Financial literacy: What you need to know about credit

By Tom Moore
Staff Writer

The word “credit” has many different uses in the English language. People can be credited with an original work. People can give other people credit for helping them out. But this is not the type of credit discussed here.

According to the Merriam-Webster dictionary, credit is defined as: “The provision of money, goods, or services with the expectation of future payment long-term credit.” Simply put, the word “credit” means the ability of an individual to borrow money.

But who gets to decide who is a good credit risk and who is not? Where does the information come from and who has access to it? What purpose can it be legally used for, and who regulates it? And most importantly of all, how does all this apply the average citizen and their everyday life? These are the questions we will try to answer here.

To determine if someone is a safe credit risk, banks and financial institutions rely on for-profit companies called Credit Reporting Agencies (CRAs). Their only business is gathering, storing, organizing and selling individuals’ personal information. There are many of these companies, but three of them dominate the consumer credit landscape.

These “big three” CRAs are Equifax, Experien and TransUnion. Anytime a person moves to a new address, gets utilities turned on, leases an apartment or buys or rents a car, they gobble up this information, which is available to businesses that pay a substantial monthly fee to have access to your credit file.

(Photo from Pixabay.com)

Credit files contain a lifetime of all loans, credit cards, name, phone numbers, current and past addresses, utilities, and most importantly, date of birth and Social Security number.

“Credit reporting would be impossible without the individual’s Social Security number,”  said Nancy Schumer of ConsumerCredit.com of Florida. Schumer is a certified credit counselor.  Her job is to help people in debt make budgets, manage their finances and plan for their futures. For the last six years, she and her co-counselors have helped their clients negotiate with their creditors, settle accounts for pennies on the dollar, and clear up their credit reports.

“Without the consumer’s Social Security number, there is no way the CRAs would be able to keep the information straight on each individual’s credit report,” Schumer said. “Names, addresses, even birthdates can be duplicated, but a person’s Social Security number is unique to that individual.”

There is just one little problem. As with any other organization, CRAs employ human workers to gather the initial information and feed it into the computers. Sometimes the data entry clerk will make a mistake: put someone’s information on someone else’s file, or even duplicate a file.

That is why the Big Three CRAs hold 500 million files on Americans. Much of this information is outdated, erroneous, or duplicated in the files. But it is still damaging the credit of thousands of Americans. “That is where we come in,” Schumer said. “Using our understanding of the law, we can help remove these negative accounts and clean up a person’s credit.”

The key to understanding, applying for, and managing your credit is “Fair Credit Reporting Act (FCRA) circa 1970.” This legislation protects the consumer from multiple, erroneous, and inaccurate information from being reported on their credit file.

The FCRA ensures that only accurate information may be reported. It gives the consumer the right to dispute any inaccurate information, which by law must be stricken from the credit report. The first step is to get your own credit report and check it periodically for errors.

Thanks to the updates in the FCRA, consumers are entitled to one free copy of their credit report per year.  The report is available at AnnualCreditReport.com, which accesses reports from all the Big Three.

Students have a unique situation with credit. While in college, federal student loans are in limbo. The CRAs just don’t report them as long as they are in deferment. Once the first payment is made, then they are reported normally.

There is one area these loans do affect the overall credit report, which is the “debt-to-income ratio,” or the amount of debt accrued compared to annual income. Mortgage companies use this criteria when determining whether to extend credit for a mortgage. A student with three or four student loans, all outstanding, can have a harder time qualifying.

One possible solution is a consolidation loan. Depending on the loan, it is possible to save a considerable amount in interest over the life of the loan.  One thing to remember: Student loans are required by law to give students the different options to pay them off. These include future deferment, and payments based on income. The consolidation loan is not held to these standards. This just part of the many ways student loans affect credit.

“This is one of the main reasons a lot of millennials are waiting longer to get married, start families, and buy a home,” said John Heckmann, finance and investment manager for Pen Air Federal Credit Union. “Instead of buying a home right out of college, they may wait three to five years to build up some savings and pay down their student loans. Millennials are also much more conscious about saving money as a percentage of their income. As the country recovers from the recession, and the job market remains uncertain, many college students who graduated in the last few years are a lot more careful with their spending habits than the previous generations.”

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