Broke Millennial by Erin Lowry: Thoughts on Chapter 6

 Chapter 6: Credit Reports and Scores: The Report Card for Life

Why credit scores and reports matter and who uses them
Apparently landlords may also check your credit score so they can see if you've missed any payments in the past or a high debt. Makes sense. Low credit score or high debt makes you a risky renter. I think my apartment also pulled my credit score when I was doing my application.

Employers don't check your credit score; they check your credit report (Employment Insight Report). I've never heard of this. I'm not sure if the company I work for checked my. Maybe they did. In any case, they never get the actual score. 

What's the difference between my credit score and my credit report?
Lowry compares the credit score to a model and the credit report to the diet and exercises the model did. The report is the substance that makes up the score. 

• Funny how people emphasize the score way, way more than the report. I guess the score is an easy way to judge since it's just a number.

What's on my credit report?

Credit card applications stay on for 2 years. Missed payments will stay for 7 years. Loans are also tracked. Mortgages too. Debt in general is also tracked. On-time payments are tracked.

• Basically everything is tracked I guess. It's good to know it isn't permanent, but 7 years? That's a looooong time. Better not miss one then!

Three credit bureaus track the info: Experion, Equifax, and TransUnion

• Btw, there was a data breach with Equifax. I think they should've been shut down after that or at least very severely penalized. Don't think what they were fined was enough.

Apparently, lenders don't have to report to all three bureaus. Lowry says if a lender reports with one bureau, it doesn't necessarily show up on the other two's reports. Depending on which bureau future lenders pull from, your report can look different.

• Why is there no centralized system? That would make the most sense. Although with the apparently weakness of data security, I guess it's better not everything is in one place?

Understanding how a credit score works
According to Lowry, it started in 1956 when Bill Fair and Earl Isaac created a credit-scoring model. They called it the Fair Isaac Corporation, AKA FICO. It got changed in the 1980s to what it is now.

• Woahhh!!!!! FICO!!!!!!! Every now and then, the bank will send me an email saying my FICO score has changed. The higher the better! Well, that was a cool piece of information. I'm surprised it started in 1956. That's a lot latter than I thought it would.

Why your credit score even matters
Lowry says to view a good credit score as "an insurance police for your financial life." A high score means you're a good person to lend to, which means better terms

• Perfect analogy for a credit score. It sums it all up so nicely.

A high credit score means lower interest rates. A low credit score means higher interest rates or even a rejection. (Inverse relationship!)

Also if you don't need to borrow money, Lowry says a high credit score can get you a good rewards credit card. It's also easy to build your credit score with a credit card. Just pay them off!

• So true. Credit Karma will recommend you credit cards based on your score.

How do they determine your credit score? The FICO score range
The base FICO score goes from 300 to 850. Of course, the higher the better. If don't have much credit history or missed payments, then you will have a lower score. Lowry says to have a credit score of 700+, which is at least good credit. 800+ is good to brag about, but being securely in 700+ is enough to get the good rates

• 800+ is my goal then! If you're going to do it, then do it well!!!!

What the heck is a "thin file"?
So apparently that's a thing. It can happen if your credit card doesn't report to all three credit bureaus, and the credit score checker just so happens to pull from the bureau your score isn't being reported to. A thin file can also happen if you have little to no credit history. Makes sense.

•     Still dumb that there are three different bureaus for the same thing and not all bureaus get reported to. What a mess

One interesting Lowry says is that a thin file may cause you to be reported as deceased. What.

• That's messed up. What if I just like using cash and don't have loans?
  
  

How a credit score is determined: The Five Factors

•  Payment history: 35%
• Pay your bills on time! Do at least the minimum payment! (Although really you need to pay in full)
  
• Amounts owed (aka utilization): 30%
• Try using 30% or less of your total credit. Credit bureaus like that. Why 30%? Idk. I see that all the time though 
• Also Lowry notes that this is 30% of your total credit. However, it's still best to keep to 30% or less of individual credits because it doesn't look good to max out a card.
  
• Length of credit history: 10%
• Keep your credit card active. Don't switch cards until you've had it for awhile. Small factor
  
• Credit mix :10%
• This is such a small factor. Personally, I only have a credit card, and I have a good score. Lowry says she got a high score doing the same thing. Don't go out seeking or trying to get differnt forms of credit.  
  
• New credit: 10%
  
• Another small factor. Just don't go opening a bunch of credit cards at once

Lowry says a hard inquiry happens when you apply for a credit card. It lasts for two years on your report but is only factored into your score for one year. It will cause about a 10 point drop max. Of course if you start applying to many, you may get a bigger drop.

• Good to know. I've hesitated on getting a new card because I knew it would ding my score. Didn't think it would be that small of a number
  

 

There is more than one credit score

There are FICO scores for credit cards, auto loans, mortgages, etc. They are all taken from your credit report, so Lowry says to not worry about which lender is going to look at which score. Just have a good credit report, and you'll have a good score.

• Whattttt I always thought it was just one number. Now I wonder which number I'm seeing when I look at it.....maybe there's an overall score too. Wouldn't be surprised.

 

The quick way to get results (No, this isn't a diet ad, I promise)

Basically, Lowry says to make the monthly payment on time! Easy peasy. If you have a credit card, try to keep your utilization low too. 

I'm worried about hurting my credit score

According to Lowry, being scared of applying for credit because of credit dings is dumb. It's just a minor ding. She says it's "ridiculous."

• Ahahahaha that's me 😅

A credit score "isn't a trophy to be kept on the mantel, where it will just collect dust." Use it when you need to! 

 
Where do I get my credit reports (and are they free?)
The official place to get your credit score is from annualcreditreport.com. From there, you can get a free copy of your credit score from each bureau (there are three: Experia, TransUnion, and Equifax) every year. Lowry, along with lots of other people, say to get a report every four months. Note, this doesn't have the official FICO score. This is just the report.

• Go check it now! Linked it for your convenience!

 
How do you decipher this credit report?
Apparently, the reports from the bureaus is less complicated than the reports from lenders. Also, you get to see soft inquiries on your official report. The soft inquiries don't affect your credit score or stay on your report.

• Didn't know soft inquiries existed. Also I find it interesting that the bureaus' reports are typically easier than the lenders' reports. Usually I think it's the other way around.
  
  

 Something's not right on this report! What do I do!
This is why you check your report! Gotta make sure things aren't wrong! Steps to take if things are wrong:

• Dispute an item
• You can do this online or by mail. Provide the information the credit bureau asks you, and they will go to the lender you're disputing. You'll be notified how the investigation went
  
• Put on fraud alert or credit freeze
• You can do this just to be careful. Don't need to actually be a victim of fraud to do it
• Fraud alert - notifies the lender to verify the identity of the requester
• Usually free
  
• Credit freeze - locks down your report and vendors can't get your report until you life the freeze (can be temp or permanent)
• Might have a small fee, ~$10
• Might be free if you're a victim of identity theft
  

 How do I get my credit score for free?
You can pay to get it or you can get something similar to it.

Credit cards
Many of them will offer it as a feature. If you have an annual free, then you're paying for it. If you don't have a fee, then it's offered for free. They are usually from a specific credit bureau

• I have this feature!!! I remember I didn't always have it, so I'm glad they offer it now. 

Free credit score websites
Credit Karma is one of the more popular websites. Lowry says some people call it a FAKO score, which means it isn't an official score, but now these scores can be legitimate too. Credit Karma pulls from TransUnion and Equifax's VantageScore 3.0. It's updated every week. Credit Karma won't charge you, but they do have ads and affiliate links to get money. 

• I use Credit Karma! It is easy to use. I also do my tax returns through them! Completely free!

Lowry lists three other websites: Credit Sesame, TransUnion credit score and Identity Theft Protection; Quizzle, VantageScore credit score and TransUnion credit report; Credit.com, Experian and VantageScore 3.0 credit score

Don't believe these credit myths!
Fortunately I didn't believe these myths, but I can see how some people would. There's definitely a lot of untrue or just unknown things about financials. Money is surprisingly tricky.

Here's a summary of what Lowry says:

1. Checking your credit report will not hurt your score.
2. A potential employer can check a shortened version of your credit report with your permission but will not get your score.
3. You do not need to carry a balance on your credit card. Pay the balance in full when you get the bill but don't pay it off before. Otherwise, it looks like you haven't used the card, which means you can't prove you can pay off balances.
4. Keep your credit utilization at 30% or less. Prepaid cards and debit cards aren't bad, but they won't build your credit score. 
5. Accepting a credit increase isn't bad. It can help keep your utilization low. Just be mindful of not overspending. 
6. You can close your oldest credit card, but it may impact your score. You can keep the card and just have a small amount charged to it that you pay off each moth. You can also just close it you have history with other cards and a good credit score. It'll just be a small dip.
   

 

 Whoops, I missed a bill and it's in collections - What do I do?

Uh oh. I don't like what Lowry says: "items in collections are the credit report equivalent of plagiarizing a term paper; there is a zero-tolerance policy." 😱😱😱

You will find out by either the collection agency calling you, getting notified the debt was sent to collections when you try to pay it off, or your credit report tanks. 

How long will this haunt me?

7 years. 7 years from the time you first didn't pay the bill. Lowry provided more info about other delinquencies. 7 for foreclosures, 7 for Chapter 13 bankruptcy after filing, 10 years for Chapter 7 bankrupty after filing, 7 years for civil judgments after filing, 10 years or indefinitely for unpaid tax liens after filing, 7 years for paid tax liens after paying.

• My god. So long. Ahhhh!!!

But this debt isn't mine

So there is a way to report it, but there is a time limit. Lowry says to request a debt validation notice within 30 days of being notified about the collection. She advices to send the request to the agency by certified mail so there's proof that you sent it. Keep a paper trail and report notes on phone calls! Lowry says the letter should tell the agency you want documentation to verify the debt is yours and that you also want info about the original creditor.

• Document! Document! Document! Vital for almost every important thing, esp legal and money business

The agency can't keep contacting you until they prove the debt is yours. If you miss the 30 day date, then they can come after you for the money. 😬

Fortunately, the CFPD (Consumer Financial Protection Bureau) has a template you can use to send to the credit agency!

• Found a link for their templates! https://www.consumerfinance.gov/consumer-tools/debt-collection/

Should I pay off the debt?

Unfortunately, paying it won't automatically remove it from your credit report. Fortunately, on your report it gets marked as a "paid collection"! Future lenders might like this. If you pay off part of it, it might even be marked as "partial payment". 

Some agencies do a "pay to delete". Lowry says this is an "ethical gray area." That's because it goes against the credit reporting agencies' policies to delete a collections. So do that at your own risk. 

• Hmm...interesting....at least I know that's an avenue

Consider negotiating

Collection agencies will buy your debt for a cheaper price. Lowry gives an example: $400 dollar bill might be sold to the agency for $75. Therefore, while the agency might want you to pay the full $400, they can settle for less.

However, Lowry says the collection agents might not always be the nicest people to deal with. Get any deal you make should also include that your debt will be marked paid in full even if you paid less, and get that in writing! Otherwise, it might be marked as "partial payment" and sold to another collection agency 😱

• Document!!!!!!! Also, human cockroaches. Like the tow drivers. 

How to pay an item in collections

Lowry says to "never pay a collection agent with a debit card or directly out of your bank account." They might end up withdrawing the entire debt even if you agreed on less, or maybe they will take more money later on.

• Human cockroaches!

Lowry advices to open a checking account just to pay the collection (one without an overdraft fee in case the agency try to pull more money out). She also says you can send a money order or certified check (send through certified mail so you can make sure they got it).

I heard talking to a collection agency or acknowledging my debt resets the clock

 

Lowry says this will depend on the state because they have different statutes of limitations (SoL). SoLs keep you from being sued for a period of time. Collection agencies can sue after after the time limit runs out or try to make you admit your debt. If they do sue, show up in court and/or get a lawyer. Also, Lowry says the SoL might resent if you acknowledge the debt or make a payment, but good thing is it doesn't affect when the debt is removed from your credit report! So it will still be gone from your report in 7.5 years!

Do I have rights when dealing with a collection agency?

 

Yes, in the Fair Debt Collection Practices Act (FDCPA). Lowry gives a few of the rights listed:

• They can only call between 8am - 9 pm
• They can't contact you at work. If you send in writing asking to stop communication, they can't contact you at all unless it's to say they won't contact you or to file a lawsuit
• They can't contact other people or share your debt info, but they can get your contact info from a third party
• They have to give you a written validation notice within 5 days of first contact. The notice needs their name, your owed amount, and how to dispute it. Then you have 30 days to dispute in writing (use certified mail!)
• They can't say you'll be arrested if you don't pay, and they can't pretend to be law enforcement when talking to you 
• Now I'm wondering if there were cases of them pretending to be police for this to be included in the act........hm.....

Violations can be reported to your state attorney general's office, Federal Trade Commission, and the Consumer Financial Protection Bureau. 

 

How can I improve my credit score and history after a collection item?

Fortunately, Lowry says there is a "dramatic impact at the start" but within a few years, it won't as heavily affect your score. If you continue to do good things (see How a credit score is determined: The Five Factors above), then it can balance against the collection item.