Credit

Credit is precious. The value of how much credit you have and how you use it goes far beyond shopping. Whether you have good or poor credit can affect where you live and even where you work, as prospective employers may consider your credit history. It is important to understand how credit is awarded or denied and what steps you can take if you are treated unfairly.

Building and Maintaining Good Credit

The short answer to building good credit is to buy items on credit, pay them on time, and repeat this process over an extended period with multiple lenders to establish a credit history. A credit rating is designed to measure your ability to repay a debt. Lenders look at your history of paying bills on time, your individual account credit limit in relation to the account high balance, and your income or other sources of money in determining whether to extend credit. Having a reliable source of income and maintaining an emergency savings account makes it easier to pay bills on time, ultimately contributing to a good credit rating.

The Major Laws That Regulate Credit

The fundamental federal laws that regulate credit are the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, and the Fair Debt Collection Practices Act.

The Fair Credit Reporting Act values the accuracy, fairness, and privacy of information in the files of consumer reporting agencies. It controls the use of credit reports and requires consumer reporting agencies to maintain correct and complete files. Under this Act, you have a right to review your credit report and to have incorrect information corrected, and you have the right to know if you have been denied credit, insurance, or employment based on a credit report.

The Equal Credit Opportunity Act requires that individual creditors apply credit standards in a fair manner so that all consumers are given a fair chance to obtain credit. It does not require all creditors to have the same standards, nor does it guarantee approval of loan applications. In reviewing your credit application, lenders cannot discriminate on the basis of sex, color, marital status, race, religion, national origin, age, income from assistance programs, or your exercise of rights under the Consumer Protection Act. The only acceptable criteria are your ability and intent to repay funds borrowed.

The Fair Credit Billing Act provides for the prompt correction of errors on open-end credit accounts (such as department store credit accounts) and protects consumers’ credit ratings while they settle disputes. Under this law, if a consumer disputes a charge, a creditor may report the account but must report that the charge is disputed. This applies to open-end credit instruments such as credit cards, revolving charge accounts, and overdraft checking services. Consumers who question an item are responsible for notifying the creditor in writing within 60 days of receiving the bill. The creditor must acknowledge the notice within 30 days and may not do anything to harm the consumer’s credit rating while the item is in dispute.

The Fair Debt Collection Practices Act promotes the fair treatment of consumers by prohibiting debt collectors from using unfair, deceptive, or abusive practices. The Act does not allow calls to a debtor before 8:00 a.m. or after 9:00 p.m. A debt collector is not allowed to communicate with anyone other than the debtor or the debtor’s attorney without express permission, and collectors may not give false, misleading, or threatening statements. The Act subjects debt collectors to actual damages, attorney’s fees, and costs. Similarly, section 559.72, Florida Statutes, prohibits anyone collecting a consumer debt from pretending to be a law enforcement officer or a representative of any governmental agency, threatening force or violence, threatening to disclose information regarding the debt to another, or misrepresenting that the collection effort is from an attorney.

Clearing a Bad Credit Report

How long it takes to clear a bad credit report depends on the seriousness of the past problems and the accuracy of the consumer report. If you believe there is inaccurate information on your credit report, you must follow the proper procedures to dispute the errors in accordance with the Fair Credit Billing Act. If the negative information is accurate, the Fair Credit Reporting Act also prevents certain credit information from being included on consumer reports if that information is more than seven or ten years old, depending on the type of debt.

Collateral and Types of Loans

Collateral is anything of value that can be taken by the lender if you do not pay back the loan. Loans granted based upon collateral are called “secured loans” (for example, a home mortgage or car note). The lender wants to identify property owned by the borrower that has a value at least equal to the amount of the loan, so that the property can be used to pay back the debt if the borrower is unable to repay. If the collateral’s value is not equal to or more than the amount of the outstanding debt, the lender may seek a deficiency judgment against the borrower for the difference. Another type of loan, the “unsecured loan,” does not require collateral but is based on the borrower’s ability to pay (for example, credit cards and student loans).

Nondiscrimination in Lending

A lender may not have different rules for making loans to women and men. It is unlawful for any creditor to discriminate against any applicant on the basis of sex or marital status, and lenders may only make decisions based on the borrower’s ability and intent to repay the loan. A married person who is not employed outside the home might have difficulty obtaining a loan unless they have sufficient collateral to secure the loan. If the person’s spouse has a good credit rating, the spouse could guarantee the loan as a co-signor or provide other security to support the loan.

Obtaining Your Credit Report

For further information on credit, visit the Federal Financial Literacy and Education Commission’s website. To learn more about your credit rating and obtain a free credit report, visit annualcreditreport.com to receive your credit report from the three major agencies: Experian, Transunion, and Equifax. This website allows you to obtain free online credit reports from each of these three agencies weekly. However, these reports do not include your credit score, and some additional detailed information may also be missing. If you would like more information, you may purchase additional access from each agency or from various credit assistance organizations.

Student Loans

Student loans are treated differently from other credit in some noteworthy ways. Generally, student loans are not discharged in bankruptcy unless the borrower establishes undue hardship, although separate disability-discharge programs may be available for qualifying borrowers. You should therefore be particularly careful when taking out student loans, whether from the federal government or from private banks. If your student loans are federally provided, various payment and discharge options are available. For example, under Income-Based Repayment (IBR) monthly payments may be 15% of discretionary income, or 10% for certain newer borrowers, with forgiveness periods that vary by plan and borrower status. Federal student-loan repayment and tax rules can change, so borrowers should consult current Federal Student Aid guidance; if a balance is forgiven after the required period, you may owe federal income tax on the forgiven amount. For more information, see the Federal Student Aid website.

Identity Theft

Identity theft occurs when someone steals your sensitive personal information, such as your name and Social Security number, and uses it to commit fraud. Examples of this include but are not limited to opening a credit card account or filing tax returns in your name. Identity theft can inflict long-lasting damage to your credit status because the thief will not pay back any loans taken out in your name. To protect yourself, safeguard your sensitive personal information as much as possible and regularly obtain your credit report to check for accounts you did not open. You may also purchase credit monitoring services or “freeze” your credit through various services, but you should exercise your own due diligence even if you purchase such a service.