How Credit Works
Credit can be a complex system to consider. For many people, it’s a black box. Meaning that you can see and understand what goes in and we know that credit scores are the end result but many people don’t understand what happens in between. It’s well understood that your credit balances and when you make payments affect your score. We also know that if we’re late on payments or we don’t pay at all, our scores will drop. Another part of the system that many people don’t understand is credit utilization. This is the ratio between what you owe on your revolving credit accounts and your credit limits. If the ratio is low, it’s beneficial to your score. If it’s high then it’s detrimental. The reason? According to the credit bureaus, you’re not managing your financial resources, including debt well. It could be an indicator that you overspend each month or that you’re only paying the minimum balance. Neither is good for maintaining good credit standings. If it’s possible, consider paying as much more than the minimum amount due as possible or as you can afford. Many people don’t think twice about paying on their credit cards for most of their adults lives.We’d rather not give our money to the banks and we’d rather use it ourselves.
Another vitally important factor in building strong credit is the age of your credit. The longer you hold onto the same credit or revolving card account, and you’re reliably paying it off (or down), it’ll build your credit score. We’d also go further and say that if you’ve got more than five credit cards, that’s probably not a good situation. Our rationale is as follows. First, the more credit cards you posses, the harder it is to reconcile statements, view online transactions, and keep track of your purchases. If you actively use them all, you also have to track due dates of payments and balances due. It just makes life more complicated. The other aspect to consider is that it also potentially increases your likelihood of being a victim of identity theft. The reasons mirror what we presented regarding tracking what’s going on with your accounts. It might be easier for a criminal to slip charges past you if you’ve got a lot of cards to content with. Most people are very busy between work, life, and family. Why make it harder by having a lot of credit cards?
Too many people spend money they haven’t earned, to buy things they don’t want, to impress people that they don’t like.
– will rogers
Credit and Fraud Monitoring
This is the process used to review your own personal credit scores and history. Many people start looking at their credit scores when they want to make a major purchase. They might start working on increasing their scores so that they can qualify for a car loan or a mortgage. Alternatively, they might work on them just enough so that they can transfer their balances to a new card with an introductory 0% interest rate offer. Naturally, we have opinions about this and believe that it rarely works out as planned. In many cases, people wind up with both the new credit card and the old card and proceed to run up the balances on both of them. With good discipline and a smart understanding of how the credit system works, anyone can improve their credit scores. Focus on paying down large balances, consistently paying on time, and if you’ve got black marks (slow pays, delinquencies, or anything later than 30 days past due) you’ll have to wait seven years from the date of the issue for them to come off your credit history.
Credit history and scores can also be used to protect your identity. In fact, the processes we recommend are industry recognized ways of fighting criminals when using identity theft protection services. Besides monitoring your credit history and scores, you should also regularly review your bank and credit accounts for fraud. We recently interacted with Dexter Evans. Mr. Evan was the victim of a 10 year long identity theft. The person was an illegal immigrant that somehow got his SSN and opened up not only multiple Conn’s credit card accounts but at least twelve different organizations that required a SSN; including to qualify for a mortgage. Law enforcement was able to track the identity thief down, get a confession, and arrested him for felony identity theft. All based on the information and evidence Mr. Evans was able to provide like creditor letters and statements of accounts. The story does not end on a good note as the perpetrator was able to receive a no-bill judgement on his third degree felony charges from the court system. He stole Evan’s identity, racked up over $100,000 in debt and got away with it.
Stories like the the one involving Dexter Evans are only too common. The scariest part of the story is that both Mr. Evans and his identity thief were both LifeLock customers. It perfectly illustrates why you need a service that enables you to review your credit and credit history but you should never rely only on alerts and notifications. Timely detection of identity theft depends on people regularly reviewing their own accounts.
Disputing Information on Your Credit Report
Identity theft is a felony. Despite the fact that it’s illegal, it happens because criminals see it as an easy way to make a buck. Because it’s illegal, the credit bureaus have all had to create and maintain processes for consumers to dispute charges found on their credit reports. There are forms available in their websites and applications that will allow people to file a claim that a charge is not accurate or even fraudulent. If you’re unable to provide documentation, you’ll likely be unsuccessful in getting the charges removed. It’ll likely take a police report or even proof that you’ve filed a report with the FTC at IdentityTheft.gov. The dispute process can be very detailed and burdensome but don’t give up – it’s worth it!
You should also understand that sometimes mistakes are made. These mistakes can include putting other people’s credit items on your report, wrong amounts, incorrect data about slow pays, and two huge ones are tax liens and civil judgement records. In 2017, civil judgement records were removed. Then tax liens were removed from all credit reports by all three credit bureaus (Experian, Equifax, and Transunion) starting in April of 2018. Previously, even if you paid the lien, it would have stayed on your credit report for up to ten years. The system was bad because the linkage between this data and people’s credit reports were tenuous at best – simply first name, last name. So even if someone lived in a different city or state their judgement or lien might have gotten linked to your credit file. Tax liens could affect scores by up to 100 points.