioned above, a credit report is a record of your financial history, while a credit score reflects the information found in your credit report and is used to determine your creditworthiness.

The Elements of a Credit Report

This comprehensive view helps lenders, landlords, and even potential employers gauge your financial reliability. As you can imagine, it’s essential to know what information is included in your credit report!

Explore the 4 different elements that make up your credit reports below.

“Credit can be a double-edged sword. Use it wisely, and it will be your servant. Misuse it, and it can be your master.”

– T. Harv Eker

This section showcases your track record of making payments on time or any missed or late payments. Consistent on-time payments enhance your creditworthiness!

Charge Cards are not to be confused with a credit card. A charge card is commonly issued by retailers for use exclusively in their establishment. Charge cards are relatively rare these days. They are used in much the same way as credit cards, but they don’t permit you to carry a balance and must be paid in full at the end of each billing cycle.

Whenever someone checks your credit, an inquiry is recorded. “Hard inquiries” are typically initiated when you apply for new credit. Multiple inquiries within a short time might raise concerns about your financial stability.

Any financial or legal issues related to debt, such as bankruptcies or tax liens, are also documented. These records have a significant impact on your credit score.

Major Credit Bureaus Explained

There are three major credit bureaus in the United States: EquifaxExperian, and TransUnion. These bureaus collect and maintain credit information.

Lenders and creditors report your credit activities to these bureaus, which in turn compile the data to create your credit report.

Part 1

Checking Your Credit Report

Imagine your credit reports as mirrors reflecting your financial image. Just as you’d glance in the mirror to ensure you look your best, regular credit report checks are essential to maintaining your financial well-being.

Knowing how to check your own reports can also keep you safe from scammers! There are plenty of people that claim they can help you with credit repair and credit building – but the best person to take control of your financial future is you.

Identifying Errors and Discrepancies

Think of errors on your credit reports as hidden obstacles in your financial path. These errors, whether due to human errors or identity theft, can hinder your progress if left unattended for too long.

Why Errors Happen:

Mistaken Identity: Imagine someone else’s name tagged to your financial reputation. Mistaken identity can lead to someone else’s debts negatively impacting your report.

Data Entry Mistakes: Just like typos in your personal information can mess up a document, errors in entering your financial data can distort your credit report.

Fraudulent Activities: Consider if someone stole your identity and started opening credit accounts in your name. Detecting these accounts requires vigilant checking.

Tips for Effective Credit Report Checks

✔️  Set Reminders: Schedule quarterly or biannual reminders to check your credit reports. Consistency is key.

✔️   Rotate Bureaus: Request a report from a different bureau every few months to get a comprehensive view.

✔️   Use Authorized Sources: Obtain your free reports from authorized sources to avoid scams.

✔️   Take Notes: Make a habit of jotting down key details and discrepancies you find.

✔️   Don’t Delay Action: If you spot an error, dispute it promptly with the credit bureau.

Now that you know what to expect to see if you were to pull a credit report, it’s time to take a deep dive into your own! Unlock the secrets held within your credit report and uncover the key factors that shape your financial standing.

With this valuable information at your fingertips, you can pave the way towards a brighter and more secure financial future…

CREDIT STORE

FICO scores are more established and have been the industry standard for many years. They are commonly used by mortgage lenders and are often required for mortgage applications.

History: FICO (Fair Isaac Corporation) was founded in 1956 by engineer William R. Fair and mathematician Earl J. Isaac. It introduced the FICO credit score in 1989, which revolutionized the way creditworthiness was evaluated.

Algorithm: FICO uses complex algorithms that analyze credit data from credit reports. It considers payment history, credit utilization, length of credit history, credit mix, and recent credit inquiries to calculate credit scores.

Credit Score Range: FICO scores range from 300 to 850, with higher scores indicating better creditworthiness. The score is divided into different categories, such as poor, fair, good, very good, and exceptional.

Part 3

You Have the Right to Take Control Of Your Financial Narrative

With proper education, you can solve any financial challenges with confidence!

Understanding your rights as a consumer when it comes to credit reports is essential. The Fair Credit Reporting Act (FCRA) ensures that you have the right to access your credit reports and dispute any inaccuracies. Familiarize yourself with these rights to protect your financial well-being.

Empowerment Through Awareness

Think of checking your credit reports as having a map to navigate your financial journey. It empowers you to make informed decisions and protect your financial interests.

Taking Charge Against Identity Theft

Suppose you spot unfamiliar credit inquiries or accounts. It’s like finding a trail of breadcrumbs left by a thief. With this knowledge, you can take immediate action to prevent further damage.

Using Reports as a Guide

Your credit reports are like a roadmap guiding you to financial stability. If you notice high credit card balances or missed payments, you can take corrective measures to improve your financial path.

Need to Know Credit Laws and Consumer Protections

The Equal Credit Opportunity Act (ECOA) prevents lenders from discriminating against people or businesses based on non-financial factors.

Top 3 tips on what you need to know about ECOA:

1. You have the right to be not discriminated against.

A lender cannot discourage you from applying or discriminate against you based on factors that include:

  • Race
  • Color
  • Religion
  • Marital status
  • Age (unless you’re too young to sign a contract)
  • Whether the applicant receives public assistance
2. You have the right to withhold information about your spouse.

The ECOA limits the information lenders can ask about an applicant’s spouse only in certain situations, like a joint application, when you’re relying on your spouse’s income to pay the account, or applicants made in community property states. The lender isn’t allowed to ask whether an applicant is widowed or divorced. Only the terms married, unmarried, and separated can be used.

3. You have the right to a written statement when denied credit.

Under the ECOA, lenders are required to send an explanation to applicants whose application for credit is denied. The explanation must be made within 60 days of the decision and must include the specific reasons for the decision.

The Fair Credit Reporting Act (FCRA) protects your rights when it comes to credit reports and credit bureaus. What this means for you is that the information in your credit report must be accurate, fair, and private.

Top 3 tips on what you need to know about FCRA:

1. You have the right to know what is in your credit reports.

FCRA requires that credit reporting agencies provide you with a free credit report every 12 months.

You are also entitled to a free file disclosure if: (a) adverse action has been taken against you as a result of what is in your credit report; (b)you are a victim of identity theft; (c) your file has inaccurate information due to fraud; (d) you are unemployed and expect to apply for employment within 60 days, and (e) you are on public assistance.

2. You have the right to know if adverse action has been taken against you.

If your file has been used to take adverse action against you, then you must be notified of such action. You must also be provided with the name, address, and phone number of the agency that was provided the information.

3. You have the right to dispute errors in your credit report.

You can dispute incomplete or inaccurate information, and request the information be deleted or corrected.  In order to do this, you must contact the credit bureau or the party who provided the incorrect information to the credit bureau.

Your dispute must be investigated within 30 days, and the credit bureau must correct or delete inaccurate, incomplete, or unverifiable information. Upon completion of your investigation, the credit bureau must provide their findings in writing and a free copy of your report if there is a change due to your dispute.  This report does not count as your free annual report.

The Equal Credit Opportunity Act (ECOA) prevents lenders from discriminating against people or businesses based on non-financial factors.

Top 3 tips on what you need to know about ECOA:

1. You have the right to be not discriminated against.

A lender cannot discourage you from applying or discriminate against you based on factors that include:

  • Race
  • Color
  • Religion
  • Marital status
  • Age (unless you’re too young to sign a contract)
  • Whether the applicant receives public assistance
2. You have the right to withhold information about your spouse.

The ECOA limits the information lenders can ask about an applicant’s spouse only in certain situations, like a joint application, when you’re relying on your spouse’s income to pay the account, or applicants made in community property states. The lender isn’t allowed to ask whether an applicant is widowed or divorced. Only the terms married, unmarried, and separated can be used.

3. You have the right to a written statement when denied credit.

Under the ECOA, lenders are required to send an explanation to applicants whose application for credit is denied. The explanation must be made within 60 days of the decision and must include the specific reasons for the decision.

The Fair Debt Collection Practices Act (FDCPA) doesn’t pertain to your credit directly, but it governs what third-party debt collectors (who do have some impact on your credit) can do when they’re collecting a debt from you.

Top 3 tips on what you need to know about FDCPA:

1. You have the right to keep your debts private

If a debt collector contacts someone you know—a friend or family member—to get information about you so they can contact you, the collector isn’t allowed to reveal that they’re collecting a debt.

2. You have the right to stop debt collectors from contacting you

The FDPCA defines when debt collectors can contact you—between the hours of 8 a.m. and 9 p.m. unless you’ve given them permission to call you at another time. You can stop debt collectors from calling you by sending them a written cease and desist letter letting them know that you want their calls to stop.

3. You have the right to not be harassed by debt collectors 

When they’re collecting a debt from you, collectors cannot make false statements, threaten you, harass you, call you repeatedly to annoy you or threaten to take any legal action that they’re not allowed to make or that they do not intend to make.

Under the FDPCA, you have the right to sue a debt collector who violates your rights. You could receive up to $1,000 in addition to actual damages and attorney fees

If you have bad credit, you may consider using a credit repair service to improve your credit. The truth is, a lot of these companies use dishonest and illegal methods to improve their customers’ credit. The Credit Repair Organization Act (CROA) is a federal law put in place to protect consumers from dishonest credit repair companies.

The law is intended to make sure that consumers who decide to use credit repair services are aware of their rights and are able to make an informed decision about choosing to pay a credit repair company.

Top 3 tips on what you need to know about CROA:

1. Credit Repair Companies have Restrictions

To protect consumers, credit repair organizations cannot legally do the following under the CROA:

  • Credit repair companies cannot lie to your creditors about your credit history. They also cannot encourage you to lie to current or future creditors.
  • Credit repair companies are prohibited from altering your identity in an attempt to get a new credit history.
  • The company must be completely honest about the services provided to you. They cannot misrepresent what they are providing you.
  • You should not be asked to pay for services before they have been provided.
  • All credit repair companies have to provide you with a disclosure that details your right to obtain a credit report and dispute inaccurate information yourself.
2. You have the right to a written contract

Before the credit repair company can perform any services for you, you must be given a contract, you must sign the contract, and the 3-business day cancellation period must expire. The contract should include the following:

  • Payment amount required
  • A description of the services that will be performed to repair your credit
  • An estimate of the time it will take to complete the services (or a date by which the services will be completed)
  • A visible statement letting you know you can cancel the contract within 3 business days. You’re allowed to cancel the contract within three days with no cancellation fee.
3. You cannot be pressured to waive your rights

The credit repair organization can’t ask you to sign any kind of form waiving your rights under the CROA. Any waiver you sign is considered void and cannot be enforced by federal or state governments. Organizations that violate the law can be sued for actual damages, punitive damages, and attorney’s fees.

You can report violations to the Consumer Financial Protection Bureau, your state attorney general, and file suit in your state. You have five years from the date the violation occurred (or the date you learned of the violation) to take action against the organization.

The Fair Credit Billing Act (FCBA) protects consumers from unfair billing practices and gives consumers the right to dispute, in writing, errors on their billing statements. While a billing error is being investigated, the consumer is not required to pay the disputed amount and cannot be penalized for withholding payment for amounts that are in dispute.

The Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) made significant changes to the law requiring credit card issuers to disclose pricing information for credit products when issuing new credit cards. Other requirements under the Credit CARD Act include:

  • Credit card companies must consider a consumer’s ability to repay before issuing a new credit card or raising the credit limit on an existing one
  • Give consumers a 45-day advance notice before increasing the interest rate
  • Send billing statements 21 days before the due date
  • Disclose the cost of making minimum payments and the time it will take to pay off the balance with minimum only payment
  • Only charge an over-the-limit fee when the cardholder has opted-in to having over-the-limit transactions processes
  • Not offer tangible incentives, like t-shirts or gifts, in exchange for college students who sign up for a credit card

Conclusion

Stay Informed To Make The Best Decisions

Understanding credit reports and credit bureaus is essential for maintaining healthy financial habits and making informed credit-related decisions. By regularly checking your credit reports, disputing inaccuracies, and implementing effective strategies for credit improvement, you’re on the path to mastering your credit journey.

Continue your credit education journey by moving on to Lesson 3, where we’ll explore credit building strategies and the power of rent reporting for credit improvement.

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