Your Credit

What is Credit? 

Credit is the privilege to borrow money and obtain goods today based upon a promise to make repayments in the future.  Credit is not a right, but merely a privilege that can be lost if it is not used responsibly. When used properly, credit is an ideal financial tool. When used foolishly, credit can cost an exorbitant amount of money in interest and fees. The misuse of credit can also hurt your ability to purchase homes or cars, as well as endanger future financial stability. There are a variety of different types of credit, each carrying with it different privileges and interest rates, such as charge accounts, car loans, student loans, and home mortgages. 

How Can You Control Your Credit and Avoid Debt?
You can benefit significantly from the convenience of credit. Credit cards offer such benefits as frequent-flyer miles and cash-back bonuses, and they are especially useful for large purchases, emergency situations, identification, reservations, and protection from fraud.  Unfortunately, millions of consumers misuse credit cards beyond their financial means. The use of credit results in costly interest payments and late fees, impulse buying, overextended lifestyles, and unnecessary stress such as harassing telephone calls from collectors. 

What Is Wrong With Just Paying the Minimum Payment?
You may mistakenly believe that making a minimum payment on a credit card is a reasonable financial move. In reality, minimum payments make only a very small dent into the original amount borrowed, which is called the principal. For example, if you are $5000 in debt on a credit card that carries a 17 percent interest rate. The creditor requires only a minimum monthly payment of 2 percent, or $100. Of that $100, a mere $29.17 would be applied to the principal if you made the minimum monthly payment. At that rate, it would take nearly 30 years-and cost thousands of dollars over the principal amount-for you to pay off the debt. 

Calculating the Interest on a Credit Purchase 
Have you ever wondered how much you are actually spending when you choose to pay with credit instead of cash?  Did you know that if it takes you 12 months to pay for a new 36” Color TV that you purchased for $1000 using a credit card charging you 18% interest, you will end up paying an extra $100 in interest charges.  To learn how much interest payments can affect the overall cost of your next purchase use this online financial calculator.

What About Using the Cash Advances on Your Credit Cards?
You may mistake cash advances (getting cash through a credit card) as free money; in reality, you must pay back the amount of the cash advance at a typically high interest rate, as well as a cash advance fee. For example, if you take a credit card cash advance of $500 you will ultimately pay back more than $600 if all payments are made on time within one year. (If any payment is late, late fees or higher interest rates may also apply.)  If you are taking out cash advances in order to pay off existing credit card balances this is not a solution to your credit woes. In reality, this method of paying bills is one of the worst financial decisions you can make, as it compounds the problem. You will ultimately end up paying off the new debt at a higher interest rate, thereby losing even more money.

What If I Can’t Pay My Credit Card Payments?

What Affects My Credit Rating? 

If you ever apply for a charge account, a credit card, a car loan, a personal loan, or a mortgage, your credit history will be a major factor considered by the creditor in reviewing your request.  It may even affect your ability to get a job or buy life insurance.  A good credit rating is an asset and if you want a good credit rating, you must use credit with discretion; limit borrowing to your capability to repay and live up to the terms of your contracts.  The quality of your credit rating is entirely up to you. 

There are three major national credit reporting bureaus collecting credit information on consumers.  These agencies compile data on millions of consumers and from these files a credit bureau can produce for a subscribing creditor a revealing report about your past and present credit activity.

Banks, finance companies, merchants, credit card companies, and other creditors regularly send to credit agencies reports on their customers containing information about the kind of credit extended, the amount and terms, and paying habits.  Some information is collected by the credit bureaus from other sources, such as court records.

Each time you buy on credit from a reporting retailer or take out a loan at a bank, finance company or other reporting creditor, a credit bureau is informed of your account number, the date, amount terms and type of credit.  As you make payments, your file is updated usually monthly to show the outstanding balance, the number of payments, and amounts past due and the frequency of 30, 60 or 90 days late.  Your record may indicate the largest amount of credit you have had and the maximum limit permitted by the creditor.

Note: each inquiry about you may be recorded; any lawsuits, judgments or tax liens against you may appear as well.

How to Maintain a Good Credit History? 

• Pay All Bills on Time: promptness of payment is a key factor in assessing your credit rating.  If you are unable to make timely payments, contact your creditor or loan officer immediately and explain you inability to meet your payments.  Follow up all communications in writing and keep copies of your correspondence.
• Do Not Become Overextended: managing several accounts in which you are current will help you maintain a good history.  However, make sure you are able to meet all payments promptly by only charging as much as can pay for in one month's time. Borrowing more than you are able to repay in a consistent and prompt fashion will reflect negatively in your credit history.
• Maintain Credit In Your Own Name If You Are Married: using your own name on an individual credit account if you have your own source of income, either from full or part-time work, will assist you in establishing and maintaining a good credit history. 
• Review Your Credit File Periodically: The Federal Fair Credit Reporting Act allows you to examine your credit file to insure that the information is accurate and current.  It is advisable to undertake this review every few years.  If you believe the information is inaccurate, contact the Credit Reporting Agency immediately.

How to Get Your Credit Report? 

If you have been denied credit, insurance or you are just interested in learning about your credit history you should order a copy of your personal credit report.  You may be surprised to learn that negative information can remain on a credit report for up to seven or even ten years with certain types of bankruptcies.  To get a copy of your credit report contact one of the three major credit-reporting agencies, but it is recommended that you order your report from all three credit bureaus to ensure that you get the most accurate information.    

Three Major National Credit Bureaus
The three national credit bureaus have websites that provide credit information as well as information on how to order your credit report.

Costs Associated With Getting Your Credit Report
Maryland Law allows you to get a free copy of your credit report once each year.  You can obtain your credit report from one or all three of the major credit reporting agencies.  When you make your request you should include your name, past and present addresses, social security number, date of birth and a statement that you are requesting a free copy of your credit report.

Yet, if you have been denied credit, insurance or employment because of information supplied by a Credit Reporting Agency (CRA), the Federal Fair Credit Reporting Act requires that company you applied with to provide you with the CRA’s name, address, and telephone number.  If you contact the agency for a copy of your report within 60 days of receiving a denial notice, your credit report is free.  If addition, you are entitled to a one free copy of your report a year if you can prove that:   

1. You are unemployed and plan to look for a job within 60 days, or
2. You are on welfare, or
3. Your report is inaccurate because of fraud.

Otherwise, a CRA may charge you up to $10 for a single copy of your report.

What Is In My Credit Report?

• Your Name
• Your Address
• Your Social Security Number
• Your Birth Date
• Your Employer, Your Job, and Your Income
• Your Former Addresses
• Your Former Employers
• Your Spouse’s Name, Social Security Number, Employer and Income
• An indication of whether you own or rent your home.
• Your Payment History

  Correcting Errors on Your Credit Report 

Under the Federal Fair Credit Reporting Act, both the CRA and the organization that provided the information to the CRA, such as a bank or credit card company, have the responsibility to correct inaccurate or incomplete information in your report.  To protect your rights, contact both the CRA and the information provider and follow the suggested procedure below: 

1)       Notify the CRA and the information provider in writing of what information you believe is inaccurate.  Include copies (not the originals) of documents that support your position.  Your letter should include: your contact information, the items in your report that you are disputing and why you are disputing the particular item, and your request to have the items corrected or deleted.  Send your letter by certified mail or return receipt requested so you can document what the CRA received.  Keep copies of your dispute letter and any enclosures.

2)       The CRA has 30 days to reinvestigate the items in question and must send the information provider all of the documents you provided with your dispute letter. 

3)       The information provider must investigate, review the documents sent by the CRA and report the results back to the CRA.  If the information provider finds the disputed information to be inaccurate, it must notify all nationwide CRA’s so they can correct this information in your file. 

4)       When the reinvestigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change.  If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the CRA gives you written notice that includes the name, address, and phone number of the provider. 

5)       You can request the CRA to send notices of corrections to anyone who received your report in the past six months.  Job applicants can have a corrected copy of their report sent to anyone who received a copy during the past two years for employment purposes.  If a reinvestigation does not resolve your dispute, ask the CRA to include your statement of the dispute in your file and in future reports.

See How To get Your Credit Report for information on how to contact the major credit bureaus.

Last legal update 02/14/08 (PLL/M.A.J.)

About this website. The Maryland State Law Library, a court-related agency of the Maryland Judiciary, sponsors this site. The website was developed (1999-2007) as part of an access to justice initiative by the Maryland Legal Assistance Network (MLAN) in collaboration with a number of legal services providers serving low and moderate income Marylanders.  In the absence of file-specific attribution or copyright, the Maryland State Law Library may hold the copyright to parts of this website. You are free to copy the information for your own use or for other non-commercial purposes with the following language “Source: Maryland's People’s Law Library – www.peoples-law.org. © Maryland State Law Library, 2007.”

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