The Doom of the Credit Report
The words “credit report” can strike fear and dread into hearts everywhere. Misunderstood, abused and yet so influential on your finances, the credit report is a huge piece of your money management. What is it and how does it work?
A credit report shows your history of how you manage your money. Every account you’ve opened with a company – be it a utility, a store, or a credit card – will be on your credit report. Companies use this information to determine if you can open a new account with them, and if they should ask you for money up front before they open that account with you. And every month, the companies you have accounts with report to the credit report agencies how you are doing with managing that account.
Your credit score is a number assigned to you, based on your credit report. It basically summarizes how well you’re doing at managing your money. Credit scores can vary from country to country, and with different credit reporting companies. In Canada, credit scores range from 300 – 900, with 650 and above considered good. In the United States, scores range from 330-850, and 700+ is considered a good credit score. And in the UK, scores range from 560-999, with 881 and above thought of as excellent.
The major credit reporting agencies are FICO, Equifax and Experion.
What affects your credit report?
The biggest impact on your credit report is how you pay your bills. A third of your credit score is determined by your payment history. Every time you are late on your payments, it will negatively affect your credit. The later you are with your payment just makes it worse. And not paying at all is devastating.
If you don’t pay your bills, often companies will hire other companies to try to collect on those debts. The effect on your credit report is huge if you have an account that goes to one of these collection companies. If you don’t respond to the collection agencies and pay your bills then, you may end up with court judgments, liens (claims placed on your assets, such as a house or car against your debts), and wage adjustments – where a collection agency takes a certain amount off a paycheck. You may even end up being forced to declare bankruptcy, which will destroy your credit for years.
How much do you owe?
The 2nd biggest impact on your credit report is how much you owe. Actually, what affects your credit is how much you owe in relation to how much credit you can get. If you owe millions but you can get credit for billions, you have good credit. If you owe $1000 but you can only get credit for $1000, then your credit will be negatively affected.
Your credit report is also affected by what kinds of credit you have. Good credit means you have a variety of different kinds — credit cards, lines of credit, utility accounts and maybe a loan or mortgage — and you can manage it all well. If every credit account is paid on time and none of them are maxed out, you will have excellent credit.
How long is your credit history?
It’s a myth that having no debts at all will improve your credit. This may seem strange, but to have a good credit report, you actually have to use your credit accounts. Lenders want to see you owe a little bit, and be responsible in paying it back. Remember, your payment history is the biggest influence on your credit report.
This means that someone who is just starting out doesn’t have good or bad credit. No credit is almost the same as bad credit. They may have issues getting some kinds of credit accounts. Good credit means you have a long history to show of managing your money well.
How many times are you opening new credit?
A small portion of your credit history relates to how often you are looking to open new credit accounts. Trying to open several new accounts quickly will negatively impact your credit report, because lenders will assume you are having cash flow issues, or have had a major life change, such as moving, a new job, or a marital change. All of those major life changes can impact how well you can manage your money, and that makes you a bigger risk.
That’s why credit checks can impact your credit score. Whenever a company checks your credit record, that also gets noted on your file. Too many checks and you can negatively impact your credit.
How to improve or maintain your credit
The best way to maintain your good credit history — or to improve a poor history — is to simply pay your bills in full, on time. That is the single most important thing you can do to affect your credit report. Pay your bills.
If you are struggling with debt, you may need to get help. Talking with a credit counselor doesn’t affect your credit history — it won’t get noted on your file. Credit counselors can help you negotiate repayment schedules with your lenders, create realistic budgets and start saving.
Worst case scenario
The worst case scenario is getting such poor credit that the only way to fix it is to declare bankruptcy. This is the equivalent of blowing up a condemned house, in order to start over and build fresh. It’s extreme, it’s devastating, and it should only be used as a last resort.
Declaring bankruptcy means getting a lawyer, filing paperwork, and paying a fee (almost $2000 in Canada!). Then you turn over all your income and financial matters to a court trustee, who will then manage your debts and assets, wipe your slate clean again, and stamp “Bankrupt” all over your credit report.
Going bankrupt means that you will not be able to get any kind of credit for years. It will impact your finances for up to a decade! It is not a quick fix, it isn’t an easy thing, and even bankruptcy won’t take care of all your debts. Some things like student loans, taxes, child support or legal fines will remain even after bankruptcy. Declaring bankruptcy isn’t the easy way out of your debts.
Get your Credit Report
Most of the major reporting agencies will let you access your credit report free, once per year. Usually it means writing in via postal mail, providing proof of ID, and waiting 2-5 weeks for your credit report in the mail. You can also go on their websites to pay a small fee, and access it right away.
It’s a good idea to check your credit report regularly. This way you can spot potential fraud or inaccuracies that may affect your credit history quickly, and correct them right away. Mistakes can happen.