When you obtain a credit card or a loan from a bank, you are borrowing money. The credit card company or the bank charges you interest to borrow the money. You are expected repay the money you have borrowed with interest. If you repay on time, you have indicated you are a trustworthy borrower and you will be deemed worthy of borrowing more money at better interest rates than others in the future.
Why does this matter? Because for some large items that we purchase, like a car or a house, most of us cannot pay the full amount for the item up front with cash. We will have to buy the item on credit. That means that everyone needs a credit rating in order to be able to borrow money if they have to.
Obtaining credit is especially important for women. Too often, older women do not have a credit history separate from that of their spouses. Unfortunately, when the spouse dies, the woman may have no credit history to rely upon to obtain credit. To protect themselves, women need to establish their own credit history. This is done by getting a credit card, making small purchases and paying off the credit card each month. Over time, this will establish your credit history.
How do you get a credit rating?
Your payment history is reported to three credit bureaus. TransUnion, Equifax and Experian are the three major credit reporting companies. If you have ever had debt you have paid off on time, like credit card debt or mortgage debt, the three major credit reporting companies have a file on you. Not only that, they have given you a “credit score.” Every thirty days, each one of your creditors sends an update to the three credit reporting agencies and your credit report is updated. If you have paid your bills late, your will create a negative credit report. A bankruptcy will remain as a negative on your report for ten years.
Your credit profile and your credit score are constantly being updated based on information the credit reporting companies receive. It is critical that you know what is in your credit report—not just with one credit bureau, but with all three.
Under the Fair Credit Reporting Act, you are protected if there is inaccurate information on your credit report. You are entitled to receive your credit report annually without charge.
You will have to pay a fee to get your credit report from the three reporting bureaus, but it is worth doing that to make sure you have a chance to correct or dispute any items on that credit report that can hurt your credit status. If you find any such items, send a letter to each one of the credit bureaus disputing the item or explaining it—even if the credit bureau keeps the item on your report, they are required to indicate it has been disputed by you and that can mean the difference to a potential lender reading your report. Do not stop writing the credit bureaus until you see the item corrected in your credit report.
If you learn you have a low credit score, how can you repair your credit right now?
- Get a copy of your credit report and correct it. It is common to find errors on your credit report so check it thoroughly and send letters correcting any errors to the three credit reporting companies.
- Set up payment reminders to make sure you pay your bills on time. Late payments are the most common source of low credit scores. Even if you have been paying late, make sure you pay on time and keep to the payment schedule so that the most recent payments are timely.
- Reduce the amount of installment and credit card debt you owe. Stop using all of your credit cards—use just one. Then, make a plan to pay off all your credit cards. Pay off the credit cards charging the highest interest first. It takes time and can be painful but it is certainly worth doing.
Last but not least, thank you to Brandi Constantino, recent Northern High School graduate, for all your help this summer. I first saw Brandi when she made a presentation to the Bay Business Group about women and finance. It was excellent and I asked her to help me out this summer with this column. It was wonderful to work with such a bright young woman who intends to pursue a career in finance. I want to congratulate Northern High School, our other Calvert High Schools and Superintendent Jack Smith for their programs teaching financial literacy to young people. We need more education focused on practical life skills. Thanks for all your help, Brandi, and good luck in college!
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.