Let’s take a trip back to New York City, circa 1807, Cowperthwaite & Sons Furniture Store began an installment credit plan allowing people to buy today but pay over a period of time. To start, a down payment was made by the customer that was followed by monthly payments of equal amounts. The concept mirrors the “non-credit” card loan payments we make today. Cowperthwaite & Sons Furniture Store was extremely discriminant as too the customers they would allow to purchase furniture on their installment plan. They hand-picked their credit customers to keep those who defaulted to a minimum.
Fast forward almost 50 years to 1850 and the cutting edge of technology, the Singer Peddle Sewing Machine. The sewing machine, at the time, presented a unique challenge; being sold for $100 how was Isaac Singer going to mass produce and mass distribute the sewing machine. Edward Clark, co-founder of the Singer Sewing Machine Company, originated the “hire-purchase plan”, the prototype for all installment selling or time payment purchases. As a result, people who would not be able to afford a sewing machine under normal circumstances could now purchase a Singer sewing machine and pay later. Even better, they could increase their productivity, earn more money and improve their position in life.
First introduced by the Strawbridge and Clothier Department Store (also Hecht’s and Macy’s in future years) in the 1960’s, the revolving line of credit gave people the opportunity to buy things without paying for them that day and it also gave the store another stream of revenue in interest. In revolving lines of credit, the terms aren’t fixed as they are in the installment loan model. Soon after the department stores began capitalizing on the “charge cards”, banks jumped into the mix with larger limit credit cards, after all, loaning money is their business.
Here is an example of how a revolving credit actually works. You apply for a revolving line of credit, a credit card, and you are approved to spend up to $500. You immediately go out and purchase a new bike for $75. You can now only spend a maximum of $425 before reaching your credit limit. Now, you purchase a concert ticket for $75, leaving $350 as your available credit limit. At the end of the month, you have a decision, pay off your current debt, $150 or, don’t pay the debt this month. By not paying the debt, you will have to pay interest on the $150 and you limit remains $350 until the debt is paid. Revolving credit, especially credit cards, typically have high interest rates and it’s not uncommon to see interest rates exceeding 15%.
As you can see, revolving credit provides a unique and valuable service – when used responsibly. In this example above, you used your revolving line of credit as needed, if you had obtained an Installment loan of $500 you would have had to pay interest on the full amount, $500, rather than just the amount that you had used, $150. Once you pay the $150 – plus interest back, your available limit will then increase back to its previous maximum, $500. When used irresponsibly, revolving credit can become an unmanageable nightmare. So, the questions remains, when to approve and how much.
The Big Three and Two More
Does anyone remember the “Welcome Wagon” representatives? You move into a new neighborhood and the Welcome Wagon representative sets a time to come over and deliver baked goods, coupons, advertisements for local businesses, etc. Well that’s not all they were doing. Retailer’s Credit, now Equifax, used to gather data about you during those “welcome visits”. Information such as, race, ethnicity, the quality of your home, furnishings, their opinion of your character, etc. Back then, trying to see what was in you report was nearly impossible. It could be riddled with mistakes, error and incorrect information but you would never know. Even if you did know, there was nothing you could do.
Today, there are three mainstream Consumer credit Reporting Agencies (CRA), Equifax, Experian and TransUnion. The fourth, Innovis, is similar in nature to the main CRAs; however, Innovis is not used nearly as much in terms of reporting. Companies who use them will usually say, we report to all four bureaus.
There is a fifth bureau out there called PRBC, it is similar to the other four CRAs in that it is an FCRA (Fair Credit Reporting Act) compliant national data repository. However, PRBC differs in a few distinct and consumer favorable ways. Consumers are able to self-enroll and report their own non-debt payment history. They can build a positive credit file based on alternative data, such as rent, utilities, cable, telephone, and insurance that are not automatically or traditionally reported to the other bureaus.
Under the FCRA credit bureaus are legally known in the United States as Consumer Reporting Agencies. There are a number of important consumer protections which are made available as a remedy to consumers by the following acts and/or regulations, they are as follows; FCRA, Fair & Accurate Credit Transaction Act (FACTA), Fair Credit Billing Act (FCBA) and Regulation B. Additionally, there are two government agencies responsible for overseeing credit bureaus and the data furnishers which supply them with their data. The Federal Trade Commission (FTC) is responsible for overseeing all consumer credit bureaus. Data furnishers are regulated by the Office of the Comptroller of the Currency (OCC).
So now that we have the landscape of the industry, let’s dig in a little and see how your credit affects just you. To start, take a snapshot in your mind of how you pay bills and accumulate debt. Would you say you’re responsible, irresponsible or somewhere in the middle. Just having that idea, or snapshot, you probably have some idea of what is being report by the CRAs about your credit. Now just so we’re on the same page here, all of these reporting agencies have different information based on what companies (the furnishers or creditors) report to them. Hardly an exact science and sometimes I wonder how fair our system actually is, but it’s our chosen system so let’s move on.
Based on the data available on your credit reports, you are assigned a number between 300, the worst and 850, or perfect. The data that is looked at can range from being late with a payment, having a charge-off to public records, such as, bankruptcies as well as liens or judgments. The most recognized and widely used credit score is the FICO Score, a credit score developed by the Fair Isaac Corporation. Lenders use your FICO score and other like it to help them make billions of educated credit decisions every year. Fair Isaac calculates the FICO Score based solely on information in consumer credit reports maintained at the credit reporting agencies. Ultimately, the FICO score estimates your level of future credit risk – remember, future prediction are best evaluated on past performance. Meaning if you did it before, we assume you will do it again.
CBS News reported four out of every five credit reports contains some error or inaccurate information, that’s eighty percent! Where could you find a job where you could be wrong 80% of the time? How about a school you could be right only 20% of the time? That job and that school don’t exist but the credit bureaus, seemingly the largest oligopoly of our time, are satisfied with those statistics and defend the industry to any naysayers the first chance it gets. How does this affect your report? Let’s take a look.
Your Credit Report
Everyone in the United States over the age of eighteen is a consumer, from a technical perspective anyway. You can be issued credit by banks, car dealerships, department stores, gas stations, you name it. It’s usually your start to becoming an adult, the next phase of your life after high school. Let’s say when you started high school as a little freshman, some senior walked the halls spewing negative information about you, saying you’re smelly and have a contagious rash. Now you have to start making friends that will follow you for the next four years. Not an easy task after the jerk senior went around spreading that inaccurate information.
So let’s break this down. Jerk senior, or the Consumer credit Reporting Agency, has bad or erroneous information, or credit data, about you and wrongfully spreads it through the school, or the credit community, hurting your otherwise immaculate reputation, or credit report. Hopefully you are catching on.
Now, the senior has to answer to the school principal, or the Federal Trade Commission, who oversees the rules of the school. The senior rats out another student, the creditor or furnisher, thereby admitting the data he had was second hand and could not be verified. The principal ensures the senior is set straight and sends him on his way with accurate information about the freshman. Once he has this data, he and the freshman become best of friends. So in our example, what if the student wasn’t smelly but did have a rash he was trying to get rid of. Well if the rash isn’t verifiable and is in a place that can’t be seen – it can’t be used against him now can it. Same with your credit. Your report can say whatever they want it to say; however, by law, at any time you request, the CRA must verify the data it reports. Data such as, contracts, late checks, agreements, public record, etc.
What we have just learned is your credit report is basically your consumer reputation. Walk into a furniture store and fill out a credit app, will you get approved or turned down. What if the salesperson is your neighbor, hopefully you get approved. Otherwise, there will be a certain level of embarrassment for sure. Why chance it? You don’t play around with your personal reputation why play around with your consumer reputation?
Now you can certainly go it alone with the CRAs, creditors, furnishers, collections agencies, etc. and the federal government requires any credit repair organization to tell you that. We don’t have special relationships or powers to do anything you can’t do yourself, other than experience and education in the industry. To that, I always ask, if you were being charged with a serious crime and the judge looked at the attorney and made him tell you he doesn’t have special relationships or powers to do anything you can’t do yourself, other than experience and education in the industry. Would that make you want to represent yourself? Remember two things they say about self-representation in court, “a lawyer who acts for him or herself has a fool for a client” and “ignorance is not a valid defense”.
However, when selecting a credit report organization, I do caution you to use due diligence and/or red flags of illicit or illegal behavior. Here are some key things to look out for:
- Avoid Credit Repair Services That Promise the Impossible
- Avoid Credit Repair Services That Suggest You Create a New Identity
- Select Credit Repair Services with Credible References
- Avoid Credit Repair Services Requesting any Payment Upfront (It’s illegal and against federal law.)
- Avoid Credit Repair Services Who Avoid Using a Mutual Contract.
No matter where you are or what you’re doing you you can see advertisements and promotions regarding credit and financing. Credit scores play a huge role in every aspect of our financial lives – from qualify for loans to employment opportunities, and even insurance premiums. Arguably, a consumer’s credit score has become one of the single most important measurements of a person reviewed and considered by lenders and potential employers. The information reported by the credit bureaus about you impacts almost every part of your financial life and can save you or cost you thousands of dollars.In 1970 congress created the Fair Credit Reporting Act. A federal law designed to protect a consumers right to a fair and accurate credit report. One of the most important FCRA protections is the consumers right to dispute errors in his or her credit report. This law was created to ensure everything on your credit report and can be verified, that’s the key, can these companies validate the debt – you would be shocked at how many companies are holding people to a debt they no longer have the paperwork on.