Creditworthiness and Carefree Shopping

Article written by: Angela L. Serrette
Posted on: August 4, 2009

Shopping with ease.  Catching unbeatable sales.  Affordable bills.  Approved for charging at the register.  A supreme credit score.  A smiling cashier, a happy go lucky you.  Money in the bank.  No worries and a restful night.

Creditworthiness and being responsible will get you to all of the above mentioned and keep you in style.  Carefree shopping whether it’s in a supermarket or boutique is something we all want.  Not having to worry about having enough finances or credit is what we all want-even if you shop very little.  The comfort factor that good credit brings allows you to sleep at night and catch those great sales tomorrow.

Credit Risk: as defined by Wikipedia, “…is the risk of loss due to a debtor’s non-payment of a loan or other line of credit.”

This will make every creditor run from you and you’ll miss all those fabulous sales. And will keep you up at night.

Take your pick. I’m choosing creditworthiness.

Now let’s make it clear there are plenty of people who are creditworthy and do not have credit card accounts.  And of course there is vice versa. The difference is when you have an account your credit history or credit profile displays your shopping and payment habits.  This history can make or break the perception of your credit worthiness depending on your repayment and spending habits.  What we tend to forget is our ability to manage can be a “learned trait” from our parents or other influences around us.  We need to be careful about who and what influences our financial decisions.

With the economy in flux and so many layoffs, many are re-thinking or re-strategizing their spending habits.  The downturn in the economy over the past 2 years will serve as a strong lesson globally on the importance of curtailing spending, wiser investment strategies and having a “financial back-up resource” that can be counted on.  That’s on an individual and business levels-globally.

Just who is deciding your creditworthiness?

Lending institutions, loan officers, who each have their own distinct methods for investigating, evaluating and determining if you are a credit risk. Possibly your employer-if they do a full credit check/ background check on you.

So what methods do financial institutions use to judge us, discourage default payments and minimize risk?  What types of safeguards are used to protect you from going deeper in debt and protect the lender from approving a bad loan or line of credit?  Let’s take a look.

What type of scoring is used by mortgage companies, banks and credit card companies to judge our credit worthiness?

FICO Score developed by Fair Issacs Corporation is mainly used by mortgage companies use to judge potential client’s credit worthiness. FICO Scores range from 300-850.
ScorePower is used by Equifax
PLUS Score is used by Experian
Vantage Score is used by TransUnion (scores range from 501-990)
Credit Card Companies each have their own scoring models they have developed to meet their distinct needs.

• Lenders have their own methods (credit scorecards) to rank new or existing customers.
• Uninsured loans and mortgages require higher interest rates to cover potential repayment loss.
• Revolving products such as credit cards, overdraft accounts manage possible risk by setting limits or requiring security such as property (personal, real etc.)
• Probationary period to watch consumers spending and paying habits before authorizing credit line increases.
• Lending institutions will request references from landlords, utility companies etc.
• Loan officers and credit card companies may seek references from personal friends and relatives

Now let’s take a look at a few things that can affect your creditworthiness:

 

Timely Bill Payments

Rent, mortgage, utility, phone, cable, student loans, credit cards, and personal loan payment history all affect your credit ratings and financial officer’s decision on extending a line of credit to you.

Parking Tickets, yes I said parking tickets.  Leaving parking tickets un-paid can be reported as delinquent or “piling up” and have an adverse affect on your credit profile, FICO Score and negative remarks remain on your credit report for up to 7 years.  Think about it.  If the city gives you a ticket they are considered a creditor-you owe them money.  Therefore the city has a right to make a claim to the credit bureau that a debt is owed and unpaid.  Unless you are positive you were wronged and can prove it beyond a shadow of a doubt, pay the ticket and fight for a refund later.  Keep your credit clean.

Identity Theft is a leading cause in destroying credit history, whether your credit is stellar or not.  Look into many of the theft identity companies such as ID Vault, LifeLock, Identity Guard, DefenseLock or check out www.IDProtectionGuide.com which will list a host of ID theft companies for your to compare. If you are a victim of identity theft clearing up your credit history will require legal assistance and persistence.

Take extra precautions to:

• Minimize how many credit cards you use.
• Keep close watch on your children’s and deceased loved one’s social security numbers to track when and if they are used.
• Use a firewall on the Internet and have unusual pins and access words not easily thought of.
• Track all bills and look for and dispute unusual charges.
• Shred personal information before disposing of bills, insurance/ bank statement etc. in the trash.
• Don’t give out personal information to un-accredited companies.
• Safe guard your senior relative’s personal information-they can be unsuspecting victims.

 

Student Loans are not exempt from credit reporting agencies. Remember student loans are based on bank approval, banks and credit reporting agencies are partners in compiling credit profiles.  If you are late on your monthly payments banks will most likely report this to credit bureaus. This can hurt the new graduates looking for a fresh start in the “credit world”.  Before taking the student loan, have a game plan for repayment “after graduation” or try to start paying the loan back “before you graduate.  The goal is to start out with clean slate after graduation and hopefully maintain a great credit score throughout your career.

Car Loans are not exempt from credit bureaus.  And you should be working to pay off the loan to keep your credit score in good standing and avoid the “repo-man”.

 

Credit Cards  should be thought of as “back up” not as essentials and primary methods for shopping.  In addition minimize the number of credit cards you apply for. You don’t need all 6 American Express cards do you?  Do you need a Bergdorf’s credit card? Just how much shopping at Victoria’s Secret warrants a charge card?  Be honest with yourself and only apply for the credit cards that offer you advantages you can utilize with the least interest rates.

A few hints in what to look for in credit card advantages:

• Lowest interest rates, ATM fees and finance charges offered.
• Compare membership fees.
• Upfront information on rates to be charged “after the 1st year interest free” offer expires.
• Check out how often the credit card company increases membership fees.
• Find credit card companies that report to Credit Bureau every 6 months rather than every month.

 Back Taxes, Judgments, Liens must be paid on time or cleared up.  Payment issues of this nature can be detrimental to your credit profile and remain on your credit report for years.  Potential lenders or creditors will be dissuaded from offering you a line of credit with these issues in your past. Negative remarks in this area can remain on your credit report for up to 10 years.

Library Fines are now reported to credit agencies such as Equifax and others. Yes even library fines are considered a valid tool to judge your credit worthiness. So get those library books back on time, afford late fees and avoid a blemish on your credit report.

Co-Signing can be advantageous but can be a downfall as well.  In the case of lack of payment from the primary card/ mortgage holder with no resolution in sight, the burden of repayment falls on the co-signer.  Situations like this can be embarrassing to the primary card/ mortgage holder , frustrating to the co-signer and discouraging to the loan officer from extending future lines of credit to you.  In addition this situation will be reported and add a negative reference on your credit report.

It’s OK to help friends and family and no one can guarantee the future, but try to make sure they have a game plan for repayment.

 

Buying a foreclosed home will come with certain pre-existing financial obligations from the previous owner such as back taxes, liens etc. that will become the new owners’ responsibilities.  That means any negative or outstanding financial marks are transfered to your credit report which will impact your credit profile.  Keep this in mind.

Special Note; Real Estate, Foreclosure, Mortgages, Back Taxes, Liens, Homeowner Loans

 

 

Review your financial obligations weekly, keep the checking account balanced.  But put away some savings that you can regulate and withdraw easily for emergencies.  Set aside funds for monthly expenses such as utilities, groceries etc.