4 common misconceptions about credit
Many people are confused about who keeps track of your credit history and what they do with that information.
This post comes from Jeanne Kelly at partner site Credit.com.
The lender types information into a computer, waits for an answer and then relays the "good news; you're approved!" or "bad news; you've been declined" message.
What many people don't know is how that decision is reached. Credit scores are somehow involved. But how? And who provides these credit scores? There is a lot of confusion surrounding the application of a loan, so let's take a closer look at the process to dispel some myths (and reveal some opportunities for you to boost your credit).
The first confusion to clear up is who provides credit information. The companies that provide your credit scores to lenders are not government agencies. They are sometimes called "credit reporting agencies" or "credit bureaus" but they are for-profit companies, just like McDonald's or General Motors.
The second confusion to clear up is how they collect information. There are three of these credit reporting agencies -- Experian, Equifax and TransUnion -- and each collects information about you from various sources, including publicly available information as well as from information you provide on loan applications. However, their information-gathering systems are not 100% reliable, and you might be surprised to discover errors on your credit reports from these companies.
The third confusion to clear up is what they do with the information. The three credit reporting companies do not communicate with each other. They each collect information about you, and compile it into a report -- your credit report. When you apply for credit, the credit reporting agency provides your report to the creditor to whom you are applying for credit.
The fourth confusion to clear up is why some lenders will lend to you and others won't. When you apply for a loan, lenders take your information and pull your credit report with scores. If you apply for a mortgage, they will pull all three credit reports with scores. Then they usually take the middle score (not the top score or the bottom score or the average of all the scores -- just the score that's in the middle) and they compare that with the "ideal" score that the lending company has decided is the minimum score they will lend to. So, if your middle score is at least as high as their minimum score, you'll likely receive the loan.
With these four misconceptions corrected, your next move is clear: If you want to apply for a loan, take steps now to boost your credit by working with all three credit reporting companies to correct mistakes and build your credit so you can have higher credit scores.
More on Credit.com and MSN Money:
You can get a "free" report from the government once per year. Unfortunately, it does not tell you a credit score, only saying what credit lines are open, and where. Essentially nothing I don't already know. I have done it twice, but it's been a couple years. Also, I have no idea what my credit score currently is. I pay in CASH for almost everything. I have one CC with a $300 limit.
I am essentially "poor" so, I suppose that makes a difference. I do not recieve any government assitance, nor do I ever intend to. Other people generally have higher "standards of living" than I do, so I figure they must have tons of money. LOL. I did take out a car loan about 3 years ago, and they told me my score was 820 at that time. I paid it off in a year, and am curious what my score is now, but I wouldn't pay $1 to find out.
I do think there needs to be some government intervention into the credit scoring system, as it is important to most Americans. Scores should be available to everyone, for free, not just bankers, and car salesman.
My 2 cents, and I'm always willing to liten to others opinion on the matter.
So many silly, ill informed comments. The credit reporting system is not perfect but it is not a scam to jack up interest rates. The reality is that the federal government has made several strong moves in the last 3 years to fix the broken credit reporting system. As a loan originator who works on commission, I have every reason to want to see every application I take get approved. But there are times when common sense and good conscience cause me to tell people that based on their scores, they simply aren't ready to take on a financial commitment (aka...a home loan) worth hundreds of thousands of dollars. There are many cases in which low credit scores are the product of actual hardship such as a serious illness, long term layoff or unemployment, or a death of a wage earner. But 7 out of 10 times when I see a low score it's due to a prolonged pattern of very bad money managment. I can tell by looking at the number of defaults and late payments by people who have no hardship at all. They are simply prone to living well beyond their means. The rules of good credit management are easy to find and easy to follow. Establish and follow a budget, live within your means, pay your bills on time, and try to keep your use of any particular credit account well below 50% of the spending limit. If you have to sacrifice a trip to Hawaii or Mexico in order to pay off late bills, that's life. Grow up and act like an adult and not a pleasure driven adolescent. Imperfect as they may be, credit scores in and of themselves still serve as a fairly reliable barometer or predictor of how likely it is that a loan applicant will actually be a trustworthy borrower. If the banks and government had paid more attention and denied low scoring applicants the oversized jumbo loans on which many of them are now defaulting, it would have compelled borrowers to purchase more affordable homes. They would have had to live within their means. The failure on the part of banks and Bush era regulators led to millions of homeowners taking out loans they could ultimately not afford. The cost to the economy, the cost of government programs to try to stem the rate foreclosures could have been avoided had the government actually forced lenders to pay more attention to credit scores. They are an imperfect but still useful tool that can be used to discern which borrowers are most likely to reliable and which are likely to be financially risky. The goal isn't to prevent people who have made financial mistakes from buying homes, but rather to use the scores to define borrowing limits thereby causing people with bad financial skills to purchase more affordable houses so that they don't get into trouble. You are allowed to pull one free credit report from each bureau per year. A good idea is to stagger them so that you can get a fresh look at your report once every four months to be certain that their aren't glaring errors or even worse, entires that indicate identity theft. Regulators in the WA state recommens pulling scores through annualcreditreports.com because they won't try to sell you extra services. The free report agencies are not government agencies but rather for-profit groups so it is they, not the government or the banks who are scamming you and trying to sell you extra services. If you are being dinged on your score for over using credit cards or lines of credit, lower the balances by transfering parts of your high balances to cards with lower balances. The general rule of thumb is keep the balance on any one card below 33%, and never exceed 50%.
Oh, as I understand, you get one FREE credit report yearly. The government wants you to think they are helping you. But, if I am correct, when you get that FREE report, you are then billed about 12 or 13 dollars monthly for the rest of the year. So, unless you are careful, that one FREE credit report will cost you about 140 to 150 dollars for the year. Some magazine companies use the same tactic. They will send you a free copy and then bill you unless you cancel your subscription. To me, that is unfair marketing. The government allows direct marketing that many companies take advantage of, including insurance companies and surveys, etc. It is a shame our country has resorted to use of under the table tactics to scam us, and government is allowing it. VOTE ALL INCUMBENTS OUT!
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Is it ever a good idea? That depends on who's doing the borrowing and who's doing the lending.