Last summer, FICO – the primary score report lenders and creditors use when determining whether or not to offer someone a loan or line of credit – decided to recalibrate how individual items on a person’s credit history will affect that person’s score and, by extension, ability to borrow money. The change could be a huge boost for people whose credit histories involve collection accounts, etc. While some say that this makes it easier for people to be irresponsible with their money, others insist that it stops penalizing people who faced unexpected hardships and who were legitimately trying their best to stay financially solvent.
Still, It’s a common misconception that managing money and credit is easy. “I just need to keep bringing more in than I send out and everything will be fine,” they think. Though this is not entirely wrong, it doesn’t really set someone up to have good credit or stable personal finances. If you truly want to manage your money well and have excellent credit, it is the details that matter.
Most Credit Reports Have Mistakes
Do not ever assume that your credit report is correct. According to Lexington Law’s credit repair eBook, almost 80% of credit reports contain inaccurate information. The credit bureaus operate on the basis of “if it doesn’t get disputed it must be true.”
Granted that statistic is from ten years ago, but recent reports from the FTC reveal that the numbers aren’t getting a whole lot better. One in four people reported finding mistakes on their reports.
This is why it is important that, before you do any sort of major budget or payment overhaul, that you make sure that everything listed in your credit report is accurate. Fixing mistakes can have a big effect on your overall credit score!
Debt to Income Ratio Matters
It isn’t just whether or not you have debt that affects your credit score. It is also how much debt you have that affects your credit score. Specifically, it is the amount of money you have to put toward your debt versus the amount of money you have coming in that will be one of the deciding factors in your score.
Please note that we said “amount of money you have to put toward your debt“ and not simply the total amount of the debt you owe or the amount of money you are actually paying on your debt. In determining your debt-to-income ratio, lenders and creditors will look at your outstanding debts and the amount that your creditors think you should be paying each month to keep them happy, compared to the amount you have coming in to determine whether or not you should qualify for a loan or line of credit.
This is why you should apply for credit and use the credit you get sparingly. You don’t want to have all of the money you earn being forced toward those payments. Not only does it look bad for your score, it puts you in a terrible position should you ever face a financial emergency.
What Creditors Can and Cannot Do
It is vitally important that you familiarize yourself with the Fair Credit and Reporting Act. Most creditors, and especially credit collection agents, will bet your not knowing what they are and are not allowed to do and say. For example, creditors and collection agents are only allowed to call during certain times of the day. They are only allowed to use certain language and take certain types of action against you in attempting to collect the debt. Most will operate outside of these rules. If one breaks the rules with you, you can report them. You can even sue them!
Plus, knowing what to look for can help you stay calm when a scam artist calls you pretending to be a collector. You will be amazed at how quickly a scam artist will hang up when you use the phrase “this needs to be handled through my lawyer.”
Outside of what lenders and creditors want to see, it is a good rule of thumb to set up your own debt and savings rules for your income. For example, many people automatically send ten percent of their paychecks into a savings account. Others say that they only want twenty percent of their income to be allocated for debt payments. Set up some rules to keep yourself on track so that you don’t have to worry about financial doom if you suddenly need to see a doctor.
It all starts, though, with education. Learning how your credit score works and the basic rules of financial management are the key to future financial success.