Welcome back to the second installment of my blogs about managing your debt. I recently in the last week just signed my life away in blood in order to procure a car loan. My poor hubby's Toyota Camry decided to let it be known she was dying a potentially spectacular death, so we needed to find some new wheels. In order to do that, we needed money.
After searching around the local credit unions for the best APR (there's that Annual Percentage Rate again), we chose one and set about applying for a loan. As we are only a few years out of college, we had no idea what to expect. Our loan officer told us that things would get going after they did a credit check on us and received our 'credit score'. Once you graduate school, you think you're done with report cards, but no. As an adult, you are rated by three companies that compile together and create your FICO score, otherwise known as your credit score. This score tells companies how big of a 'risk' you will be to them.
Risk to a company means how likely you are not to pay back the loan, but it can also be used to make an educated guess at how likely you are to make payments late, how likely you are to steal from your workplace, drive recklessly, be bribed, etc, etc . Your credit score is a number assigned to you by three companies: Experian, Equifax, and TransUnion. Those three number differ slightly from each other, so the median number is used. Score Overview: You are given a number from 300-850. Pretty broad range. 620 and under: Dangerously bad. Take immediate steps to make a plan, stick with it, and keep your chin up. You can and will improve your score. 680-621: Decent; could use some polishing. 700 and up is where you want to be. 720 and over is just gravy.
These numbers are determined by a number of things, starting with how long your credit history is. The longer you have a line of credit open, the more pattern you show in your debt-paying, be it for better or worse. Credit reports take everything into account for the last 10 years. Another obvious factor in determining your score is your history of payments that are late. It is easier and easier to be late on a payment nowadays. Companies used to have something called a grace period, where there was a due date, but you had anywhere from 5 to 15 days for the company to actually receive the payment before it was counted late. In the last few years, this has unfortunately been a dying practice.
Credit card companies want your money, but if they can slap you with a late fee, they'll get more money. Thus, the slow extinction of grace periods. Worse yet, late fees are becoming a bigger sum than they were even five years ago. The current average is around $33 per late occurence. The final straw? Some companies are making it so that even if your payment comes in on the due day, if it isn't in by a certain time (like, say, noon), it counts as 'received the next business day' and is therefore qualified as 'late'. Cute, right?
Other factors that are used to figure out these life-depending numbers are how much debt you have revolving compared to how much credit you use per month and how well you manage different types of debt. In layman's terms, they want to see how much debt you are already in, how much more you take on in order to pay bills, and how you pay them off.
The last factor is how many other people have been inquiring for your credit reports. We discovered that when our credit union looked at our reports, they could see everyone else who looked into them, as well, and if we got approved or denied for any other loans/credit we applied for. This can be a double-edged sword, like so many other financial processes. If you've never been denied anything you've applied for, it helps your credit rating and makes you seem less risky for a company to lend you money or extend credit to you. If several companies have been looking into your report and you have been denied by some of them, it allows other companies to think that you were 'too risky' and makes them less likely to give you anything. If they do, they probably will hit you with a higher APR.
Now. What also shows up is if you look at your credit report. That's right! You can request your credit score from the Three Companies! You get one report annually free, so if you look into your own history, it reflects well on your report. It shows that you are policing it and if it is damaged, trying to take steps to repair it. (Remember, it takes 10 years for a black mark to be erased from it.) We've all seen the 'FreeCreditReport.com' advertisments where the curly-haired guy is singing about how much better his life would be if only he looked at his credit report. Quasi-true. It isn't an instantaneous thing, but you can catch potential thieves and fraud from happening. And you can dispute wrongful information, provided that you have proof to support you (bills, receipts, contracts, the like. Make copies of important papers when you cancel a payment and do other financial maneuvers).
A word of caution: the universal default law exists. This does nothing good for you and lets every company that you have a loan or a credit line open with potentially able to make loads of money off of you. This law says in a nutshell that if you are late on even one payment to one company, all companies that you have ties to are able to raise your APR because you are now "a greater risk". It does not matter to those companies if you are in 'good standing' and haven't ever in a million years made a late payment to them. If you are late paying your Ashley Furniture credit line (had to have that king size bed, didn't you?) your Visa can now bump up your APR, and so can your 5/3 credit card, and so can your private student loan, and-you get the picture.
A law was passed to start regulating credit cards in how much they can charge you and how high the APR can go, but it does not take effect until 2010. The credit companies are trying every trick in the book to hit as many people as they can with 'finance charges', late fees, higher APR, and what-have-you, before they lawfully are unable to. You might have already seen it in action; I know my husband and I have...one card of ours had the credit limit slashed down 3 months after it was raised, which is highly suspect. The company cited the reason that we 'had not proved our ability to handle' it. Don't make me laugh; we both have cards with higher limits than that one and both have steady, reliable income (AKA: not risky). What they really did? Dropped the limit within $20 over what we owed on the card, and we got a small envelope with nothing on it 10 days after it took affect. The letter, of course, was dated much earlier than that, wink wink. They were hoping we would use the card and max it out, thus enabling them to hit us with some heavy fees.
Joke was on them, though. We had enough money in our accounts to blast that card's debt down to two payments, and then the balance was a nice, round goose-egg. A big, fat zero. So far, they have not raised the credit limit back up and we don't particularly care if they do. We don't use that card on the principle that we lost faith in that company. We kept it open, because closing the account would make a bigger dent on the all-important credit report than just the reduced limit would. We were lucky. We also ate pasta for the next couple of weeks in order to pad our poor bank accounts again.
So be wary and be proactive. Take a look at your credit reports; that gives you the ability to head off problems before they become one. And with one free report a year, there isn't any reason not to.
, Carmen Wong Ulrich
. My absolute favorite book on finances because it breaks everything down into easily understandable language. Chapter 4: The Potential Prison of Credit Card Debt, pp49-75. It ends the chapter with a list of websites that you can compare APRs, information on identity theft and other mishaps, and, as always, request your credit reports.