Living with Bad Credit

A credit report contains your entire credit history, basically any borrowing and repayment of money. Lenders will see everything in your credit report and use the information to base a decision to lend or not lend you money.

Your credit report contains:

  • Basic information: your name (any previous names,) current and previous addresses, telephone number, Social Security number, date of birth, and most recent employment information.
  • All credit accounts, open or closed, including: limit (how much you can spend,) balance (how much you owe,) amount of monthly payment, length you have had account, if the account is joint (and with whom) and if you have made late payments. 
  • A list of all delinquent accounts: how much you owe, how long the account has been in default and if the account has been sent to a collection agency. 
  • Judgments against you: bankruptcy, court-ordered child support, tax liens and any public records. 
  • Companies who have requested your credit report. 
  • Optional: personal statement that you provide to explain your circumstances, which can be helpful if you have negative information on your report.

A credit score, also referred to as a FICO score, is a number based on your credit report that allows lenders to determine your credit-worthiness. The number can range from 300 to 850. This number is used to predict your payment behavior and is an easy way for lenders to decide if they can risk lending you money.

The most widely used scoring system was developed by the Fair Issac Corporation, hence FICO score. A credit score is comprised of your personal credit information compared to statistical data. The credit score is comprised of five different categories:

  • Payment history (35%) – the most important category. Have you made all payments on time and for how long. How many unpaid debts you have that have resulted in alternative action (e.g. bankruptcy, tax liens, collection lawsuits, etc.)
  • Amounts owed (30%) – how many lines of credit you have and how much you owe compared with how much you can borrow. 
  • Length of credit history (15%) – how long you have had your accounts. 
  • New credit (10%) – how many new lines of credit you have. 
  • Types of credits used (10%) – do you have a balance of revolving (credit cards) and installment (loans) credit lines. 
  • What about errors?
  • Errors in your credit report will negatively effect your overall credit, and they may not be your fault. The process of disputing errors takes time and patience, but there is an easy way to do it.

There are three credit bureaus that have your credit report; Experian, Equifax and Trans Union. Due to the way that credit is processed, each credit bureaus report should be examined independently because they all may not have the same error.

The first step is to get copies of your credit report from all the credit bureaus. Examine each and look for errors. Common errors to look for that may be lowering your credit score are: misspelled name, incorrect address, phone number, birthday and social security number. Any of these errors could effect your score because someone else's information could end up in your report. Next, look at all of your account information. Make sure all account information, balance and limits, and any account activity is correct.

If you find legitimate errors on any of your reports, the next step is to start a file that you will keep all communications with the credit bureaus. Keep copies of every letter you send and receive. You may need this later if you need to re-investigate your claim.

For each bureau that has the error on the report, you will need to prepare a letter that clearly states your information, the error and any proof that you have that can prove the error is legitimate.  Include copies of any documents that can back up your claim. Send the letter first class mail, with "Return Receipt Required." This will allow you to receive confirmation the letter was received by the credit bureau on a certain date. Keep a copy of this letter in your file.

According to the Fair Credit Reporting Act (FCRA,) the credit bureau must investigate all disputes and contact you in roughly 30 days with the results of the investigation. All errors are crosschecked with the credit lender's information. They will either report the error was corrected and fixed, or they will refuse to correct the error. An error correction will be refused if the creditor (lender, collection agency, courthouse, etc.) confirms that the information currently on your report is correct. If the error is corrected, you will receive a free copy of your report showing the correction.

If the credit bureau will not fix the error, the next step to take is to write a follow up letter, asking the credit bureau to fully explain the dispute and why it was not corrected. At this point, you should also contact the creditor explaining the dispute, and make sure that their records are correct. Again, include copies of relevant documents.

If your dispute is again not corrected, the final step you can take is to contact government agencies that can help such as, the Federal Trade Commission (FTC) or your State Attorney General. You can also contact a FCRA attorney, who can give you specialized legal advice.