Equi-what? Why the Equifax Breach is a Big Deal for Everyone

You may have heard of the big Equifax breach from your parents, friends, or co-workers.

So what is this mysterious company and why is its data breach a big deal?

Equifax

Remember when we talked about credit scores?

Equifax is one of the three companies that tracks your credit history. The others are TransUnion and Experian. Your credit score is determined by the reports that these agencies create.

Why all the fuss?

There are a couple of things that make this data breach potentially worse than others.

  1. The number of people affected is pretty huge. About 143 million Americans’ information was exposed during the hack. That’s almost HALF of the total US population.
  2. Because Experian tracks people’s credit, it has access to basically every important piece of everyone’s personal financial information. This includes Social Security numbers, credit card numbers, and bank accounts, along with addresses, birthdates and driver’s license numbers. With these details, someone could easily steal your identity and take out loans or make big purchases in your name.

What should I do?

  • Go to experiansecurity2017.com, the ONLY official site to check whether you’ve been affected, and enter your last name and Social Security number. It will inform you whether your information might have been compromised.
  • Even if you are not over 18, it is a good idea to check whether you’ve been affected because children have Social Security numbers, even if they have never held a line of credit. Someone using your SSN could ruin your credit before you ever have a chance to build it.
  • If you have been affected, pull your credit reports from annualcreditreport.com and check them carefully for errors.
  • Also look over statements for any credit cards you have and check for fraudulent purchases.
  • Contact the credit bureaus — all three of them — to freeze your credit. This will temporarily prevent ANYONE from opening a new line of credit in your name, including yourself. If you want to open a new line of credit, like a credit card or loan, before the freeze period ends, you’ll have to unfreeze it. Depending on the state in which you live this may cost $10 – $30, and you may have to pay to unfreeze it, too.
  • Equifax is offering affected customers a free year of credit monitoring. At first, it seemed that signing up for this service would also prevent you from potentially suing Equifax in the future, but the contract has since been amended so that it no longer implies this. Signing up for the service will only freeze your credit from Equifax, so you’ll have to request a freeze from the other two separately. Whether or not to take Equifax up on its offer is definitely a personal call.
  • Be vigilant. Check your credit reports regularly, which you should be doing anyway, and keep an eye out for anything suspicious.

Wrap-up

If any good comes out of this data breach, let it be a reminder to all of us to pay attention to our finances and not let them be “out of sight, out of mind”.

How to build credit as a teen

Credit is an amazing word. It gets used for all sorts of things, like crediting a source in a research paper or giving your brother credit for not stealing all your Cheetos even though they were RIGHT THERE waiting to be stolen.

In the money world, credit is a big deal. Without credit cards, online shopping would be much harder, and without lines of credit like mortgages and car loans, a whole lot of people wouldn’t be able to afford houses or cars.

The word credit actually comes from a Latin word meaning belief or trust, which makes sense because when someone loans you money, he or she is trusting that you will pay it back. Credit scores were invented to represent how likely it is that you’ll do that.

Trouble is, credit scores are based on a lot of factors, all of which reflect your history using credit. Without a credit score, you won’t get money from most lenders. So, how do you get credit if you don’t already have it?

How do I get credit?

Creating a credit profile can seem like a Catch-22 because many credit-building sources require a credit score!

I remember thinking that this was confusing and unfair when I was first looking to build credit, too. Luckily, there are a couple of side doors into the world of credit that can help get you started at any age.

If you’re a minor…

If you’re under 18 in the US, you cannot qualify to borrow money or open a credit card of your own. However, there are still ways to start building a healthy credit record with the help of your parents or legal guardians.

Become a registered user on an adult’s card.

Registered users get access to the perks of the credit card, but are not responsible for paying for charges made on the card. Living the dream.

Of course, this option requires a lot of trust on the part of the person allowing you onto his or her account, so if you want to remain on good terms with this person, don’t go hog-wild with the credit card.

My dad did this for me when I was first starting out, and it was understood that the card was for emergency use only. Otherwise, I used my debit card. I’m so thankful now that I got the benefit of his years of credit background and good money management. It made getting my first apartment much easier. Thanks, Dad! 🙂

If you’re 18 and over…

Becoming a registered user is also an option for non-minors, but once you’re legally an adult, a lot of other options open up, too.

Have an adult co-sign on your first loan or credit card.

Co-signers are basically there to reassure the credit-givers that SOMEONE will pay them back, even if you flake out. This means they are on the hook for any money you borrow or charge if you don’t pay it back, so, again, don’t abuse this privilege if you want to keep your relationship with your co-signer healthy.

Get a secured credit card.

This one you can do all on your own! Secured credit cards are designed to help people build enough credit to get a real, big-person card.

To get a secured card, you’ll usually have to pay a deposit equal to what the card’s credit limit is. It then works just like a real card, including interest rates on unpaid balances. When you are ready to graduate to an unsecured card, pay off any balance on the unsecured card and you’ll get your deposit back.

If you’re interested, WalletHub has a nice list of 10+ Best Secured Credit Cards for 2017.

Report your rent payments.

If you’re living off-campus at college or just living on your own, using a service that reports your rent payments to the credit bureaus can help you build credit without needing a credit card or loan. You’re going to be paying rent anyway, so why not benefit from it?

These services typically charge you a fee for each payment they report or each month you use them, and some charge a set-up fee. However, in the long run, a higher credit score could save you much more money in the future, so a rent payment reporting service might be worth it if you can afford it.

You might need to get your landlord or apartment office on board, and not all rent-reporting services report to all three credit bureaus, so make sure you read all the fine print before shelling out any money.

Popular services include RentReporters, Rent Kharma, Rent Track, PayYourRent, and ClearNow. I have not personally used any of these services, so I can’t endorse any one of them over any other.

Take out a credit-builder loan.

Some banks and credit unions will loan small amounts of money to people with bad or no credit with the goal of building those people’s credit score.

There’s a catch, though.

When you get one of these loans, you don’t actually get the money. The bank puts it into an account, where it waits for you to complete the payments on it. THEN you get the money.

This is clearly not a loan for people who actually need the money for something right away. It really is only for building a payment history. However, the amounts are small, sometimes only $100, and the potential bumps to your credit are large, so if you are 100% sure you can pay all the installments, this could be a nice way to add some points to your score.

Be careful

Don’t over-extend yourself trying to do all of these things in a hurry. Pick one or two ways you want to start building credit, and put those into action. If, after a few months, you’re still on track and want to explore other options, feel free.

Remember that no matter what methods of credit creation you use, the best thing you can do to boost your score is to make payments on time. Do that consistently, and your score will rise naturally.

What is a Credit Utilization Ratio?

In my article about what a credit score is, I talked about the factors that affect a credit score. Most of them are pretty straight forward. However, the second-most-important factor, your Credit Utilization Ratio (CUR), is a little trickier because it’s all about percents.

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I can feel all you math-phobes out there starting to sweat, but just hear me out.

Your Credit Utilization Ratio is the relationship between what you can borrow and what you actually borrow. This is represented by the percent of your available credit you’re using at any one moment.

Example

For example, say you have a credit card with a credit limit of $1,000. That means your available credit is $1,000.

Lucky you, you have a date! You go out and end up paying for dinner for both you and your date, and charge $50 to your card.

To find out what percent of your available credit this is, follow this formula:

(part÷whole) × 100 = %

In this case $50 is our part, $1,000 is our whole. Divide them, and we get 0.05. Multiplying by 100 gives us 5, which is our percent. So, you have used 5% of your available credit.

By the way, you’ll need that formula on the SAT, so you might as well memorize it. 

To keep your credit score looking rosy, you want to use 30% or less of your available credit. What is that for our imaginary credit card? Back to the formula!

This time, we’ll plug in numbers for the percent and whole, but we need to find the part.

(part÷1000) × 100 = 30

Using those awesome algebra skills I know you have, you can divide each side of our equation by 100, then multiply each side by 1000 to find that $300 is the most you should spend on your credit card before you pay it off.

Important Notes

  • Just because you can spend up to $300 in our scenario doesn’t mean you should. That’s just the max. Keeping your spending less than that creates an even better Credit Utilization Ratio.
  • Most credit cards and banks report what you owe to the credit bureaus once or twice a month, so if you do have to charge more than $300, it may not affect your score if you pay at least some of it off before it gets reported to the bureaus.
  • Every new line of credit you open increases the amount of available credit you have. Closing those accounts decreases that available credit. Both of these events affect how much you can spend and still stay within the ideal CUR range.
  • If you get offered a larger credit limit, don’t let it convince you to spend a ton more money simply because you’ll be able to. Remember, you still have to pay off the whole amount before the end of the month.

Now you know what a Credit Utilization Ratio is, use that knowledge to give yourself incentive to curb your spending urges. Your credit score and future self will thank you.

What is a credit score?

You might have seen the commercials for sites and credit cards that give people access to their credit scores. All the people in those ads seem so surprised and excited to get their credit score, and it always shows a screen with some number in the 700s on it. But, you might be thinking, what exactly is a credit score?

What are credit scores?

Essentially, credit scores are meant to represent how likely you are to pay what you owe.

Credit scores are based on a formula created by a company called the Fair Isaac Corporation (FICO), so you’ll often hear credit scores called “FICO scores“. There are other types of scores out there, but for our purposes, we’re going to focus on the classic FICO score, as that’s what people are usually talking about when they say “credit score”.

There are three credit bureaus — Experian, Equifax, and TransUnion — that collect credit reports on people and provide credit scores based on what’s on these reports. Scores will often vary a little between these companies depending on what information they have collected in their reports.When a credit card or bank offers you free access to your credit score, it will use data from one or more of these credit bureaus to come up with the score.

Who cares?

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Zendaya may not, but some people do

Money lenders: Banks and other lenders use credit scores to determine if you are someone they want to loan money to for stuff like a car or mortgage. Usually, people with high credit scores will be approved for bigger loans and be charged lower interest rates than those with lower credit scores.

Landlords: Credit scores help landlords decide if you’ll be a good bet as a tenant. A high credit score shows landlords you are responsible and will probably pay your rent on time, so if you’re competing with other applicants for a nice apartment, a good credit score can help put the odds in your favor.

Credit card companies: People with good credit will be approved for a wider range of cards and higher credit limits than those with poor credit.

Employers: Sometimes, employers look at credit scores to get a picture of who they might be hiring, although this practice has been widely criticized.

What do the numbers mean?

Credit scores range from 300 to 850. The higher your score, the better you look to lenders and landlords.  Scores generally break down like so:

Anything 750+ is Excellent

Between 700 and 749 is Good

Between 650 and 699 is Fair

Between 600 and 649 is Poor

Anything below 600 is Bad

How do people get good credit scores?

Credit scores depend on several criteria, some of which are more important than others.

fico-score-percentages

Source: FICO.com

Payment History: Your payment history is the most important factor that controls your credit score, and the concept is so simple. It reflects whether you pay your bills on time or not. Late payments or debt that “goes into collections” (basically someone has to chase you down for it) cause terrible damage to your score. Pay your bills, people.

Amount of Debt: This category is also known as “Credit Utilization Ratio”. Essentially, the more you owe compared to what credit you have available, the worse your score. More on that in another post.

Length of Credit History: For teens and young adults, this section is tough. The longer you’ve been building credit, the better, but most of you haven’t had a chance to do much credit-building. That makes the other parts of the score even more important when you’re starting out.

New Credit: Every time you apply for a new loan or credit card, the company you are applying to does a “hard pull” of your credit report to check you out, and your score gets dinged a little. “Soft pulls”, like when you request your own report, don’t affect your score.

Credit Mix: Credit bureaus like to see that you’ve had experience with a mix of credit situations, such as credit cards, mortgages, loans, etc. The more types of credit you’ve successfully managed, the better your score looks.

Wrap-up

So there you have it. The credit score system may not be perfect, but it’s not going away any time soon.

Your personal credit score plays an important part in your financial future, so it’s a good idea to at least be aware of it in your teen years and going into college. Debt and late payments when you’re wild and reckless can set you up to spend years re-building your credit. You’ll have plenty to worry about when you get out of college. Whether you’ll end up in a crappy apartment because your credit score is in the toilet shouldn’t be one of them.