As the economy sours and interest rates increase, credit scores will become increasingly important. Many people do not understand what it means to have good credit, how they can obtain it and what they can do if their credit is wrongfully tarnished. Most importantly, many people do not understand what credit is and who compiles it. This month’s column will focus on some of those issues while also addressing what a lawyer can sometimes do to help.

Q: What is credit?

A: In the 1800s when currency was predominately based on gold coins, obtaining a loan was particularly difficult. Only those in high positions of society had access to capital. The way they secured loans was by developing relationships with their local town bank. These relationships were critical and often other banks would not lend to someone who also borrowed from the bank down the street. Matters were worse when a borrower moved to another state or town. When this happened, it would take years to develop a new banking relationship. Banks had no way to determine if prospective borrowers were good risks except by contacting former banks. This was still dangerous to the bank as the only former banks a borrower would disclose were the ones they had paid timely. The banks with defaulted loans would remain the borrower’s secret. In short order, the banks looked for a way to record each person’s payment and loan history so that creditworthiness could be easily assessed and folks could move their residences without loosing their ability to borrow.

Q: Who maintains the credit system today?

A: Experian, Equifax and TRW are the keepers of consumer credit today. These for-profit companies maintain a listing on each and every person who has borrowed money or opened a bank account and their filed overlap in most ways.

Q: How do they receive their information?

A: Almost every lending institution, no matter how small, reports loans and payments to these firms. The reporting will include the date of your loan, the minimum payment amount, the total loan amount, the current balance, and the date(s) the loan was reported. This information is in place for all loans such as mortgages, car notes, personal loans and credit cards.

Q: How do I find out what information is in my file?

A: You can write to each of those companies or you can go to their websites. There are also a number of services on the web that will pull all three credit reports and put them in one report. The last time I looked, each credit bureau can charge you $8 for a copy of your report.

Q: Can I ever get a free report?

A: Anytime you are denied for a loan or you are denied for an increase in credit line with one of your credit cards, you are entitled for a free copy of your credit report from the agency(s) that your bank consulted. If the lender is complying with the law, you will receive a written notice of the name and address for the firm consulted.

Q: Can I opt out of the credit system?

A: No. The only way you can be purged from the database is to never borrow money or engage in banking relationships.

Q: Do you recommend these credit monitoring services?

A: Some people find them helpful but they appear to me to be a waste of resources. You could spend your whole life working and adjusting your credit. Banks are routinely reporting incorrect information. A monitoring service will notify you when new entries have been made to your credit so that you can attempt to repair them. Because most of the errors are minor, it is not worth the constant attention or fee a monitoring service requires. Others disagree, however, and argue that the service helps you to catch identity thieves early and before they do too much damage.

Q: How can I develop good credit?

A: Pay your bills on time. That is the number one rule in obtaining good credit. Other important rules to keep in mind include, keep your credit card balances low and pay more than the minimum payment when possible, keep a minimum number of credit accounts, and keep your credit report active.

Q: How can I establish credit if I have none.

A: This used to be a lot harder than it is today. Nowadays persons with no credit can get a credit card with a $500-1,000 limit. Get one of these cards, use it, and pay on it regularly. Do not always pay off the balance immediately, carry a balance for a while and then make several substantial payments to reduce the amount. You can also generally get a car loan. Keeping that loan current will help.

Q: What about my kids, I would like them to have good credit before they go off to college. Anything I can do?

A: Yes. Many parents will make their child a co-borrower on their own credit card account (only if they are over 18). A card will be issued in the child’s name but the parents often keep it. As the card is used by the parents and paid each month, the child will receive positive credit reporting to his own credit file as do the parents. This method, as opposed to cosigning a loan, is the least risky way of developing your children’s credit. If you decide to cosign on a loan for your child and it doesn’t get paid, the whole family will have bad credit.

Q: Is there any one thing that improves credit the most.

A: Yes. Having a mortgage on your own home and paying it timely improves your credit better than any other step you can take.

Q: How do I repair my credit?

A: This is sometimes complicated and will be dealt with in next month’s column.