The world of credit: The 10 commandments of credit John Hudockcredit, guidelines,
The following are what I consider "The 10 Commandments of
Credit." This is by no means a complete list. There are dozens of
other items I could list, some of which could be more important to
you than what I have selected.
1. Pay your bills on time, or at least never more than
30 days late.
This should be the basis for good credit. Besides having the
ability to repay a loan, your payment history is the next most
important item. The trigger date for late payments is 30 days, then
60 days, 90 days, etc. Each period is another category with a
greater point deduction. It is very important to keep all credit
accounts within the agreed payment period to establish credit. If
you are more than 30 days late, the account changes from an open
account to a derogatory account. This is very serious because even
if you pay your account current or close the account, it will
remain derogatory, lowering your credit score for up to seven
years. You must arrive at a fair settlement with the creditor to
report as paid in full with no derogatory comments.
I feel this is excessive and may not be a correct representation
of an individuals true credit habits. It is possible that the
payment was misplaced by the creditor or you never received a
statement. Either way, your score is reduced for seven years.
2. Budget your income.
Setting up a budget is paramount in any successful personal
financial plan. A budget is actually a plan for spending and saving
your money. There are many benefits to having a budget. Many
individuals attempt to do this mentally, but if your income ratio
to expenses is close, you must be able to see the reality of the
numbers. Making and following a budget means you can have money for
the things you want. When you are not tracking your expenses, cash
always seems to disappear.
Income is the amount of money you make. Expenses are what you
spend your money on. A balanced budget is when your income is at
least as much as your expenses. The most important factor in
budgeting is maintaining simple, but accurate records. When
starting your budget you will need to keep track of where your
money comes from and where it goes. You should record what you
spend in a spreadsheet or notebook, and try to keep receipts for
what you spend. Without a budget, you do not know accurately where
your money goes, and perhaps you can't afford things you would like
to have. When you know where your money goes, you feel and actually
are more in control. It's easier to pay your bills on time, save
money each month and avoid money problems.
Start a checking account and get a debit card. That way, when
you pay for purchases, you will already have a record of them. This
will reduce the individual expenses you must track to only the cash
payments you make. A checking account will also provide a vehicle
to establish an automatic method to make payments and develop an
excellent payment history.
Each month, compare your actual expenses to what you have in
your budget. To make this work, you must keep your spending within
your plan, constantly looking for ways to reduce your expenses. You
have more control over expenses than income. It takes perseverance,
especially in the beginning. It will take some time to set up a
plan that works for you. You can make all the changes you need to
make it work. The sooner you start, the easier it will be.
3. Use credit cards to your advantage.
There are many credit card considerations. The main consideration
is to use your credit card as cash and pay the balance in full
every month. Credit cards are good for two things: convenience and
increasing your credit score.
You should never use credit cards for any long-term credit it is
entirely too expensive. You increase the cost of anything you
purchase by more than 20 percent, unless you pay the balance in
full each month. The higher the balances on your credit cards, the
more you lower your credit score and the more interest you pay on
anything else. It is ridiculous to pay more than 20 percent extra
by using your card to purchase anything and then not paying the
balance each month. Paying your balance each month could save you
the more than 20 percent for other things you need or want. Also,
never have a credit card without a grace period. You need this time
to manage your expenses. The grace period should be at least 20-25
days. The current average interest rate is about 21 percent, but no
interest is charged if the balance is paid in full during the grace
period. Use the bank's money, pay each account in full when due and
pay no interest. Always check your monthly fee, annual fee and any
other fee on your monthly statement. Read your agreement and keep
your balance below 25 percent of your high limit. Some credit cards
will charge a late fee if they receive your payment on the day it
is due. This is illegal. Contact the credit card issuer immediately
and have the late fee removed.
You should use each credit card once every six months. Credit
card issuers are now canceling some credit card accounts if they
are not used. The current credit scoring system requires you to
have at least two credit cards or revolving accounts; the credit
reporting agencies (CRAs) claim the number is required to evaluate
your payment habits. Actually, you need three to four open trade
lines with each repository. Credit cards are the most appropriate,
since they report to all three credit repositories. You should
restrict the number, and do not have more than four credit cards.
There are two types of credit cards available: "unsecured,"
requiring credit scores above 620; and "secured," which require a
deposit. Normally, for a secured credit card you need to deposit
the amount of the credit card limit to get a credit card issued.
Some programs will charge the amount of this to the credit card,
then deposit this amount into a low-interest bearing savings
account. All secured credit cards charge an annual membership fee
(anywhere from $29 to $150).
4. Protect your identity.
There is a difference between "credit theft" and "identity theft."
Credit theft also known as credit fraud is when someone makes
purchases on accounts that are yours. The fraudster will take one
or more of your credit card numbers and use it as his own. Even
though credit theft can be difficult, it is nowhere near as hard to
deal with as identity theft. Identity theft is when a criminal uses
your personal information to open new accounts. In the case of
identity theft, the criminal will obtain personal information about
you and use that information to secure credit in your name. They
will open these credit accounts and take out loans in your name,
which could be for anything from autos to home equity loans. The
six most important guards against identity theft are as
- You should guard your personal identifying information. Before
divulging it, you should find out how it will be used and whether
it will be transferred to third parties. You should find out
whether you have the choice of opting out of having the information
shared with third parties.
- Make certain that personal financial information is disposed of
properly. You should be certain that items containing personal
information such as charge receipts, insurance forms and bank
statements are disposed of safely.
- Disclose your Social Security number only when absolutely
necessary. You should ask to use alternative numbers as identifiers
whenever possible, including on your motor vehicle license.
- Periodically check your credit report.
- Carry only the credit cards and identification you actually need.
If you lose credit cards, notify the creditors by phone and request
that a fraud alert be placed in your file.
- Pay attention to billing cycles. Bills that do not arrive on time
may have been misdirected by identity thieves.
For more information or to report fraudulent activity, contact
the national repositories: Equifax (www.equifax.com), Experian (www.experian.com) and TransUnion
5. View your credit report at least once per
You should obtain and review a copy of your credit report from each
of the three major credit reporting agencies at least once a year
to make sure your information is accurate. The reports are free if
you live in Colorado, Georgia, Massachusetts, Maryland, New Jersey
and Vermont. The cost ranges from $1 to $9 in the other states.
Your credit report is free in all U.S. states if:
1. You were denied credit, insurance or a job;
2. You are on welfare or unemployed and looking for work; or
3. Your report is inaccurate due to fraud.
The new Fair and Accurate Credit Transactions Act (FACT),
adopted in December 2003, provides all consumers a free copy of
their credit report (one from each bureau each year) without the
scores. If you see any errors on your credit report, contact the
creditor and the credit bureau. If you do not get cooperation from
the repositories in correcting errors on your credit report, call
the Federal Trade Commission (FTC)
at (877) 382-4357 and file a complaint.
6. Understand "good" and "bad" credit.
There isn't any constant or fixed deduction for any negative on
your credit report. There is no specific reduction for any
considered action. The deduction is relative to the entire credit
report. This is called "segmented scoring."
In calculating each trade line deduction, we have assigned fixed
numbers to develop relative actions. In the "mortgage model," the
credit bureaus designate an 850 as the highest score and the banks
cite 720 as the highest score necessary for a preferred interest
rate. There are 130 points that are unnecessary.
The amount of the credit score that you should be concerned with
is approximately 85 percent of the credit score. To get to a
"target score" (a specific level of score), we have 15 percent
flexibility. This is where minor deficits in your credit profile
can remain until resolved or deleted by time.
7. Don't pay late accounts without an
I am not suggesting that you fail to pay any legitimate bills, but
it is not to your advantage to pay off any late account that is
more than 30 days late unless the creditor agrees to certain
conditions. You should give your creditor two choices: either
remove the trade line from your credit report; or mark the account
closed with a zero balance with no additional comments. Unless you
do this, even if the account is paid in full, it will remain as a
derogatory on your credit report for up to seven years.
It is quite difficult to legally restore your credit without
somehow satisfying your outstanding debts. If it is a legal debt,
you should always make an effort to pay it. However, the act of
paying off a debt can actually hurt your credit. Negative credit is
allowed to stay on the credit report for a maximum of seven years,
except for a bankruptcy, which may remain on the credit report for
10 years. This seven-year period begins on the "date of last
activity" (DLA) in other words, when the last action took place on
By paying an outstanding, delinquent debt, you will change the
account status to a "paid collection," "paid was late" or "paid was
charged off," which will still stand out as a very negative
listing. Regardless of what the creditor states, it is not up to
the credit repository as to what is on your credit report. The
creditor reports what they want to the repository; they can put on
or take off any trade line and any information they determine is
accurate, complete and current. It is very important you receive,
in writing, a satisfactory settlement before you pay off any
A payment could also change the DLA so that it will start all
over, increasing the time that this derogatory will stay on your
credit report. It may be to your advantage to close all derogatory
accounts and make arrangements to pay them, if the creditor will
agree to a proper settlement agreement.
8. Understand what constitutes a credit
Your credit score is like a credit report reduced to a three-digit
number that ranges from 350-850. Since 1991, each of the CRAs
utilizes the Fair Isaac Corporation's (FICO) algorithm to provide
credit scores. The bureaus each market their credit scores under a
different name. These three scores are what most lenders will look
at when evaluating your credit for loan applications. Most lenders
use the middle score. Your FICO score, as it is generally called,
was meant to be based on your credit history. If the credit
information is accurate the reflection is correct. Unfortunately,
there are consistent errors in each credit report that can cause,
at times, a dramatic lowering of the credit score.
My first inclination was to suggest that you practice good
credit habits and not concern yourself with the credit score, but
FICO and the three CRAs will not let you do that. They have placed
a very high importance on credit scores. Most scores are
artificially low since they are based on inaccurate information.
You must understand what factors make up your credit score and what
you can do to increase this three-digit number. For mortgages the
score ranges from a low of 350 to a high of 850; 720 and above is
the preferred score for most lenders, which will give you the
lowest interest rates. A score from 500-620 is considered
sub-prime, with higher interest rates. Any score below 500 is
generally too low for any type of credit. You probably need open
lines of credit. The best and fastest method is to start with a
secured credit card, since they report to all three national credit
The current scoring models are in the process of being updated.
They have determined more factors that affect your
creditworthiness, which I interpret as incorrect. For example, if
you do not have an auto loan or mortgage, the result is a deduction
from your credit score. I feel this is unfair to consumers.
9. Avoid credit score deductions.
You should maintain at least three to four open trade lines of
credit with each repository. An open trade line is credit granted
to you that you have paid as agreed from the day it was started. If
you are more than 30 days late on any trade line, it becomes a
derogatory account and will remain a derogatory account for up to
seven years, even if you pay all past-due balances or pay your
account in full. You must have at least two open lines of credit
from creditors that report to the repositories to have a credit
score above 500. You must have at least three open lines of credit
to have a credit score above 600. There are five types of
information used to calculate a credit score at any given point in
time. Each type of information counts as a percentage of a total
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- Types of credit in use: 10 percent
- New credit: 10 percent
These are not fixed percentages for any deduction and they are
based on the importance of the five categories for the general
population. For particular individual groups, such as people with
relatively short credit histories, the factoring of the categories
will differ. Credit inquiries account for 10 percent of the total
score and are part of the "new credit" category. Their importance
depends on the overall information in your credit report. For some
people, a given factor may be more important than for someone else
with a different credit history. In addition, as the information in
your credit report changes, so does the importance of any factor in
determining your score. What's also important is the mix of
information, which varies from credit report to credit report for
any one person over time.
In an attempt to justify the credit score, FICO lists four
adverse actions for each repository on each credit report. It is
intended as an explanation for consumers and illustrates the top
four adverse conditions for the credit report. All three
repositories use the same code numbers for the same adverse action
but do not list them in the same order on the credit report.
Sometimes there does not appear to be a relationship to the credit
information and codes. There are currently 38 adverse actions. FICO
takes deductions from the credit score for each of these that
apply. Many actions are similar and use every tactic to reduce your
10. Know your credit rights.
The FTC works for the consumer to prevent fraudulent, deceptive and
unfair business practices in the marketplace and to provide
information to help consumers spot, stop and avoid them. To file a
complaint or to receive free information on consumer issues, visit
the FTC's Web site, www.ftc.gov or
call (877) FTC-HELP. The FTC enters Internet, telemarketing,
identity theft and other fraud-related complaints into Consumer Sentinel, a
secure, online database available to hundreds of civil and criminal
law enforcement agencies in the United States and abroad.
Credit card information
- Cardholder protections. Federal law protects
your use of credit cards.
- Prompt credit for payment. An issuer must credit
your account the day payment is received. The exceptions are if the
payment is not made according to the creditor's requirements or the
delay in crediting your account won't result in a charge. To help
avoid finance charges, follow the issuer's mailing instructions.
Payments sent to the wrong address may delay crediting your account
for up to five days. If you misplace your payment envelope, look
for the payment address on your billing statement or call the
- Refunds of credit balances. When you make a
return or pay more than the total balance at present, you can keep
the credit on your account or write your issuer for a refund if it
is more than a dollar. A refund must be issued within seven
business days of receiving your request. If a credit stays on your
account for more than six months, the issuer must make a good faith
effort to send you a refund.
- Errors on your bill. Issuers must follow rules
for promptly correcting billing errors. You'll receive a statement
outlining these rules when you open an account and at least once a
year. In fact, many issuers include a summary of these rights on
your bills. If you find a mistake on your bill, you can dispute the
charge and withhold payment on that amount while the charge is
being investigated. The error might be a charge for the wrong
amount, for something you didn't accept or for an item that wasn't
delivered as agreed. Of course, you still have to pay any part of
the bill that's not in dispute, including finance and other
charges. If you decide to dispute a charge:
1. Write to the creditor at the address indicated on your
statement for billing inquiries. Include your name, address,
account number and a description of the error.
2. Send your letter promptly. It must reach the creditor within 60
days from the date the first bill containing the error was mailed
to you. The creditor must acknowledge your complaint in writing
within 30 days of receipt, unless the problem has been resolved. At
the latest, the dispute must be resolved within two billing cycles,
but not more than 90 days.
- Unauthorized charges. If your card is used
without your permission, you can be held responsible for up to $50
per card. Provide reliable sources of the disputed information and
inform them of the nature of the consumer's dispute. In some cases,
if you report the loss before the card is used, you can't be held
responsible for any unauthorized charges. If a thief uses your card
before you report it missing, the most you'll owe for unauthorized
charges is $50. To minimize your liability, report the loss as soon
as possible. Some issuers have 24-hour, toll-free telephone numbers
to accept emergency information. It's a good idea to follow-up with
a letter to the issuer. Be sure to include your account number, the
date you noticed your card missing and the date you reported the
- Disputes about merchandise or services. You can
dispute charges for unsatisfactory goods or services. To do so, you
must have made the purchase in your home state or within 100 miles
of your current billing address. The charge must be for more than
$50. These limitations don't apply if the seller also is the card
issuer or if a special business relationship exists between the
seller and the card issuer. First, make a good faith effort to
resolve the dispute with the seller. No special procedures are
required to do so. If these conditions don't apply, you may want to
consider filing an action in small claims court.
John Hudock is president of The
International Credit Club and The World of Credit, two
companies specializing in credit report problems and scores. He can
be reached at (570) 829-5696 or e-mail [email protected] John invites e-mails
on any credit topic. He will answer each one and publish any that
will benefit his readers. Please be specific with your
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