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Consumer Credit

What is Credit and Credit Worthiness?

Consumer Credit, in the financial industry, refers to money provided to an individual in lieu of payment. Credit is used most commonly to purchase items that cost more than an individual typically is able to afford in a single cash payment (like a vehicle or property). Credit is also commonly used as a convenience (as in a credit or store card).

Credit Worthiness is a measure of how much money an individual is able to borrow while still being able to reliably pay back the debt later in time. Financial Institutions typically use one or more of three main national Credit Reporting Bureaus to obtain credit worthiness history/ratings before extending credit to a consumer. Using a Bureau(s) can ensure higher accuracy in calculating credit worthiness as the Bureaus typically track a larger set of data among many other reporting financial institutions.

How Credit Scores are Calculated

A Credit Score is a mathematically calculated representation of an individual's credit worthiness at a point in time. There are several ways to calculate credit scores using varying criteria; several organizations offer differing credit score products.

Credit Scores most commonly take into account the following information:

  • Previous Credit History, including Defaults, Settlements, Bankruptcy, etc
  • Payment History - If you're making payments on-time
  • How much Credit you have, and how much is currently used
  • Number of and Types of Credit (Auto, Home, Credit/Store Cards, etc)
  • How long your credit history goes back in time
  • How often you apply for and are granted additional credit

Credit scores may also be based on criteria including Income Level, Job Type, Local Community and Economy statistics, Utility costs, Bank Account Balances, and publicly available information including that obtained from Social Networks, etc.

Improving Your Credit Score Short-Term

  1. Obtain a credit report from each of the three main Credit Reporting Bureaus.
  2. Report any issues in your credit report, specifically accounts you didn't open, credit inquiries performed by third parties that you are not aware of or did not approve, and payments you made on time that show up as late.
  3. Draft letters to any creditors (using addresses provided in the report) that haven't updated a significantly [lower] current balance in your report, asking for this update (such as if you paid a card/loan off one or two months ago but don't see a recent update for this item).

Improving Your Credit Score Long-Term

Unfortunately, improving a credit score significantly usually takes time. Some information, such as Bankruptcies, may remain on your report for as long as 7 to 10 years. However, with a little effort over several months or years, credit scores will improve!

The best steps to take often include:

  1. Make payments on time, or work with the creditor directly for alternate arrangements to pay-in-full
  2. Pay off debt such as Credit cards and keep balances as low as possible.
  3. Close unused store or credit card accounts
  4. If you have excessive numbers of store or credit card accounts, consider closing all but a handful
  5. Refrain from opening new credit and store card accounts more often than required

In addition, review your free credit report(s) yearly and report any anomalies, specifically looking for accounts you didn't open, hard inquiries that you did not know of/approve, and payments you made on time that show up as late.

Protecting Your Credit from Identity Theft

One of the easiest ways to protect your Credit from Identity Theft (where a criminal steals your information such as Social Security Number and Birthdate, opening a line of credit such as a credit card or loan in your name) is to place a Security Freeze on your credit file with each of the three main Credit Reporting Bureaus. This is a provision of Iowa Law.

When you place a Security Freeze, your credit report is 'frozen' and not available to many financial institutions that require a copy of your credit report before issuing credit or a loan. In the State of Iowa, you may be required to pay a small fee (such as $10) to each Bureau to initiate the Security Freeze. If you have already been a victim of Identity Theft, fees may be waived. Down the road if you legitimately require credit, ask your financial institution which Bureaus they will be checking your credit with, and temporarily lift your Security Freeze. This temporary lift may incur a small fee (such as $12) to each Bureau required. Some credit bureaus offer an online form and payment system to easily set-up and manage Security Freezes.

Placing and removing Security Freezes may become costly and prohibitive if you (or your business) routinely rely on establishing credit. Contact a Credit Bureau before placing a Security Freeze on your file to make sure that you fully understand the benefits, drawbacks, and fees involved.

Another way to protect your credit is to check your credit report from each of the three main Credit Reporting Bureaus yearly - even if you have a Security Freeze on your credit file. Be on the look-out for, and report to the respective reporting bureau ANY item you find in the report that is incorrect.

See Also: Identity Theft

Free Annual Credit Reports

You are entitled to one free online credit report from each of the three main Credit Reporting Bureaus per year. The following website is the only free service authorized by these Credit Reporting Bureaus; they warn consumers to never provide their personal information to any other company or person for requesting free annual credit reports under the FACT Act.

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