LITMIR.BIZ

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One Year Ago Savings & investments $_____________________________________________________ Savings & investments $____________ – Loans & debts $_______________________________________________________________________ – Loans & debts $___________________ = Net worth today $_____________________________________________________ = Net worth a year ago $____________ Correct for changes in value of investments you owned the past year Net worth today $____________________________________ – Net worth a year ago $____________________________________ – Appreciation of investments (over past year) $____________________________________ + Depreciation of investments (over past year) $____________________________________ = Savings amount $____________________________________ Annual gross income $____________________________________ Savings rate (savings amount divided by your annual gross income) ___________________________________ %

      

If you have debt that you’ve been paying down over the past year, you can count the principal payment reduction on that debt as savings. For example, suppose a year ago you owed $5,000 on an auto loan. Now, a year later, you owe just $4,500. You can count that $500 reduction in what you owe as new savings.

Understanding and Improving Your Credit Score

      If you expect to someday apply for a loan of any type and get a competitively low interest rate, you should understand your credit report and credit score and how to improve each. A credit report is basically your credit history, while a credit score is a three-digit score based on the information in your personal credit report. This section highlights what you need to know about your credit score and reports, including how to obtain and improve them. Chapter 4 provides more insight into managing your credit report and credit score.

      Deciphering how lenders use credit reports and scores

      Most people borrow money at various times in their life, whether it’s to buy a home (or other real estate), to finance a small business, pay for educational expenses, or for other purposes. When you want to borrow money, lenders examine your credit report and your credit score(s) to determine how responsible you’ve been with credit and to help them decide whether they should lend you money (and if so, how much to charge you based on your creditworthiness habits).

      Specifically, lenders examine your history of credit usage in your credit report. This information tells the lender when each of your accounts was opened, what the recent balance is, your track record of making payments on time, and whether you’ve defaulted on any loans. A credit report also tells a prospective lender where else you’ve been applying for credit most recently.

      Lenders use your credit score to help them predict the likelihood that you’ll default on repaying your borrowings. The higher your credit score the better, because a high credit score means that you have a lower likelihood of defaulting on a loan. Thus, more lenders will be willing to extend you credit and charge you lower rates for that credit. It’s important for you to know your credit score because a high credit score puts you in a negotiating position to ask for better rates. Lenders are in the moneymaking business and many don’t automatically give you the best rate for which you qualify.

      The most widely used credit score is the FICO score, which was developed by the FICO company (formerly known as Fair, Isaac and Company). FICO scores range from a low of 300 to a high of 850. Most scores fall in the 600s and 700s, and the median is around 720. You generally qualify for the best lending rates if your credit score is in the mid-700s or higher.

      Obtaining your credit reports and fixing errors

      You want to get your hands on your credit report so you know what lenders are reviewing. You’re entitled to receive a free copy of your credit report (which does not contain your credit score) every 12 months from each of the three credit bureaus — Equifax, Experian, and TransUnion. If you visit www.annualcreditreport.com, you can view and print copies of your credit report from each of the three credit agencies. (Alternatively, you can call 877-322-8228 and request that your reports be mailed to you.) You could also order your credit report from a different bureau every four months.

      When you obtain your reports, inspect them for possible mistakes. Credit-reporting bureaus and the creditors who report credit information to these bureaus make plenty of errors.

      If your problems are fixable, there’s no need to hire someone to do so for you — you can fix them yourself, but you will likely have to make some phone calls or submit a dispute online via email or by writing a letter or two.

      Some credit-report errors arise from other people’s negative information getting on your credit report. This can happen if you have a common name, have moved a lot, or for other reasons. If the problematic information on your report appears not to be yours, tell that particular credit bureau and explain that you need more information because you don’t recognize the creditor.

      Creditors are the source of some reporting mistakes as well. For example, perhaps a bill you paid off is still incorrectly being reported as a balance you owe. If that’s the case with your report, write or call the creditor to get the incorrect information fixed. Phoning first usually works best. (The credit bureau should be able to tell you how to reach the creditor if you don’t know how.) If necessary, follow up with an email (preferred because it leaves a trail) or letter. You can also dispute errors online directly with the credit reporting agency.

      

Whether you speak with a credit bureau or an actual lender, make notes of your conversations. If representatives say that they can fix the problem, retain their contact information, and follow up with them if they don’t deliver the promised results. If you’re ensnared in bureaucratic red tape, escalate the situation by speaking with a department manager. By law, bureaus are required to respond to a request to fix a credit error within 30 days. And if you file a dispute and the creditor doesn’t respond, the credit bureau must then remove the derogatory item.

You and a creditor may not see eye to eye on a problem, and the creditor may refuse to budge. If that’s the case, credit bureaus are required by law to allow you to add a 100-word explanation to your credit file. Just remember that if you go this route, be factual in your write-up and steer clear of broad attacks on the creditor (such as “their customer service sucks”). You’ll find sample 100-word statements online and a place to enter your statement on each bureau’s website. Or, you can mail your statement to the bureau.

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