Credit Basics: A Credit to You

Welcome to A Credit to You: Credit Basics from Money Fit by DRS. Here’s what you can expect when taking this course. First, the course will present you with the disclosures and privacy statements required by our rep regulators. Sorry. Then the course will take you through 26 short lessons spread among three modules: one on the value of credit with seven lessons, two on your credit report with eight lessons, and three on your credit scores with eleven lessons.

Each lesson will consist of a few brief paragraphs to read. Some may also include videos, downloads, quizzes, and links to external resources.

Warning: Do NOT use the BACK button or Refresh option on your browser or your phone. It may cause you to lose your course progress. Instead, use the BACK button at the bottom of each screen.

To SAVE your place and continue later, use the SAVE button at the bottom of each screen. When doing so, we recommend you choose the "Skip Create an Account" at the bottom of your options unless you already have a JotForm account.

How much time should you expect to complete this course?

You should expect to take about 30 to 60 minutes to complete the entire credit for your course. You may complete the course in a single viewing or log out and return at your convenience.

How do you earn your certificate completion?

By following the steps through the course, you can master your credit report and score, whether you would like to know the difference between a credit report and a credit score or are looking for specific steps to follow for rebuilding your credit rating.

This course is for you.

To move from one module to the next, you will need to view each lesson and then complete the module quiz with a score of 80% or better or four out of five questions correct. Once you have gone through all three modules and completed the quizzes, you will receive a certificate of completion in PDF format.

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 homeownership, 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 utility 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 or truck 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.

How Poor Credit Affects Your Life

The improper use of credit involves many decisions, choices, and situations, including 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 other 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 vehicle, life, and homeowners insurance.

Fortunately, poor credit is not forever. There are many ways to build and rebuild your credit, which we will share in lesson #9 of the Credit Score module. For now, let’s make sure to differentiate between your credit report and your credit score.

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.

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 a period as long as 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 lesson.

What Is on Your Credit Report Report

Lesson 1:4

While each of the three main consumer reporting agencies (Equifax, Experian and TransUnion) vary their credit report formats a bit, they all include six general sections:

1. Your identifying information (Name, social security number, addresses, phone numbers, possibly your current or past employers).
2. 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.
3. 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.
4. 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.
5. 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 or corrected. Examples include issues resulting from identity theft or recurring name confusion.
6. 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 course on items that are not on your credit report.

What Is Not On Your Credit Report

Lesson 1:5

Many myths exist about the 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 going to learn just who is making decisions that affect your life and basing those decisions on your credit report.

Additional Information that Is NOT on Your Credit

Let's talk about five things you WON'T find anywhere on your credit report. They might surprise you.

What do you think? Which FIVE of the following are found on most credit reports and which are not?

1. Bankruptcies you have filed in the past 7-10 years
2. Your checking account activity
3. Your employer's name
4. Your employment status (full-time, part-time, unemployed, self-employed...)
5. Your income
6. Your loan and credit card interest rates
7. Your overdue child support
8. Your paid child support
9. Your phone number
10. Your race or ethnicity
11. Your religion
12. Your savings account balance(s)
13. Your speeding tickets
14. Your spouse's name
15. Your spouse's income
16. Your spouse's accounts

#1 will definitely be reported to the credit bureaus

Information possibly, but not necessarily, reported to the credit bureaus include #3, #7, #9, and #14.

The rest will not be found on your credit report. Some (like #10 and #11) are even prohibited by law to prevent possible discrimination.

Who Is Checking Your Credit

Lesson 1:6

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:

1. Potential home, auto, personal, private student loan, and even some business loan creditors
2. Property management companies
3. Potential employers during the application and hiring processes
4. Almost all auto insurance companies
5. Utilities and cell phone service providers

Some of the less common situations where an organization will look at your credit might involve:

1. financial planners if you want to trade on the margin through their brokerage
2. private schools for your children
3. providers of elective medical procedures
4. 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 lesson to find out definitively who is NOT looking at your credit.

Who Is NOT Checking Your Credit

Lesson 1:7

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 a 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 have 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 in the next lesson, learn how to pull your own credit report and where to find the names of companies who have looked at your credit history in the past two years.

 But first, let's review this lesson with a brief (and easy) quiz:

Click "Next" if you're ready to continue

Accessing Your Free Credit Report

Let’s start off with four simple steps to pulling your free, no-strings-attached credit report every twelve months from any consumer reporting agency:

1. Go online to AnnualCreditReport.com.
2. Enter your personal information including your name, date of birth, social
3. security number and your current address.
4. Answer three to four identity-confirmation questions related to information on your credit history.
5. Review your report online, download it, print it, or do all three.

If you prefer to request your reports by mail, you may send your request to:

Annual Credit Report Request Service
PO Box 105281
Atlanta GA 30348-5281

In some cases, you may be required to request your report by mail if the consumer reporting agency feels it needs additional security measures.

If you would like to order your reports by phone, call toll-free 877-322-8228.

But just who are these consumer reporting agencies, and why do they get to collect our personal information? Stay tuned.

Who Are the Credit Bureaus (Consumer Reporting Agencies)?

Lesson 2:2

A common question in many of our credit workshops involves concerns about who the consumer reporting agencies are and why they are allowed to essentially traffic in our personal information.

The three major, nationwide consumer reporting agencies, also known as credit bureaus, are Equifax, Experian and TransUnion. These are NOT government agencies. They are for profit businesses that gather and distribute our credit-related information. Not only do they have the right to use our information in their business, but we are the ones who have given them permission to do so.

Any time you apply for a credit card, store card, loan, line of credit, utility account, or cell phone plan, there will be a request for you to give the creditor permission to check your credit history. If you were to read the fine print, it will say something along the lines of, “With your signature, you give us permission to request and receive your credit-related information from the consumer reporting agencies and to report credit-related information from the account for which you are applying.”

Next up, let’s answer the question, “why are there three credit bureaus, and not just one?”

How Credit Reports Are Organized

Lesson 2:3

Another question we often get is, “why are there three credit bureaus and not just one?” Being for profit companies, each consumer reporting agency (or CRA) believes they can create a better product than their competitors. It is the exact same reason we have as many car makers as we do.

They all make cars, but they tailor them for their target market.

There are actually many more than just three credit bureaus, but most are typically regional or specialized and not used by national lenders.

We’re going to review this information again because it among the most important of the course. The main sections found on any credit report regardless of the bureau include:

1. Personally Identifying Information
2. Trade Lines
3. Public Records
4. Inquiries
5. Consumer Statement
6. Consumer Rights

Your personally identifying information usually includes any variety of names you’ve used when applying for credit accounts, as well as misspellings due to transcription errors. This information will also include your social security number (although we recommend you check the “exclude” option so your SSN does not end up on your report), a history of your addresses, phone numbers, spouse(s) names, and even employers.

Trade Lines make up the most important section of your credit report by far. You will find here a list of all your credit accounts from the past seven to ten years or more, the creditor’s name and address, when you opened the accounts, when you closed them (if they are closed), their current status (open, closed, charged off, included in bankruptcy, etc.), your current account balances, the highest balance you’ve had on the account, the original balance (for home, car, student, and personal loans), the current payment due, and, most importantly, a history of your payments indicating whether they were made on time or late. Depending upon the credit bureau, this section may be split into adverse accounts (collections and those with late payments) and accounts in good standing.

The Public Records section used to include judgments and tax liens, but since 2018, the only bit of information it will list is a personal bankruptcy filed within the past seven years for Chapter 13 filings and the past ten years for Chapter 7 filings.

The Inquiries section lists the names of any organization that has pulled your credit report in the past two years. Depending upon the credit bureau, these may be listed under Active, Promotional, or Soft/Passive inquiries. Only those under Active would have any effect on your credit rating, and only for a year or less.

All consumers have the right to add a Consumer Statement of 100 words or less to their credit reports. This provides an opportunity to explain current or past error disputes that you have not found satisfactory. This statement has no effect on your credit rating but may influence any human eyes reviewing your report as part of an application.

The Consumer Rights section lists many of your rights regarding your credit. Of most relevance are the instructions for disputing any errors you find on your credit report.

Now that you know what is on a credit report, would you like to know what specifically to look for and assess among all that information? Stick with us to learn more.

What You Should Look For on Your Credit Report

Lesson 2:4

A typical account on your credit report can easily contain 50 to 100 unique bits of information, from creditor details to a three-year history of your payments, from your current account balance to the highest account balance you have had. How are you to know which of all these data you should care about most?

Here is a step-by-step process to help you find information that will give you an idea of whether your credit is doing well, is in need of some TLC, or is requiring some emergency attention.

1. Verify that the names, addresses, and phone numbers listed under the Identifying Information section belong to you. Don’t worry about misspellings or transcription errors. However, if you see the name of your ex’s new partner, your long-lost cousin, or a name that is completely erroneous, this might be a sign that you should take extra care to look at the accounts on your credit report for the possibility of identity theft or fraud. Do the same with the addresses and phone numbers listed.
2. Go through your trade lines sections to make sure you recognize every single account listed. It can be difficult to identify accounts, especially if they are collections. However, collection accounts will list the original creditor under their details. Mark any account you do not recognize and return to it at the end to do further research or to dispute. Keep in mind that even after paying off an account or when a collection agency transfers an account to another agency, that account will continue to show on your report for up to seven to ten years.
3. Go through each account, one by one, looking to verify that the reported balance, account status (e.g. paid as agreed vs. charged off), and history of payments are accurate. If you see something that looks inaccurate – keeping in mind that information is only reported once a month – highlight it and return to it to either research or dispute.
4. Look over the businesses listed under your reports’ hard inquiries section. If you see any businesses listed there that you do not recognize from having applied for a loan, line of credit or an account with them in the past two years, highlight and note the account for a possible dispute.
5. Return to do some extra research on the items you highlighted. If you believe they are inaccurate or in error, use the credit bureaus’ error dispute options to have them removed. If you would like details on how to dispute errors, we are happy to help. The following segment explains in just eight easy steps how to request the removal of errors and fraudulent activity from your report.

8 Steps for Disputing Errors on Your Credit Report

Lesson 2:5

Three out of every four credit reports contain an error of some sort. Most are simple misspellings or transcription mistakes. However, depending upon the study you read, anywhere from 5% to 25% of all credit reports contain an error so serious that it would lead to a credit application denial that otherwise would have been approved.

Disputing an error on your credit report is a simple if not perfect process.

To dispute an error, follow these 8 simple steps:

1. Go directly to the website of whichever consumer reporting agency (CRA) issued the report with the mistake on it, whether it was Equifax, Experian or TransUnion.
2. Click on the “Error Dispute” option located on the home page.
3. Enter the credit report or file number found on your report copy in order to bring it up on the CRA’s system. You may be asked to create a free account with the CRA at this point.
4. Find the error on your report and click the corresponding link to begin a dispute. You may also be given the option to “start a new dispute.”
5. Choose from the drop down menu the reason for your dispute, from ownership or payment error to fraudulent account or out-of-date information.
6. Add brief, factual clarifications in the corresponding explanation field as necessary.
7. Repeat steps four through six to dispute additional mistakes or errors.
8. “Check out” or “Submit” the dispute(s) and add any supporting documentation you might have.

After submitting your dispute, the CRA will forward the dispute to the creditor in question, who will have 30 days to respond, though most do so in less time.

If the creditor disagrees with your dispute, your next step should involve contacting them directly and sharing your documentation with them in order to correct the error.

Note that there is no advantage to sending your dispute by mail nor to submitting multiple disputes for the same error. Finally, beware of credit repair agencies offering to perform these steps for you, since they often charge more than one-third the area’s median monthly household income to do for you what you can do yourself for free.

With so many possibilities for errors, isn’t there a way to keep creditors from sending you promotional offers in the mail? Yes, there is. Learn more coming up next.

Opting Out of Promotional Credit and Insurance Offers

Even if you are tired of all the credit card and insurance offers in your mailbox, you should know there is a more important reason to put a stop to all the junk mail: identity theft. The more credit card offers you have in your mailbox, the more likely you are to become a victim of a “flagger” – someone who steals mail from mailboxes and submits credit card offers in your name with a fraudulent address.

Either way, you will be glad to know there is an easy way to put a halt to most credit card offers in a matter of days. Here’s how:

The easiest way is to access the online portal at OptOutPreScreen.com. Here, after entering your name, address, social security number and date of birth, you will have the option to opt out of promotional credit card offers for five years. If you have already opted out and really miss all that junk mail in your mailbox, you may also opt back in at this same site.

If you prefer to opt out by phone, you may call 888-567-8688. Again, you may opt out for five years, but not permanently.

If you would like to opt out permanently, you must go to OptOutPreScreen.com, select the “Opt Out Permanently” option, fill out your information on the form, then print, sign, date and mail it to:

Opt-Out Department
ATTN: Permanent Opt-Out Election Form
PO Box 530200
Atlanta Georgia 30353

Hand written requests may be delayed or even rejected.

Another protection for your credit is known as a security freeze and, since 2018, is free to place on your credit report. Find out why this is so helpful and how to do it in our next segment.
 

Freezing Your Credit Report

Lesson 2:7

Since 2018, American adults have had the right to freeze and thaw their credit report at any time at no charge. When your credit report is frozen, no creditor will have access to your history in order to open a loan. This all but guarantees to eliminate fraudulently opened accounts, even if the identity thief already has your social security number, date of birth, and other personal information.

The process of freezing your credit report is simple:

1. On the home page of each of the three consumer reporting agencies (Equifax, Experian, TransUnion), choose the “Security Freeze” link.
2. Complete and submit the online questionnaire that requests your name, social security number, birthday, and email address.
3. Create a security PIN (a 5- to 10-digit number) required to freeze and thaw your credit report going forward. Keep your PIN in a secure vault, and do not share it with ANYBODY.

That’s it. Your security freeze takes effect immediately.

And don’t worry. A security freeze has no negative effect on your credit rating, and you can thaw it immediately at any time in the future.

So what are you waiting for?

Once you have frozen your own credit report, it would be natural for you to think next of minor children or protected adults for whom you are legal guardian. Is it possible to freeze their accounts? To get your answer to such a great question, stay with us.

Freezing Your Child’s Credit Report

Lesson 2:8

Freezing the credit report of your minor child – or of a protected adult for whom you have legal guardianship – can minimize chances of heartache and financial hardship. Freezing your child’s credit report means that no identity thief can open and use an account in your child’s name. It means no bank or lender will mistakenly open accounts under your child’s social security number. It means when your child turns 21 and is ready to apply for an account in their own name, they are starting from a fresh slate and not one that is possibly muddled by mistakes and fraud, requiring a year or more to clean up.

To freeze the report of a minor or protected adult, go to the same web pages as you did for freezing your own report and fill out a form specifically for minors and protected adults. You will not be able to submit the request online but will need to mail the completed form, along with copies of identifying documents for yourself and the minor or protected adult to the CRA’s address on the form.

Coming up in the next module, learn how to build or rebuild your credit, what a good credit score really means, and how to deal with information and activity negatively affecting your credit rating.

Let's go to another brief (and similarly easy) quiz:

Click "Next" if you're ready to continue

Remember all those decisions involving your credit? Chances are very high that the credit score involved was generated by a company called, FICO. FICO holds a true monopoly on credit-based decisions, being involved in around 90% of them. That said, there are over 1,000 scoring models in the US, and even FICO has multiple versions of its own scores.

When you hear about credit scores other than FICO, you will likely first hear about VantageScore.

VantageScore was developed in the early 2000s through a collaboration of the three major consumer reporting agencies in an effort to counter FICO’s dominance. While its early versions looked much like school grades and grading percentages (900 to 990 equated to an A, 800 to 890 equated to a B, etc.), VantageScore has not taken off with most lenders.

Other scores available through the credit bureaus would include the Experian Plus and the TransRisk scores, being similar in calculations and formatting to common FICO scores.

If you’ve ever seen the FICO scoring system, you may have wondered why it is so quirky. Let’s see if that is the case in our next segment.

The FICO Score Range

Lesson 3:2

The FICO credit scoring model starts at 300 on the bottom end and goes to 850 at the top. You would think a range of 1 to 100 or 1 to 1,000 would make more sense, but that would be looking at the score from the perspective of a consumer. It was not until the late 1990s that consumers could even access their own credit scores. The FICO scoring model was created for lenders, so it was designed for the lenders’ systems. It did not have to make sense to consumers, just to the lenders.

Where does a good credit score fall on this scale? Let’s take a look in the next lesson.

Good Credit Scores

Lesson 3:3

Defining a good credit score with a number is actually a mistake. The FICO score itself should not be defined as good or bad, because a good credit score simply means you will qualify for the best interest rates and repayment terms a potential lender has to offer. Since lenders vary in their qualification standards, the credit scores necessary to get those best terms will also vary. Some will offer their best interest rates and repayment terms to borrowers with a credit score of 690 and higher (such as FHA home loans). Other lenders are more conservative and require a 725 score or higher. Still others will only offer their best rates and terms to borrowers with scores at 760 or higher.

That said, it would be safe to say that those with credit scores in the 750 or 760 range or higher will be considered to have good credit by just about all lenders.

It should also be noted that trying to achieve even higher scores (say, in the 800s) does not mean you will earn any additional benefits. Although it may give you bragging rights, it might also be considered a waste of time, energy and sometimes even money.

If you are wondering if everything below the seven fifty or even the six ninety threshold equates to a bad credit score, well, let’s answer that question up next in the next lesson.

Bad Credit Scores

Lesson 3:4

It is helpful to remember that credit scores indicate the likelihood of the consumer making his or her payments on time and as agreed. Recognizing the variety of possible scores, lenders also offer a variety of repayment terms and interest rates based on the risk they are willing to take with the variety of potential borrowers. For this reason, it is an over-simplification to categorize any score as good, bad and even okay.

That said, when a consumer has a score in the low 500s or below, it will be extremely difficult for him or her to qualify for any loan or line of credit. Those who have filed for bankruptcy recently will likely find their FICO score in the 485 to 515 range, depending upon where their score was before they filed and what was included in their bankruptcy petition.

That said, even consumers with scores in the 600 range can find it difficult to qualify for loans with many credit card companies, banks and credit unions.

Since a higher score can save you thousands of dollars over the lifetime of a car loan and tens or even hundreds of thousands of dollars over the lifetime of a mortgage, let’s find out how to get a hold of your score and whether you need to pay for it or not.

Viewing Your Credit Score

Lesson 3:5

If you want to view your FICO score that would be used by actual lenders, you will need to do one of two things:

Go to MyFICO.com and sign up for the $20 to $40 monthly subscriptions or apply for a loan and ask the lender to share your score with you.

Otherwise, there are likely more than 100 free options to get a credit score, whether a FICO or a VantageScore. View our 17-minute Money Fit LIVE webinar below. It lists dozens of places you can get your free credit score as well as noting the type of credit score (FICO vs. VantageScore). You can even earn a separate certificate at www.moneyfit.org/live. A few places to get your free credit score include those listed here:

• bankruptcy.com
• creditkarma.com
• creditsesame.com
• creditwise.com
• nerdwallet.com
• wallethub.com
• Many credit card companies and banks

Accessing your own credit score with these options will not hurt your credit and can be used to monitor activities on your accounts. For example, if you notice an unexpected sudden drop in your credit score, regardless of which version you are using, it might be a sign of fraud or identity theft you need to look into.

Most, but not all, of these services have their own apps, but all can be accessed online. You can use one or all of them. It’s up to you.

Now that we’ve learned about what good and bad credit is and how to access your scores, let’s look next at some of the events that negatively affect your credit, followed by things you can do to improve your score.

• For some reason, most people believe that the worst thing you can have on your credit report is a collection account. In reality, collections come far down the list of painful events that will negatively affect your credit. The first and most damaging is filing a personal bankruptcy, whether a Chapter 7 or Chapter 13. We estimate that between 30% and 35% of your credit score can disappear through filing bankruptcy.

Next, experiencing a home foreclosure or going through a home short-sale might lower your score from 25% to 30% or so.

Finally, each account that ends up in collections can have a 5% to 10% negative effect on your credit score. So, if you have multiple collection accounts on your credit report, you can see a dramatic decrease within a short period of time.

Speaking of collections, do you know the first steps you should take if you ever receive a collection notice? That’s up in the next lesson.
 

Dealing with Collection Account Threats

Lesson 3:7

The same day you receive a notice in the mail from a collection agency that they have acquired one of your accounts, call the original creditor, whether a credit card company, retail store, or doctor’s office. This information must be on the mailed notification. Speak with the original creditor’s finance department or billing specialist. Be honest about why you have not made payments and ask if you can set up a monthly payment you can afford. Then, ask if they can retrieve the account from the collection agency. The sooner you do this, the more likely the account will be returned and will NOT show up on your credit as a collection.

If you receive a phone call from a collection agency, your sole focus should be on getting them to send you confirmation in the mail that the account is yours. NEVER give debit, banking, or credit card information to a company that calls you. Arrange all your payments by mail unless you are 100% sure of the legitimacy of the collection agency. Legitimate collection agencies will not threaten you, verbally abuse you or harass you.

If a collection account makes it onto your credit report, what are your options?

When a collection account ends up on your credit report, it has a negative effect on your credit rating.

That said, the newer FICO scoring models ignore collection accounts that have zero balances, even if they remain on your report for seven years. The sooner you can arrange to pay off your collection accounts, the sooner your credit rating will improve.

Now that you know how to deal with some of the negative events on your credit report, let’s discuss five general steps you can take that will have a positive effect on your rating.

Activities that Positively Affect Your Credit Score

Lesson 3:8

Let’s cut through all the clutter and chatter. Here are five great general financial activities you can use to build your credit:

1. Get your accounts current. If you have missed a payment or are late, get caught back up.
2. Make at least the minimum payment on every account every month.
3. Pay down your debts as much as possible. This includes credit cards, home loans, car loans, student loans, and even collections.
4. Keep old accounts open and, ideally, at zero balance. Closing old accounts will likely hurt your utilization rate which lowers your credit score.
5. Whenever you make an in-store purchase with a store card, pay off the balance before leaving the building. You may do so at the customer service desk or, in some cases, at the cashier stand. Consequently, you will have made and paid for a purchase and have a zero balance on the account, all of which contribute to positive credit ratings.

Want to know six specific steps you can take to rebuild bad credit? Let’s look at these in the next lesson.

6 Steps to Building (or Rebuilding) Your Credit Score

Lesson 3:9

While these steps are specifically designed to help consumers with poor credit to rebuild their rating, they can also help consumers who have no credit rating to get established.

1. Pull your credit report at AnnualCreditReport.com and review and clean up as discussed previously.
2. Ask a trusted family member if they would be willing to add you to their credit card account as an authorized user. You do not need to use or even see the card when it arrives, but you will benefit from your family member’s good credit without your own poor credit affecting him or her.
3. Ask your utilities and cell phone service provider to report your history of on-time payments to the credit bureaus. Not all such companies are in a position to do so, but many can. Consider using a free service like Experian Boost.
4. If you already need new tires or brake work on your vehicle, save up the money in cash and then apply for a line of credit at the tire shop, which usually offer credit accounts even to those with no credit or somewhat challenged credit ratings. That same evening, link your bank account to the line of credit and pay off all but a small amount, so you are not incurring interest on a large balance. Then, make payments on the account for the next six months or so until the account is paid off in full. You can do the same thing with a retail or gas card.
5. Find a bank or credit union that offers a secured credit card and that reports activity on the card to the credit bureaus. Shop around, since many charge annual and even monthly fees. Be prepared to put down $300 to $800 as collateral in order to open the account. You will get the money back once you can convert the account to a standard credit card or you close the account in good standing.
6. Find a bank or credit union that offers a credit builder loan. Typically, the lender will place your loaned money in a secured account that you cannot access until after you have made monthly payments for a year or paid off the debt.

Building and rebuilding credit can take time, so be patient. We have had clients go through bankruptcy, work hard for the next two years to rebuild their credit, and qualify for a home loan with excellent interest rates and terms.

What about a general approach to building and caring for your good credit? The next few lessons will finish up your credit building journey with a plan.

Your Credit Building Plan

Lesson 3:10

Despite everything on the Internet you can read about credit, your plan for building your credit score and protecting your credit rating can be very simple. You do not need a large number of accounts. In fact, with a couple of store and credit cards whose balances you keep low or, better yet, that you pay off in full every month, you can build a score that would qualify at most lenders for their best interest rates and repayment terms. Additionally, one purchase a month, such as your cell phone bill or even a pack of gum, will build a history of positive activity needed for good credit.

You do not need to have a car payment. In fact, we recommend avoiding car loans because you are incurring a debt for something whose value declines over time.

Having one installment loan on your report over the past 10 years can also help, but limit it to a mortgage, student loan or business loan, since these are for assets or activities that increase your net worth or improve your ability to earn money.

Remember, since your credit score is attempting to predict your likelihood of missing payments in the future, it’s all about building a history of positive credit-related behavior. Your past affects your future.

Now, let’s wrap up this course with some housekeeping issues to get you your certificate.

As we finish up this course, I want to congratulate you for sticking with me. Credit scores and reports can be confusing and feel overwhelming. You are, of course, welcome to revisit this course anytime in the future as a refresher.

Look for additional video courses on our website at MoneyFit.org under the Academy menu.

To receive a certificate of completion for the “Credit to You” course, complete the following 5-question quiz with at least 4 correct answers.

Click "Next" if you're ready to continue

Congratulations!

Click the "Submit" button below to complete A Credit to You: Credit Basics course and receive your certificate of completion!

You’ve taken important steps toward improving your financial future by learning key strategies to build and improve your credit. Keep up the great work, and remember that building strong credit is a journey. This certificate marks a significant milestone along the way!