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Getting Back to Credit Basics
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Kelly Rote (713) 394-3201 |
Release Date: April 5, 2005 |
During National Credit Education Week, MMI teaches consumers healthy credit habits 101
HOUSTON (April 5, 2005)— Currently 40 percent of Americans are spending more than they earn. In fact, according to the IRS, in 2003, more than 1.2 million people paid their federal taxes by electronic funds withdrawal or credit card. With the growing credit crisis in our country, many consumers are misinformed about the basics of credit, and can fall prey to financial schemes. April 18-23 is National Credit Education Week, and Money Management International (MMI) is helping to educate consumers about getting back to the basics of good credit.
”Think long and hard before pulling out the plastic to pay your taxes,” said Cate Williams, vice president of financial literacy for MMI. “The last thing you want to do is roll your tax bill into a revolving credit card balance that you will be paying on this time next year. Rather, get educated on the basics of healthy financial habits.”
A good credit score is often evidence of a healthy financial plan. However, according to MMI, many Americans are misinformed about how to raise and even maintain their credit score. The following are tips from MMI designed to bring consumers back to the basics of financial health:
Credit Killers
Following are five common "credit killers," mistakes that seem innocuous but can ruin a credit score:
· Staying out of debt: Having no credit history is nearly as bad as having a poor credit history, because creditors have no way to judge how the person will handle a loan.
· Rate shopping: Too many inquiries can damage a credit score. Generally, six or more inquiries within six months will scare a lender. Transferring balances on credit cards can negatively affect a score for the same reason.
· Assuming there's a grace period: If a payment is even one day overdue, it's late—and even one late payment can lower a credit score.
· Closing old accounts: It seems smart to close unused accounts, but it can actually shorten a person's credit history by lowering the credit score.
· Cosigning on a loan: Cosigning has many risks and little reward, because the primary borrower's mistakes will end up on both signers' credit reports. Just say no every time.
Beef Up Your Credit Report in 4 Steps
· Pay your bills on time. Payment history is the single most important factor in determining your credit score, making up 35% of the total number. Missing even one payment can knock 50 to 100 points off a good score.
· Pay down your debts and consider charging less. Lenders like to see plenty of room between the amount of debt reported on your credit cards and your total credit limits. Credit scores don’t distinguish between those who carry a balance on their cards and those who don’t carry a balance. Charging less can also improve your score—even if you pay off your credit cards on a monthly basis.
· Don't be afraid of credit counseling. In 1998, the Fair Isaac Corporation changed the FICO scoring formula to remove references to credit counseling in consumers files after learning that receiving credit counseling was becoming less predictive of credit risk. Be sure to research, and only become involved with legitimate organizations.
· Stay out of bankruptcy. Bankruptcy can knock 200 points or more off someone’s credit score, who, otherwise, might have had good credit. After filing, consumers are usually only able to secure lines of credit through high-interest lenders, which can often lead consumers back down the path of bad credit.
Understanding your credit report
Credit scores are usually determined by the FICO scoring method, and are used to determine a person's credit risk. A credit report is basically divided into four sections: identifying information, credit history, public records and inquiries.
· Identifying information is just that—information used to identify you. Besides your name and social security number, the report may include your current and previous addresses, date of birth, telephone number, driver's license number, employer and spouse's name.
· Credit history. Each account will include the name of the creditor and the account number, which may be scrambled for security purposes. Each entry will include account history, payment detail, and balance and limit detail, including how well you’ve paid the account.
· Public records. This section, ideally, should be blank. It lists bankruptcies, judgments and tax liens, which all can damage your credit faster than anything else.
· Inquiries. A list of everyone who asked to see your credit report. Most inquiries are ignored by FICO scoring models and do not damage a credit score.
“If you find a mistake on your credit report, such as an account that isn't yours or a disputed amount, you'll need to fill out the form that comes with the report, or follow the instructions on the explanatory sheet,” said Williams.
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Money Management International, is a non-profit community service organization that provides confidential financial guidance, counseling and debt management assistance to consumers. MMI helps consumers trim their expenses, develop a workable budget, lower their debt payments and repay debts. Services are available by phone. To visit with an MMI counselor, call toll-free 1-800-762-2271- 24 hours a day, 7 days a week. Spanish speaking counselors are available. Consumers can also learn more by visiting the MMI home page at www.moneymanagement.org.
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