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:: Credit Issues - the overlooked fallacies of credit reports

Credit reports are to an extent a secret dossier of a person that may have a significant impact upon their life. Almost everything that we do financially is reported, collected, and stored in each persons credit profile. What we do in our lives can directly affect how favorable or unfavorable the reported information appears. Often times we do things, unbeknownst to us, that have a negative impact upon our credit status. The following is a list and explanation of many adverse actions that will ultimately affect how others view your credit history.

1) Debt. Debt is a word the financial industry uses to describe any situation that you borrow money. "Too much debt" is how the industry describes situations where people borrow more money than they can easily repay. There are a lot of types of debt: credit card debt, department store debt, charge accounts, auto loans, student loans, mortgages, and money that you may owe the Internal Revenue Service. You might also borrow from parents, relatives, and friends, although those debts may not be reflected in your credit report.

Your ability to borrow more money or to have your credit extended is directly reflected by how much debt you carry. Mortgage lenders, for example, determine your purchasing ability by applying a debt-to-income ratio (a ratio that is calculated by totalling your monthly debt payments plus the proposed monthly debt payment divided by your gross monthly income). Too high of a debt-to-income ratio reflects greater risk with the loan and may result in rejection of the credit application. Most mortgage lenders will allow you to pay up to 42 percent of your gross monthly income in debt service. Of course this may vary depending upon the loan size, the type of loan, and the type of property you are purchasing.

2) Late payments. If you're chronically late in paying your bills, you've got a late payment problem. It can be a severe blemish on your credit report for lenders prefer to lend money to people who repay debt in a timely manner.

How late is late? If you don't pay your Visa bill by the due date, you're late and it may show up on your credit report. If you fail to make a payment all together, a past due notice will be sent to you and you may be assessed a finance charge. If you're so late that you stop paying entirely on the account, it is likely that the matter will be turned over to a collection agency, that will be reported on your credit history as well as a late payment notice.

How long does a late payment stay in your credit history? Typically, a late payment will appear for two years, though credit bureaus may keep them on your credit report for up to seven years. However if you missed only one payment in the last two years and you have been current on the account for the past 18 months and you have a reasonable explanation for the late payment, it is unlikely that a lender will deny you of credit solely on the basis of the late payment. How you are coping with current credit issues is far more important.

3) Bankruptcy. Sometimes the financial burdens of life become so overwhelming that a person is left with only one choice-to file for bankruptcy. A tragedy may have occurred in one's life, such as the loss of a spouse or a job, or a person may have foolishly over extended their credit and is no longer able to keep up with their debt. The reasons are many and the consequences are severe. Once you've been declared bankrupt, a judge discharges your debts and, to a great degree, wipes your financial slate clean. Sounds easy and simple but it is not. Bankruptcy can be expensive and time-consuming and forever you will feel the stigma of it. Most negative information on your credit report is kept for up to seven years; a bankruptcy can stain your credit report for as long as 10 years.

Bankruptcy is a significant credit hurdle, but it can be overcome. The key to overcoming a bankruptcy is to re-establish credit and show that you are no longer a credit risk. Most people are left only with the option of secured credit cards where they must closely monitor their spending habits so not to over extend themselves again or must suffer from higher interest rates on loans so that they can put themselves on the road to a good credit profile.

4) Errors. Because of the volume of information that is being cataloged and entered daily into the credit databases, errors have been known to have happen. . Many people have been turned down for credit because a $5,000 collection account appears on their report for a credit card that they never had. This is most commonly seen when two people share the same name (like a father and son) or have similar social security numbers. However, one good reason for checking up on your credit report is that someone else may be using your social security number or credit card numbers and playing havoc with your personal credit history.

5) Repossessions. If you buy a car, furniture or appliances on an installment plan (where you pay a little bit of interest and principal each month), and you fail to make a payment or two, the company that sold you the item may require you to give back the merchandise until it is paid for. If you refuse to give it back, the company may come by and take it (repossess it). Repossessions are usually noted in your credit report.

6) Accounts turned over to a collection agency. If you don't pay a bill, you will probably receive a threatening letter from a collection agency hired by the creditor to collect the overdue amount. This is considered a collection account. If you receive such a letter, it should tip you off to a potential problem with your credit history. Not only will the creditor report to the bureaus that your account is delinquent, but collection agencies usually report to the bureaus of the collection account as well as their efforts to collect on past due bills. It is important to remember that if you pay off a debt from a collection agency that you make sure you have them send you a letter stating that the debt has been completely satisfied and no further action on their part or the creditor is necessary.

7) Too many credit inquiries. It is common place, for example, to have several car dealerships to pull your credit information whenever you are out shopping for a new car. Whenever you apply for a new charge card, a loan or to have someone extend you some form of credit, an inquiry is reported on your credit report. Seems harmless but lenders become worried if you appear to be on a credit-gathering spree for it could mean that you are out to expand your credit quickly for a specific purchase or that there are new credit obligations on your report that are not showing up. Too many credit inquiries can spell trouble which would make you a bigger risk than what they would be willing to undertake. Credit inquiries stay on your credit report for two years (but most lenders are particularly interested in the inquiry activity within the last six months).

8) Too much available credit. One of the easiest credit issues to fix is having too much available credit. Even if you have never carried a balance on any credit card and if you have a lot of cards, creditors simply add up the balance as potential debt you could take on at any moment.

9) Absence of credit. Again, this is another credit issue that you can easily overcome. Many young people, for example, often fall prey to not having a sufficient credit history built up and as a result are turned down for credit. Many lenders do not want to take the risk of extending debt when they don't know how well someone can pay back their obligation.

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