The use of credit in today’s world is pervasive. People charge meals in restaurants and purchases in boutique shops, pay for appliances on the installment plan and obtain loans to buy homes and automobiles, take vacations, and pay for schooling. These are just a few examples of how we use credit on a day-to-day basis. Now more than ever, it is essential that you be able to qualify for credit and maintain a good credit rating.
Historically, since the late 1960s, many laws have been enacted to protect the consumer’s credit rights. As a result, it is against the law for a lender to refuse granting a loan, or to lend money on terms different from those offered to another person, solely on the basis of age, sex, marital status, race, color, religion, or national origin.
Federal law also prohibits lenders from requesting certain information on credit applications. For example, a creditor cannot ask your sex (unless the loan will be used to build or buy a home), or require you to use a title such as Mr., Ms. or Mrs., that would reveal your gender. Creditors are, however, allowed to require that you disclose your age, since that may affect your ability to repay a loan. They may need to consider the number of years remaining before retirement or how long your present income will continue.
The traditional criteria for appraising a potential borrower’s credit worthiness are often referred to as the Three C’s of credit: Capacity, Character and Collateral. Your income, expenses, length of employment, and occupation are considered in determining your capacity to repay. Character is judged by your credit history, whether you own or rent your home and how long you have lived at your present address. Finally, creditors may seek collateral for security in case their assessment of your character and capacity to pay should prove faulty.
Lenders use different combinations of these facts in reaching their decisions. Some set unusually high standards and others simply do not make certain kinds of loans. They also use different rating systems. Some rely strictly on their own instinct and experience. Others use a “credit-scoring” or statistical system to predict whether you are a good credit risk. They assign a certain number of points to each of the various characteristics that have proved to be reliable signs that a borrower will repay, then rate you on this scale. Therefore, different lenders may reach different conclusions based on the same set of facts. One may find you an acceptable risk, while another may deny you a loan.
Regardless of the method by which lenders reach their decisions, your personal credit history will be an important factor in determining whether you receive credit. Individual files are maintained at various credit bureaus and reporting agencies throughout the country. Creditors routinely supply information to the agencies about their clients and customers. Authorized users may obtain information about how faithfully you have paid your obligations to help establish your credit worthiness.
Sometimes credit information is too outdated to give a good picture of your financial reputation. There is a limit on how long certain kinds of information may be kept on file. Bankruptcies must usually be removed after ten years. Suits and judgments, tax liens, arrest records and other kinds of unfavorable information must usually be removed after seven years.
Access to your credit file is limited. A credit report will only be furnished in response to a court order, your written request or in connection with the evaluation of a credit transaction, employment, underwriting of insurance or other legitimate business need.
If you are trying to establish a credit history for the first time–as many college students, recent graduates and non-working spouses must do–you should start by opening savings or checking accounts in your own name. Another option is to enlist someone to cosign or guarantee a loan for you. Many creditors will lend to first-time borrowers only if the loan is cosigned or guaranteed by someone with an established credit history.
If your application is turned down, be sure to find out why. If a lender refuses to grant credit as a result of unfavorable information in a credit report, you have the right to the name and address of the agency that issued the report. Although the credit bureau is not required to provide you with an exact copy of your file, they must at least give you a summary and help you to interpret it. If your request is in response to a credit refusal within the past thirty days, the bureau cannot charge you a fee for the information.
Obtaining a copy of your credit report may disclose errors, as well as adverse credit information. If a creditor admits that certain information is in error, the credit agency must remove or correct the information on file. If you are unable to get information removed that you consider erroneous, however, you are entitled to place a short statement in your file explaining why you feel that the record is inaccurate. The credit bureau is then required to include this statement in any subsequent reports it issues.
94WP – 2023.08