Credit bureaus serve the business community by providing information about consumers, from where they work and live and how they pay their bills to whether they’ve been sued, arrested, or if they have filed for bankruptcy. Practically speaking, before you’ll be provided a consumer loan, granted insurance, or given a new credit card, your credit record will be reviewed.
What You Need to Know
While there are many local credit-rating organizations, there are only three major national credit bureaus, listed as follows:
• Equifax: www.equifax.com
• Experian: www.experian.com
• Trans Union: www.transunion.com
It’s important for you to keep up-to-date with the information the credit bureaus are maintaining. Even if you think your credit is stellar, errors are fairly common, and these can impact how businesses make decisions regarding the issuance of credit.
The best way to obtain the information the credit bureaus are sharing with others is to periodically request a copy of your credit record. Federal law allows consumers to request a free copy of their report from each of the bureaus every 12 months, and you should take advantage of this. The official site to obtain a free credit report is www.annualcreditreport.com.
Once you receive your report, you’ll find that it includes key information for each of your credit accounts. This will include the creditor, type of account, terms of credit, amount of the original debt, credit limit, and the current balance outstanding. There will also be a payment profile documenting whether you have been timely in meeting your obligations.
If you notice a problem, document your dispute in writing and send it to the appropriate bureau. The letter should include your complete name and address, clear identification and explanations of each item disputed, and a request to delete or correct the items in question. It would be a good idea to provide a copy of the agency’s credit report with the disputed items highlighted. You should also send copies of records (not originals) that support your position. Send your dispute letter by certified mail, return receipt requested, so that you have proof of delivery. Also, keep a copy of your letter for your own file. Once the bureau receives your request, they’re obliged to investigate the item (usually within 30 days) by presenting to their information source the evidence you submit. The source must review your information and report its findings to the bureau. The credit bureau also has the responsibility of notifying other national bureaus of any incorrect information they previously supplied.
If the results of the investigation show that there were errors in your credit report, the bureau must remove the incorrect information within a reasonable time. Upon completion of the investigation, you’re entitled to receive a report summarizing the results as well as a revised copy of your credit report if the investigation results in a change. Upon request, the agency is also obligated to notify anyone who has recently received your report of the corrections.
If the investigation shows that the report was accurate, the bureau has no obligation to remove the information from your file until it is outdated. Regular credit information can stay on your report for up to seven years, while bankruptcy information can be included for up to ten years. Even if the problematic credit information is accurate, you do have a right to add a brief statement to your file, which the bureau must normally include in future reports. For more information on your rights as a consumer, review the Federal Fair Credit Reporting Act at www.ftc.gov.
While it has always been important to keep up-to-date with the information in your credit reports, it has become even more important with the proliferation of identity theft. By ordering a free copy of your credit report from one of the three bureaus every four months, you’ll be able to stay on top of any questionable activity. For additional information on how to avoid identity theft and what to do in the event it happens to you, go to www.consumer.gov/idtheft/.
FICO is an acronym for Fair Isaac Companies, which developed the FICO credit-scoring system. Maintaining a good FICO score is simply a function of managing your credit well, which means paying your bills on time and paying off your credit cards each month. Most lenders rely on this system when making loans. The scoring ranges from 300–850, and these scores will impact whether you can obtain a loan, as well as the interest rate you’ll be paying. For example, www.myFICO.com uses the following table to illustrate the impact your FICO score can have on the interest rate and monthly payment you’d owe on a 30-year fixed mortgage of $150,000:
FICO Score | Interest Rate | Monthly Payment |
760–850 | 5.65 | 865 |
700–759 | 5.86 | 886 |
680–699 | 6.04 | 903 |
660–679 | 6.25 | 924 |
640–659 | 6.68 | 966 |
620–639 | 7.23 | 1,021 |
How a Credit Counseling Service Can Help You
I’m an advocate of taking charge of your own credit problems and developing your own debt repayment plan using the Accelerator Repayment Plan. However, if you can’t even manage the minimum payments required by the creditors and you want someone to help you along the way, one solution is to work with a credit counseling service. Remember that burying your head in the sand and hoping the problem will go away is the worst thing you can do. Whether or not you use a credit counseling service, make sure you communicate with your lender. In most cases, they’ll be much more willing to work with you if you’re open about your problem.
You’ll want to use caution in locating the right service for you, and complete due diligence before using their program. If you open the yellow pages under “credit,” you’ll find a multitude of credit counseling services. Some of these will be for-profit organizations, while others have non-profit status. Some will “cherry-pick” the loans they will assist you with. You’ll want to find an organization that will deal with all of your consumer credit. Many local agencies are affiliated with the National Foundation for Consumer Credit (www.nfcc.org), which was founded in 1951. These agencies have a developed a good reputation over the years.
If you go to an agency affiliated with NFCC, you can expect them to offer free budget and credit counseling. They also offer debt management plans. For a relatively modest fee, they will set up a consolidation loan. This results in you making one payment to them. They then make disbursements to your creditors based on a negotiated schedule. Because they have established relationships with lenders, they will frequently be able to negotiate favorable repayment terms, such as a reduction in your overall interest rate.
Bankruptcy and Restoration of Credit
People often ask whether it’s appropriate to declare bankruptcy as a Catholic. The answer is that it truly depends. We are called to responsibly manage the resources the Lord has given us, and this means keeping the promises we make (Catechism 2410) — including the repaying of our debts (Catechism 2411). We need to take our debt obligations (such as credit card debt) seriously! On the other hand, it’s clear that circumstances in life can overwhelm a person and leave him or her in an untenable financial situation. A good example of this would be when someone incurs very large hospital bills and doesn’t have medical insurance. In fact, medical bills are one of the leading causes of personal bankruptcy in America today. In cases like this, it’s clear that there needs to be a mechanism to relieve the financial strain. We read in Deuteronomy 15:1–11 that the Lord provided a way for debts to be released every seven years, and our bankruptcy system is the mechanism we have in place today for that purpose.
Bankruptcy should only become a consideration if you’re in a position where you’re unable to meet your true needs and those of your family. Before you can make such an assessment, you need to prepare a budget that lays out your essential expenses and the amount you can reasonably apply to debt repayment. If the creditors are willing to work with you and accept a repayment schedule that allows you to meet your ongoing needs, it would be best to follow such a repayment schedule. If, on the other hand, creditors require a level of resources that will not allow you to meet your needs, then seeking relief through bankruptcy is a viable option. If you feel bankruptcy is your only recourse, it’s important that you seek professional legal counsel.
Another important principle when it comes to bankruptcy is the concept of restitution. While a bankruptcy discharge may eliminate your debts legally, remember that from a moral vantage point there is merit in repaying those debts if you some day find yourself in a position to do so (Catechism 2412).
People who go through bankruptcy or who have otherwise developed a poor credit record often wonder how they can go about restoring their credit. Here are some commonsense tips. First of all, make sure that you have a savings and checking account, and manage the checking account well over time (no bad checks). This will show that you’re being financially responsible. If you feel you’re ready to properly manage credit cards, you can begin by obtaining a “secured” credit card against your savings account for a specified dollar amount. This can be an effective way to establish credit without the use of a co-signer.
Phil Lenahan is Director of Finance at Catholic Answers and author of Catholic Answers’ Guide to Family Finances. If you have a question you would like Phil to address, contact him at [email protected].
