Understanding Credit Reports

Understanding Credit Reports

Credit Report: This is a report that combines all the information reported by businesses and organizations about an individual’s credit activities and current credit situations. The information is a combination of the different credit, loan and payment activities and is compiled into a report. There are three credit bureaus that compile these reports. Not all businesses report to every bureau which causes the reports to sometimes be different.

According to Annualcreditreport.com a credit report may include:

  • A list of businesses that have given you credit or loans
  • The total amount for each loan or credit limit for each credit card
  • How often you paid your credit or loans on time, and the amount you paid
  • Any missed or late payments as well as bad debts
  • A list of businesses that have obtained your credit report within a certain time period
  • Your current and former names, address(es), birthdate, social security number, phone number and/or employers
  • Any bankruptcies or other public record information

The Fair Credit Reporting Act requires that each credit bureau give consumers one free credit report a year. The three credit bureaus are Experian, Equifax, and TransUnion. The credit bureaus provide information to credit score companies such as FICO so that credit scores can be determined.

 The Consumer Financial Protection Bureau and the Federal Trade Commission both provide excellent additional resources on credit reports. The Federal Trade Commission has resources available to aid in reporting items that are on an individual’s credit report in error.

Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-report-en-309/

Federal Trade Commission: https://www.consumer.ftc.gov/topics/credit-and-loans?sort=subject


The Process for Getting a Credit Card

Step 1: Consider a few questions before applying for a credit card. If your answer is “no” to any of the following questions we would suggest reconsidering applying for a credit card until the answers are yes.

  • Do you have a written budget and a method (spreadsheet, budgeting app, pen & paper) to track your expenses monthly see if they line up with your budget?
  • Have you been using a written budget and tracking your expenses for at least 3 months?
  • Are you aware of the impact credit card interest rates can have on your financial reality if you do not pay the card balance off fully each month?

Step 2:  Determine what kind of card you would like to apply for. Cards have different benefits some of which are: sign up bonuses, cash back cards, hotel rewards, airline miles, rewards cards, balance transfer, student, zero APR, no annual fee, a retail card, etc. Typically cards offer more than one of the benefits listed. You can go to places like bankrate.com, creditcard.com, and creditkarma.com (the websites do make money off marketing the cards if someone applies for the card through their website). Make sure that you look to see what annual fees may be associated with the card you decide on.

Note: Make sure that before you apply for a credit card it includes a grace period for purchases! Be aware that even if a credit card includes a grace period for purchases there still might not be a grace period for cash advances and balance transfers.

The grace period is the time between the end of your credit card’s billing cycle and the due date for that billing cycle. This is typically about 21 days.  As long as you pay off your card’s balance by the due date then you will not experience any finance/interest charges. If you do not pay off your balance in full by the due date then you will immediately be charged finance/interest charges. These charges will continue until you have paid your balance of in full. The interest rates are steep on credit cards. Sometimes almost 30% so make sure and pay that balance off completely if at all possible!

Step 3:  Determine your credit score. An easy way to get your credit score is to create a free account with creditkarma.com. Credit Karma offers scores for two of the three credit bureaus and it is free. When perusing through different cards, usually in the details section for the card it will show a credit score range applicants typically have when they are approved for the card.

Step 4: Apply for a card. Nowadays this is possible through an online application- this is the easy way. Applying at a bank or a retail location or sending off an application is still an option. Make sure you answer the questions on the application asked accurately.

Step 5: This step happens behind the scenes. The lender will complete an investigation into your credit history to determine your creditworthiness. If applying online, often this takes just a matter of seconds. The lender will obtain your credit report from one of the credit bureaus. The lender may get your report from one of the bureaus or all three of the bureaus. The lender will also get your credit score to help make an informed decision on whether or not to grant you a card.

Step 6: The lender will decide to accept or reject your application. If your application is accepted then the lender will determine the exact terms of your credit agreement. The higher your credit score the lower the interest rates will be on the card and the lower your credit score the higher the interest rates. Under the Fair Credit Report Act if your credit application is rejected you are allowed to request a free credit report. You must request it within 60 days of being notified of the application rejection.

Step 7: Make sure to include your credit card in your budget! It is easy to forget how much is spent on the card when not carefully including it in your budget and making sure that money is accounted for to pay off the balance each month. Read more here on budgeting with a credit card.

Don’t Trust The Card or Yourself Without a Plan

Don’t Trust the Card or Yourself Without a Plan

In the world of purchasing with plastic (credit or debit card) we sometimes lose sight ever so quickly of exactly how much we are spending! In fact, I find that by the time I am in the parking lot after making a purchase my mind has already moved onto the next thing. By the end of the week when I am about to make another purchase I have already forgotten that I even made the first purchase which causes me to have a false idea of how much money I actually have left to spend. Before I know it if the plastic I am making a purchase with happens to be a credit card then I could so easily fall into the trap of purchasing an item with future income (money from my next paycheck that hasn’t even hit the bank yet). This can happen to even the best of us.

Let me be clear I am not suggesting we should all revert back to the archaic envelope budgeting system and cash. However, I am suggesting there a few things we can recognize when purchasing everything with a card to ensure financial success.

Here are a few tips that can help lead to financial success if you pay your bills and make all of your purchases with a card, especially if its a credit card.

1) Keep Track of What You Spend.

Don’t fall into the trap of only reviewing the balance on your credit card every couple of weeks or once a month when your bill comes due. If you are using a debit card be careful to avoid only reviewing the available balance in your checking account when in the checkout line at a store or on pay day.

I am not a psychologist by any means, but I know myself well. I do not think I am alone when I say that it is easy to underestimate how much I’ve spent since I last looked at the balance on my card and overestimate how much I can afford to spend when I have not sufficiently tracked my previous purchases. The Consumer Financial Bureau suggests that there is some research to back the assessment that I have made.

It may not be fun at first, but putting a spending plan in place and rigorously keeping up with it will be one of the greatest stress relievers you can experience regarding money. If money is a source of stress or anxiety it can be tempting to ignore the way you spend, your bank account or credit card balance, however, this will create more stress in the long run and financial disaster I might add. I personally prefer to track my expenses through the use of budgeting software called youneedabudget.com. I know others that prefer good ole excel spreadsheets, pen and paper, or mint.com.

2) Don’t Trust Monthly Minimum Payment Offers.

When things are tight and there are extra items needed or wanted, it can be extremely tempting to take advantage of the credit card offer to carry the balance on your card over to the next month and only make the minimum payment. This can be especially tempting during times where there is stress pouring in from other areas of life.

It is important to recognize that when you only make a monthly payment, it means you are committing your future income to interest payments on items that are not worth paying interest on. Also keep in mind credit cards offer some of the worst, if not the worst, interest rates. They can get up to almost 30%! Nerd Wallet, a reputable personal finance website, goes as far as to say they are designed to keep you in debt. Click here if you want read more on minimum payments.

It can be tempting and you might say to yourself that you will be able to pay it all off the next month before the interest takes off and gets out of control. That can be a dangerous place to be especially considering personal finance tends to be one of the most unpredictable areas of life, because it involves almost every aspect of life. You cannot predict when your car is going to breakdown, you are going to have an emergency room visit, animal needs to go to the vet, or some other unexpected expense shows up.

3)Preemptive Planning vs. Reactionary Spending

If you want to beat living paycheck to paycheck, pay down debt, and avoid having to pay only the minimum payment on a card it happens through planning. The words “budget or spending plan” are not everyone’s favorite words. However, they can be such a lifesaver! For some they do not like the idea of a budget because they feel that it will constrict their financial freedom to do as they please. For others it is just an overwhelming, daunting task and an area that causes anxiousness so they just avoid it.

I would like to suggest that choosing to be preemptive in planning, how to spend and save your money, will actually create a sense of financial freedom not experienced beforehand and will help reduce anxiety surrounding money. Planning our spending will prevent those moments when we react to a need or want, have not planned our spending for the pay period/month and then swipe our card, and we can’t help but experience the anxiety surrounding the purchase. The all too familiar questions surface in our mind such as “can I really afford this and will I have enough left for my bills due soon?” I would like to suggest these questions almost steal the joy that could have come from the purchase.

On the other hand, when you take time to plan your spending upon receiving a paycheck and then follow point #1 of tracking your expenses, you can feel comfortable spending money because you have planned the spending and do not have to deal with questions like “Can I afford this and will I have enough for my bills?” It creates a since of freedom and peace of mind. Finally, it is important to be aware that everything might not always go according to plan, however if there is a plan in place you will know how to adjust to ensure that you are staying within your means.