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THE IMPORTANCE OF CREDIT (PART 1)

credit debt spending money Jan 06, 2018

According to Investopedia.com, credit is a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest.  Now, it would be great if there was nothing on your credit report because you never had to borrow money, but for most Americans, that is definitely not the case.  The goal of this series is to get you acquainted with your credit, the terminology, the importance of paying attention, and how to fix it on your own (you don't need to pay anyone).  Let's get started!

My Story
Before I started this financial journey, I didn't know anything about a credit report or score.  I would get medical bills and never pay them thinking they just went into the abyss after a while.  I figured once they stopped sending me the bills in the mail, they didn't care about them anymore.  So, I went a long as if nothing was happening.  When I was 19, I applied for my first apartment.  At that time, I didn't have credit cards or student loans, so I figured I should be fine.  I went to the apartment office, filled out the application, and waited for them to run my credit and background.  When I got the callback, the manager said they saw medical bills on my credit but nothing to cause concern, so I got it!  I was excited, but I was like medical bills?  This prompted me to pull my credit report for the first time ever.  I called my mom and asked her for the site she uses to pull her credit report for free.  That is where it all began...

The Credit Bureaus
There are three major credit bureaus that creditors (people that loan money) report to.  They are Equifax, TransUnion, and Experian.  Creditors can report to just one or all three.  It is entirely up to them!  That is why it is essential to pull all three reports at least once a year.  The government passed legislation that required the bureaus to supply every American their credit report for free once every 12 months.  Never feel like you have to pay for it!  There are three ways to request your free reports:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

You have the option of requesting all three at once or requesting one at a time.  I usually pull all three at once via the website.  It is pretty straight forward and just a matter of a few clicks.  I do it every year around my birthday, so I know when 12 months have passed (they will not remind you).  

But, Tiffany, Why Should I Care?
Items on your credit report can affect all areas of your life.  It can prevent you from buying a house, a car, a phone, getting credit cards, cable, or even a job.  You will be surprised by how many entities consider your credit before making a decision.

Terminology
Now that you have your official report, it is crucial to check over the information listed.  Check the list of addresses, names, accounts, and loans.  Sometimes, there can be mistakes that could mess up the accuracy of your report.  Let me introduce you to some of the terminologies.  The most common codes you will see are:

  • Collection - This means that the debt is currently over 180 days past due.  At this point, it has typically been sold to a debt collection agency.  There are some benefits to this status.  You can usually negotiate with them to settle for a smaller amount, but we'll talk more about that later.  Also, once you pay it, the debt will be removed.
  • Charge Off - This status is a little worse.  This means that you still owe the debt, but even if you pay it off, it will remain on your credit for seven years!  The company lost hope in collecting the debt from you.
  • Repossession - This means that you had some form of collateral taken back by the creditor because you stopped paying based on the agreed-upon terms.  Typically cars are the most common kind of repossession.  Stays listed for up to 7 years!
  • Foreclosure - This means your house was essentially repossessed because you stopped paying based on the agreed-upon terms.  Stays listed for up to 7 years!
  • Closed - This means that the account was closed either by the consumer or the creditor.  Typically, this shows for credit cards that are no longer in use.  


Hopefully, I didn't overwhelm you with all of this information, but it is important.  Next, we will talk about credit scores.

Do you see any codes on your credit report that you are confused about?  Any questions about this post? Please comment below.

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