All about credit

Whenever you charge a credit card, take out a loan, or use a service that requires post-payment – such as a hospital visit or utility connection – you are incurring debt, and are expected to pay back that debt. If a debt becomes past due, the creditor will reach out to collect payment. Eventually, the creditor may turn to a debt collection agency for assistance.

What are debt collection agencies?

Debt collection agencies specialize in recovering overdue debts. They provide services for creditors such as credit card companies, student loan lenders, or utility providers. Typically, debt collection agencies are paid through one of three methods: They earn either a flat fee,  a percentage of the amount of money they recover, or they might purchase the debt from the original creditor at a discounted price. Then the debt is owed to the collection agency – which becomes the new creditor – rather than to the original creditor.

A collection agency usually will send multiple notices and requests for payment through both email and regular mail. They may also contact family members if they receive no response from the person who owes money.

What should you do if your debt has been sent to collections?

If you receive a message from a debt collector, do not ignore the message. Dealing with debt collection can be stressful, but if you communicate clearly, make an effort to pay down the debt, and negotiate a solution, the situation should not escalate.

A debt collection agency wants to collect the money, so they may be open to accepting a lower amount to begin with if you can’t pay in full right away, or they might be willing to establish a payment plan.

If you choose to communicate with the collection agency, be sure all communication is in writing, and save the messages – especially if you negotiate any terms. Having records can serve as evidence, in case you need to contest anything.

How can I be sure I am not being scammed?

You should start by verifying that a legitimate source is the one informing you about the debt you are told that you owe. Check to make sure the notice includes your name and mailing information, along with the name and mailing information of the debt collection agency. The notice should name the creditor you originally owed, list applicable account numbers, and state the amount owed as of a specified date. 

And be sure you pay the correct party. If the notice comes from a collection agency, the payment also should go to them, not to the original creditor.

What happens if you don’t pay the debt collection agency?

If you don’t pay overdue debt that is in collections, you will likely see a negative impact on your credit score. This can make it more difficult to secure loans, credit cards, or favorable interest rates in the future. Generally, debt that has gone to collections will remain on your credit reports for seven years from the first date of a missed payment.

The collection agency also can take legal action against you if the debt remains unpaid for an extended period of time. If the debt collection agency wins the lawsuit, they can collect payments directly from your wages or by placing a lien on any property you own. Basically, if you continue to not pay, your property can be legally seized and sold by the agency to recoup their losses.

The bottom line

If you borrow money, you have to pay it back. And if you receive a message from a creditor by phone, email, or regular mail, don’t ignore it! Check to make sure it is legitimate, and then either pay the debt or call the creditor or collections agency to make a payment arrangement.

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Some kinds of credit allow you to repeatedly borrow money up to a set limit, as long as you stay within the credit limit you are given. This kind of credit is called revolving credit, and includes credit cards, personal lines of credit, home equity lines of credit, and business lines of credit.

Other kinds of credit provide you with a set amount of money that you repay in fixed amounts over a specified period. Once the money is repaid, you cannot borrow from the same creditor again without reapplying. Examples include auto loans, mortgages, student loans, and personal loans. This kind of credit is called non-revolving credit, also known as installment credit.

Experts suggest that correctly using a mix of revolving and non-revolving credit can help build good credit, which is essential to living in the U.S.

Here are some tips to use credit correctly:

• Always pay at least the minimum amount due on time.
• Keep balances low on revolving credit accounts to show responsible credit management.
• Regularly monitor your credit score to understand your credit health.

How to use loans to build credit

If you are new to the U.S. credit system, experts suggest that credit cards and personal lines of credit with spending limits are both excellent ways to start building a good credit history. A credit score is essentially a reflection of how responsible you are with paying back borrowed money. With a low spending limit, you are less likely to overspend and go into debt. This means you can avoid accumulating high balances that can negatively impact both your credit score and your monthly budget. Payment history is one of the most significant factors taken into consideration in calculating credit scores, so consistently making on-time payments can greatly improve your credit score.

Credit cards offer different spending limits, and a $500 limit is a good place to start because that will be easier to pay back each month than a larger amount. With such a limit, you are free to spend up to $500, and as you repay the amount that you have borrowed, your available credit will go back up to $500. This will help establish that you do not miss payments or pay them late.  If you wish, you may always pay more than the required minimum payment, or you may pay off your account in full. As long as you are in good standing, the credit will be available to use again. 

One way to positively impact your credit score is to use only a small amount of your available credit each month. This shows lenders that you can handle credit – you are not overly reliant on credit, and can repay loans on time. Credit utilization ratio refers to the percentage of your available credit that you are currently using. Your ratio is included in calculating your credit score. 

Some credit card companies require a deposit before they can approve a card, either because of a poor credit history or perhaps because someone has no credit history in the U.S. In this case, the credit limit of your card will typically be the amount of your deposit. You cannot use this deposit to pay any bills you have incurred, but with a good credit history over a period of time, many companies will give the deposit back. 

A personal line of credit is comparable to a credit card, but may have different terms, such as the interest rate and how you access funds. A line of credit may have it’s own separate card, or you may be able to access the account using checks. If the account does not come with a card or with checks, you will be able to transfer money into your checking account and use your debit card for your purchases, or make an online payment on the line of credit using your checking account’s routing and account number.

Non-revolving credit

 An auto loan is a type of non-revolving credit. Each month, the borrower makes a payment toward their auto loan. This payment goes toward principal, which is the amount of the original loan, and also toward interest, which is based on the percentage interest rate offered when you acquired the loan. Interest accumulates each month.

As an example, consider a $16,000 auto loan with an interest rate of 5% and a term of 60 months (5 years). If you are approved, the lender provides you, the borrower, with $16,000 to purchase a car. This money is considered the principal amount of the loan. You then agree to repay the $16,000 plus 5% interest , which results in a total of $18,120 paid by the end of the 5-year term. As you repay the loan, part of the payment goes toward interest and the rest goes toward paying down the principal balance that you borrowed. In the beginning, more of the payment goes toward paying off interest because interest is calculated based on the outstanding balance.

However, as time goes on and you make more payments, less interest will accrue and more of each payment will go toward paying off the principal amount. By making consistent payments, you will slowly pay off both principal and interest, until you have fully repaid your original $16,000 loan, plus interest.

The total amount that you pay will vary, based on a number of factors such as the terms of your loan, which include loan amount, length of the loan, and interest rate. How regularly you repay the loan also can drastically affect the total amount you will pay. If a borrower who makes many late payments is paying down the original balance more slowly than originally planned, which results in more interest building up over time. When the borrower makes payments that are higher than what is required, either every month or even once in a while, they pay down the balance faster than originally anticipated, which  means they pay less interest during the course of their loan.

In order to succeed in Maine, you must understand the U.S. financial system. It’s a challenging system to navigate, and many people make mistakes and fall into debt, which negatively impacts their financial health. Last month we talked about how to check credit scores. This month we look more closely at what credit scores are. Look for our articles on financial literacy each month, and tune into our podcasts for tips.

What is a credit score?

A person’s credit score is a number that determines their access to loans and credit cards, and often their ability to get jobs or rent apartments. The credit score is a representation of creditworthiness, or how likely a person is to pay back their debts in full and on time. It’s basically a number that lets lenders know how trustworthy someone is in relation to finance.

Credit unions, banks, and other lenders reference an individual’s credit score before granting them credit – which is the ability to borrow money to access goods or services, with the agreement that the borrower will pay back the money later.

To have a good credit score, the borrower must ensure that they make all payments – even minimum balance payments – toward outstanding debts by the due date. Late and/or missed payments can severely impact a borrower’s overall credit score, which will compromise their ability to obtain more credit from lenders for future needs.

Why do credit scores matter?

Your score isn’t just a number; it’s your key to various financial opportunities. Along with landlords, employers, and insurance agencies checking your score to determine if you’re trustworthy or not, lenders will look at it to determine whether they want to give you a loan. If they do decide to lend to you, your score also impacts your borrowing limit, your interest rate, and other terms. Essentially, the better your score, the less additional funds (in the form of interest and fees) you’ll need to pay for the privilege of being able to borrow the money. By understanding what factors influence your credit score, you can take proactive steps toward establishing or improving your credit standing and pave the way for future financial success.

Among the most important aspects of your financial health is your credit score. Here’s how you can check your credit score – it’s easier than you might think, and is an essential step in managing your finances. 

Checking your credit score

1. Online banking with your bank or credit union

Many banks and credit unions offer credit score checking as part of their online banking services. This feature is typically free and provides a convenient way to keep an eye on your credit score on your own financial institution’s platform.

2. AnnualCreditReport.com

AnnualCreditReport.com is the only federally authorized website for free credit reports. While it primarily offers free annual credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion), you can also purchase your credit score securely through this site.

3. Free credit score services

Several reputable websites offer free credit score monitoring. Credit Karma is one of the better known and trusted, and allows you to check your score without a fee. These platforms often provide insights into your credit report and offer tips on how to improve your score.

4. Through your lender

If you’re in the process of taking out a loan, ask your lender if they can provide your credit score. Many lenders access your score as part of the loan application process and can share it with you upon request.

Why checking your score is important

Checking your credit score is a vital part of your financial health for several reasons:

• Credit monitoring: Regularly checking your score helps you monitor your credit health, catch errors early, and understand how your financial behaviors affect your score.
• Improvement tips: Many credit score services offer personalized tips based on your credit history, helping you understand how to improve your score over time.
• Credit report access: Alongside your score, you’ll often get access to your full credit report, allowing you to review it for accuracy and dispute any errors.

Making the most of your credit score

Once you’ve checked your credit score, what’s next? Here are a few steps to consider:

• Use a simulator: Some services offer a credit score simulator, which predicts how your score might change based on hypothetical financial actions (e.g., paying off debt). Credit Karma has a built-in simulator, as do some banks and credit unions. 
• Set a goal: Determine what a good credit score would be for you and set a realistic timeline for achieving it.
• Monitor regularly: Make checking your credit score part of your regular financial routine. This will help you stay on top of your credit health and make informed financial decisions.

Checking your credit score is a simple yet powerful tool in managing your financial wellness. By taking advantage of the resources available to you, you can gain a better understanding of your credit health, work toward improving your score, and open up new opportunities for your financial future.

In order to succeed in Maine, you must understand the U.S. financial system. It’s a challenging system to navigate, and many people make mistakes and fall into debt, which negatively impacts their financial health. Look for our articles on financial literacy each month, and tune into our podcasts for tips.

What is a Credit Report?

A credit report is a detailed record of your credit history and is usually the document that lenders consult when you apply to take out a loan or hope to land a job. The lenders want to know if you are reliable, and credit reports give a snapshot of your borrowing and repayment behaviors. This can influence whether you get a loan, qualify for lower rates, can rent an apartment, or be hired at a job you want. 

Credit bureaus create credit reports by gathering information from various sources, such as credit unions, lenders, and other financial institutions. The three major credit reporting agencies in the United States are Equifax, Experian, and TransUnion.

What is included in a credit report?

Credit reports list personal information like your name, address, and Social Security number. They also list all your credit accounts – for example, credit cards, mortgages, student loans, and all other lines of credit – along with their statuses and payment histories.  A typical credit report includes: 

Personal information: Your full name, date of birth, Social Security number, current and previous addresses, and current and prior employers.

Account information: All current and past credit accounts, including credit cards, loans, mortgages, and other lines of credit.

Credit inquiries: All the companies or individuals who have requested a copy of your credit report in the past two years. These can either be hard inquiries (initiated by you or a lender) or soft inquiries (initiated by yourself or a third party for non-lending purposes).

Public records: Any bankruptcies, foreclosures, tax liens, or civil judgments that may affect your creditworthiness.

Collection accounts: If you have any delinquent accounts that have been sent to collection agencies, they will be listed in this section.

Dispute history: If you have disputed any information on your credit report in the past seven years, it will be listed here along with the resolution of the dispute.

Why are credit reports necessary?

Credit reports exist to help lenders make informed decisions. When you apply for credit, the lender reviews your credit report to see how well you’ve managed credit in the past. Have you paid your bills on time? Are you maxed out on all your credit cards? A credit report reveals these things, enabling a more objective assessment of your risk as a borrower.

Credit reports also protect you. By providing easy access to your financial history, you can quickly identify any misuse of your information, spot fraudulent activity, or correct inaccuracies. They’re a tool for transparency and protection in lending – something both borrowers and lenders can appreciate.

What’s the difference between a credit report and a credit score?

Many individuals mistakenly use the terms credit “report” and credit “score” interchangeably. However, there’s a significant difference. Your credit report is a detailed account of your credit history, while your credit score – derived from the data in your credit report – is a three-digit number that summarizes your creditworthiness at a specific point in time. This can range from 300 to 850, and the higher the number, the better your credit. According to Experian, a credit score of 700 or above is generally considered good.

The credit report provides a detailed overview, whereas the credit score is a quick summary for lenders. A good analogy is that the credit report is like the script of a film, and the credit score is the star rating. Both are essential in understanding the story, but one provides more depth and context.

Checking your credit report regularly is important for many reasons. “How To Check Your Credit Report” in this issue of Amjambo Africa provides useful tips on what to look for and how to do it.

Checking your credit report is an important step toward safeguarding your financial well-being. You can spot inaccuracies, fraud, and threats to your financial stability. Here is how to check your free credit report:

Under federal law, the three national credit reporting agencies – Equifax, Experian, and TransUnion – must allow people to access their credit report for free through the Annual Credit Report Request Service. Historically, people have been able to access one free report from each of the three agencies once a year. But since the pandemic, you now have permanent access to your credit report, and can request your free report by phone, mail, or online.

Online

The official site for viewing your free credit report online is https://www.AnnualCreditReport.com. By using this website, which is authorized by the federal government, you can get your report immediately after verifying your identity through an authentication process. Be prepared to verify your name, address, date of birth, and Social Security number. You also may need to answer questions about your existing credit accounts, if you have any. Be sure you’re accessing the exact website address as shown above – not any fraudulent websites posing as the Annual Credit Report Request Service. Imposter websites may have slightly misspelled addresses and might prompt you with emails, calls, or texts asking for your personal information. The legitimate website will only ask for your information from within the site and will not reach out to you any other way.

Phone

To check your report over the phone, call toll-free (877) 322-8228. You’ll need to go through a verification process, then your credit report will then be mailed to you within 15 days.

Mail

You can also download a request form from the official website in order to get your credit report. Just print and complete the form, and then mail it to:

Annual Credit Report Request Service

P.O. Box 105281

Atlanta, GA 30348-5281

Your credit report will then be mailed to you within 15 days.

Bottom line

Checking your credit report is a proactive way of protecting yourself from financial exploitation, and also provides an organized summary of all of your past and current credit accounts. You can get free weekly reports, and if you need access to your report more than once a week, you can also buy a report from each of the three national credit reporting agencies – Equifax, Experian, and TransUnion. There are other services available where you can purchase your report and also monitor your credit score, but accuracy and security can vary. Accessing your report through the Annual Credit Report Request Service or the three main credit bureaus is the safest way to stay up to date with your credit report.

The U.S. financial system is based on credit, so understanding the various ways the term “credit” is used is key to financial success.

In this country, almost every financial move you make is recorded. Your financial history is used by one of three national credit bureaus to assess your “creditworthiness,” which is your perceived ability to borrow money and repay the balance (the loan amount + interest) that you owe over time. If someone has an excellent record of paying back loans, financial institutions say they have “good credit.” However, if the person has had problems paying back loans, or made late payments, or has no loan history at all, they say this person has “poor credit” or “no credit history.”

Credit is based on purchases you make and whether you paid them back – on time, or at all. This includes purchases made with a credit card, or through a mortgage on a house, or a loan to buy a car or go to college, or from utility companies or medical facilities. The national consumer credit bureaus compile all this financial information in a “credit report,” and these credit reports determine someone’s “creditworthiness.” The three national credit bureaus are Experian, TransUnion, and Equifax. 

The information contained in the credit reports helps to make up a “credit score,” a three-digit number that reflects creditworthiness. Lenders use this score and the details of a credit history to decide whether or not someone qualifies for a loan and at what terms, which include how much money they can borrow, the length of the loan, and the interest rate. 

A high credit score means that lenders see a person as responsible and reliable, while a low credit score may mean the person has difficulty getting a loan because the lender is not confident they will be repaid. Good credit helps a person toward financial stability and growth opportunities. For example, good credit allows you to qualify for loans with favorable terms, such as lower interest rates and higher borrowing limits. And good credit makes renting an apartment, getting a credit card, and securing a job easier. 

A low credit score can mean a lender would charge higher interest rates on a loan. Sometimes a low score could even mean having trouble renting an apartment or getting a cell phone, or could mean you can’t get low auto insurance rates. Poor credit can limit options and make borrowing money more expensive.

Having good credit takes work. Making timely payments, keeping your credit card balances low, and maintaining a mix of credit types is crucial to strengthening your credit. By being responsible with your credit, you can build a strong credit history that will benefit you in the long run. It is never too early to get started with credit. By taking out a small, secured loan or opening a small credit card, you can demonstrate good financial practices so that you are ready when you need to borrow money for an emergency, car, or home.

You may wonder if your credit is considered good or bad or what your credit score might be. Many credit unions and banks offer free credit reports and credit monitoring to their customers, and are happy to review your report with you. Or you can obtain a free report yourself every year from each of the three major credit bureaus at AnnualCreditReport.com. Reviewing your credit report regularly for errors or potential fraud is essential. 

Credit is an important part of finances in America. It allows individuals to make purchases they may not otherwise be able to afford and opens up opportunities for growth. However, it’s important to maintain good credit and take advantage of its benefits. By understanding how credit works and being proactive about managing your finances, you can set yourself up for financial success in the future.

The biggest factor that lenders such as credit unions and banks examine to determine a person’s creditworthiness is their payment history. This is because the lenders want to be sure a loan recipient will pay back the loan on time and in its entirety. Late, missed, and delinquent payments remain on someone’s credit reports for seven years, so lenders look at payment history over time.

What happens if someone is late making payments?

One single missed credit payment should not ruin a credit score, but when lenders see many missed payments, they most likely will be concerned. The best thing to do if you have a past due payment is to try and pay it off as quickly as possible. The longer it stays unpaid, or delinquent, the worse it looks on your credit report, and the more negative its impact.

Generally, outstanding balances will be moved to collections after 30 days of nonpayment for loans, and 180 days for a credit card account. Accounts in collections are specially noted on credit reports and bring down the overall credit score. The result usually includes reduced limits on existing credit (and smaller limits for any potential future credit), late fees, and increased interest rates – all of which can quickly become a financial burden. Also, if an account has been moved to collections, the original lender may take legal action against the borrower.

Tips for making payments on time

Borrowers can and should take some simple measures to maintain good credit standing because these can save a lot of financial pain in the long run. For example, the automatic payment feature can minimize the possibility of forgetting and/or missing a payment due date. That way, at least the minimum payment is sure to be repaid each pay period. Another option is to mark payment due dates on a calendar, and setting reminders – possibly recurring reminders – for when payments are due. And making payments early and often is always a good idea for individuals, since getting ahead helps in the event that a borrower runs into unforeseen financial struggles.

How to improve a low credit score

If your credit score is low, there is no time like the present to begin to improve your score. Make a practice of regularly reviewing your credit report, make all future payments on time, pay down your debt, don’t max out your credit limit. If you follow these suggestions, you will rebuild a healthy credit file and positive credit history, and you and your family will enjoy better financial health in the U.S.