You never know when credit repair companies can come in handy
What is credit and why is it such a big deal all over the world? In simple terms and for the sake of this discussion, credit refers to the way you handle your bills. Do you pay on time? Have you been late on one or several occasions? Is there a time you were unable to pay? These and other questions demonstrate that credit is also a measure of your level of responsibility toward debt. Many people believe, falsely, that having cash is always better than borrowing. However, the perception is wrong since no bank will be willing to lend you money when they have no history of how you have handled it in the past.
The relationship between lenders and credit agencies
Creditors are always willing to lend you money in return for gain. Interest is the difference between the amount you borrowed at the beginning and what you pay up to clear the loan. However, before they can give any credit, lenders must find out whether you are creditworthy or not. At the same time, the lending industry has put in place measures of instilling discipline if you delay or fail to pay. Towards this end, banks and other institutions have partnered with credit reporting agencies. The three main ones are TransUnion, Equifax and Experian. Their work is to gather consumer credit history and share it with creditors but at a fee.
How does a credit agency work?
Assume that you have $100 that is lying idle in your bank account. You would have no reservations about lending it to a friend. In comes John who borrows the money and promises you that he would pay in the coming week. Seeing that both of you have come a long way in your friendship, you proceed to lend the money. However, the week passes by, and John does not pay. Days turn into a month and John gives you back $10. You call him, and he complains of how hard times have been. Several months later, John is yet to honor his promise. Would you lend John money in the future? Indeed, you will not since he already has a bad credit reputation.
John’s reputation proves that he is not a borrower anyone can trust. Later, you spread the word to your friends about his behavior. You caution them to exercise care when lending to John. If at all they must give him money, it will be at their own risk. They must be ready to lose the money. Credit bureaus operate on the same principle. They use information about you and assess your likelihood of paying your obligations on time. Similarly, they tell others about your creditworthiness.
In their heydays, credit reporting agencies would sell consumer information to any interested party. Unlike the case today, the technology was sloppy. There were serious inaccuracies in the reports. The situation got worse to the extent that it drew the federal government’s attention. In response, Congress enacted the Fair Credit Reporting Act, abbreviated FCRA. Despite its detailed nature, the FCRA stipulates that:
- Consumers can now obtain their credit report from reporting agencies by request
- Credit bureaus together with the partners who gather information on their behalf must do so procedurally and under regulation
Parties that are privy to your financial data
Despite the protection accorded to consumers, the FCRA allows the credit reporting agencies to share your credit history with anyone who legitimately needs it for business purposes. Among the parties authorized to obtain your financial dealings are:
- Credit card firms
- Mortgage Lenders
- Insurance companies
- Utility companies
Despite the gains made in the handling of consumer data, CRAs still give inaccurate information. However, such acts do not necessarily constitute illegality on their part. All the agencies must do is to follow the procedure. Besides, they are not at liberty to notify you of every negative information sent to them. As a result, errors keep piling up in people’s credit files without their knowledge. Such has given rise to hordes of consumers seeking negative items removed.
Origin of credit score data
Data collection starts with your first transaction. The process does not stop until the day you complete your obligation with a creditor. Even so, the credit agencies retain this information for seven years. Details about you include your phone number, home address and payment history. Unlike what people believe, creditors do not need your social security number to report you. Your name and place of residence are sufficient. By now, you should have realized how errors creep in and find their way into consumer reports.
Credit score defined
In simple terms, your credit score is a calculation of your risk level from a financial perspective. The score has a range; between 350 and 850. It determines whether a creditor can lend you money or not. Out of all scores computed in the US, the FICO score (Fair Isaac Company) is the most frequently used. FICO predicts your likelihood to fall behind over a period of two years. From the assessment obtained, using a series of complex algorithms, prospective creditors can determine the terms of lending. These include the down payment and the rate of interest.
Credit score components
- Your payment history: Falling behind on payments accounts for 35 percent of your score.
- Outstanding balances: These take 30 percent of your credit score. According to the FICO score, inability to pay your dues fully translates to a poor money handling ability.
- Credit history duration: Being in a business relationship with a creditor for a long time earns you points up to 15 percent. You too can understand the logic here; a new account has not faced the test. Therefore, the longer you have maintained an account, the less risky you are.
- New queries: Every time you make a further inquiry for credit, your score reduces. Each new application could drop see your score drop by five points. New accounts have a 10 percent score.
- Credit types: Despite the formula for calculating FICO remaining a secret, revolving accounts have a more significant impact than secured loans.
Now that you know how they arrive at your score, you need to know that a high score means that you are a better manager of credit than your peers. As mentioned before, the score determines whether you are likely to fulfill your obligation to new or existing credit in two years’ time.
A circumstance where access to a credit report is not allowed
When someone files a lawsuit against you, he or she cannot request to present your credit file to demonstrate fraud. After a court passes its judgment, the winning party cannot use your credit report to compel you to pay for damages or costs of the suit.
Seven years – the time it takes to clear your name
Just like we saw earlier about the risk of lending money to John, credit bureaus, tell lenders about potential borrowers’ credit status. Always bear in mind that lenders take a chance with their money. If you cannot pay on time, you are a risky borrower. Whenever a lender files information about you, it will remain on record for seven years. So, if you default on a payment say in 2018, it will show and stay in your credit report until 2025. Sadly, even if you make efforts to manage the debt in the next 12 months or so, your report will not acknowledge that step.
Credit repair services
However, that does not mean that you relent in your efforts to repair credit. What you must keep at the back of your mind is that the process takes time. Credit repair companies exist to assist you in getting rid of negative items and other incorrect entries in your credit report. Sadly, some of these firms have ashamed the industry by operating as scams. Fortunately, there are ways you can use to smoke out the bad ones.
a) No guarantees
If you contact such a company and the customer care staff tell you that they can ‘guarantee’ your success in a few weeks, run as fast as you can. Anyone speaking of guarantees is a scam. Credit repair firms are not the ones that delete your negative information.
b) License and bond
Request for the service provider’s license. Not only should they show it to you but must allow you to have a copy of the same. Having obtained the copy, contact the Secretary of State’s office in your region. Confirm with the office that the said company has complied with all the licensing and bond requirements. For instance, in Nebraska, all organizations providing consumers with credit services must have a Credit Services Organization License. Besides, if such firms charge their clients an upfront fee, they must obtain a surety bond of $100,000. If they wind up operations, the bond must remain in place for two years.
c) Unresolved complaints
Inquire from the Secretary of State’s office whether the organization has complaints against it that remain unresolved. Also, the Attorney General’s office can be beneficial at this stage. Inquire whether the state has initiated investigations against the company in the past and at present. You could also check for Better Business Bureau ratings.
d) Copy of the agreement
Common sense dictates that before you sign any contract, you must have a reasonable time to read and understand the contents. Tell your prospective credit repair company that you need at least a day (24 hours) to refer the contract to your attorney. If they refuse, dump them and look for assistance elsewhere.
To sum up
Credit refers to both borrowed money as well as your repayment history. The more efficiently you pay back what you owe, the better your reputation. Also, the way you handle utility bills payment can either have a negative or positive impact on your credit. Any entry by a lender stays in your credit report for seven years. All lenders have a right of access to your financial information. Credit repair companies are there to help you in correcting inaccurate and harmful data. You must exercise due diligence before you sign up a contract for the task.
Alex is a former budget manager turned entrepreneur. He works mainly at home on his credit score advice website and writes a financial blog on the side. He hopes to expand his business into a full online lending company for bad credit as soon as he gets enough investors.