Mary Beth thought she had perfect credit, and although she carries small balances on some of her credit cards, she felt confident that with her salary and work history, approval for a $300 store credit would be a no-brainer.
“I was so embarrassed,” Mary Beth says, “There I was with a pair of jeans, a few tops and a stunning pair of pointed-toe heels, which total retailed at $300, with the understanding that I was going to get 30 percent off the total by signing up for the store’s credit card. All I had to do was show identification and give my social security number, and I would be set. My jaw dropped and my heart fell into my stomach when my application was denied. It was as if I got smacked in my head. I said, ‘oh there must be some mistake,’ and basically ran out of the store.”
So, what happened with Mary Beth? Basically, she had never seen her credit report and likewise she had no idea how her credit score was compiled. In fact, she had never even given it a second thought. Mary Beth has been working steadily for years, and has never before been denied credit, so the whole idea of credit reports and credit scores was foreign to her.
First things first. Everyone is entitled to receive a free credit report annually from each of the three credit bureaus. When you go to annualcreditreport.com you can obtain your free credit report from each of these companies. I suggest you literally schedule obtaining your annual report from each as you do your annual health exams. For example, I check my Experian report every January, my TransUnion report every May, and my Equifax report every September. Use your smartphone and set a reminder to order each report annually. There is no “penalty” for checking your own credit report. On the other hand, there are huge potential penalties for not checking your own report.
Looking at your credit report tells you a lot of information, and it is the record that others (potential lenders, employers and landlords) use when judging you. So this is a priority, not an option.
Your credit report will alert you to identity theft. Your credit report may also have mistakes. When Mary Beth ordered her credit report, she found that there is another Mary Beth with her same last name, who had defaulted on a credit card bill for $70,000. She was relieved to know this was the reason for the store’s credit denial, but the error required immediate action. Had she not encountered the miserable denial of credit incident, Mary Beth may have continued to unknowingly carry this negative information on her record.
If you don’t know there are errors on your report, you may be paying higher percentage points for interest on credit cards, revolving loans and mortgages, resulting in the loss of hundreds, if not thousands, of your hard-earned dollars.
If you do identify mistakes on your credit report there are easy instructions to file a dispute on the website of each credit reporting company. You can take care of these errors yourself. You do not need to hire a lawyer.
Mary Beth learned a lot from her credit card application debacle. In addition to finding that alarming error on her credit report, she also learned that her salary was not part of the calculation of her credit score and was not part of her credit report. While your employer will appear on your credit report, your income, while relevant and requested on loan applications, is not disclosed. Other items that may be important to lenders but are not reported on your credit report are: assets (money, property and investments); marital status; and dependents.
Your credit report does disclose: age; employment; payment history; debt-to-credit utilization; credit history; new accounts; and mix of loans. Although the formula used to create your credit score is complex, the most important criteria used to generate your score is your payment history, which accounts for 35 percent of your credit score. This means pay your bills, and do so on time. Amounts owed on credit account for 30 percent of your credit score. Also having more credit, and using less of it, is best. The rule of thumb to generate a high score is to not use more than 30 percent of your available credit. The length of your credit history accounts for approximately 15 percent of your score, so while you may not use all of your cards, you are well served to keep accounts open. New cards account for 10 percent of your score. (There is consideration for how you are going to manage additional debt.) Finally, the types of credit used (mix of revolving and installment loans) accounts for 10 percent of your score.
The total of the above factors results in your credit score, which is used to predict the likelihood of your debt repayment and credit worthiness. While Mary Beth has repaired her credit by removing the error on her credit report, she also learned that the $90 she thought she would save when trying to open that store card may have cost her significantly more had she been approved. The slight drop in her credit report for having tried to open a new card (whether successful or not) could have negatively impacted her interest rates when she applied for her mortgage the following month.
Borrowing money is a very costly endeavor. When you apply for credit, you want to put yourself in the best position possible. Knowing what your credit report says about you before your intended creditor does puts you in the pole position. Order your credit report today.
I’m a debt settlement and bankruptcy attorney who negotiates resolutions between clients and their creditors. I am also a real estate attorney involved in both sides of purchasing and selling distressed real property. I am passionate about teaching people about money and helping individuals of all ages achieve financial independence and success in a "no…
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