All You Need to Know
About Establishing Credit
All of this information is reduced to a single number: your credit score.
Your credit score is a number that's generated by analyzing your entire credit profile. Scores range from 340 to 850. The lower your score the less likely the lenders will be to approve your loan. And if they do, they will charge a much higher rate.
The higher scores tell the lenders that you will be a good credit risk so they will be more likely approve your loan and at a much lower rate.
Credit scores are sometimes called FICO scores because the software used to calculate a great number of credit scores was created by Fair Isaac Corporation--FICO.
Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren't included in the report, such as income, employment history and the type of credit you are seeking.
Check your credit report. There might have information on it even if you’ve never had credit. That’s because, as we mentioned earlier, credit reporting agencies make mistakes. Somebody else's information could be mixed in with your report, there could be identity theft; bogus accounts. Be afraid. Be very afraid.
If that's happened to you, you'll need to clean up your credit report immediately. Write to each of the three agencies and inform them of the error of their ways. It can take weeks or months to get inaccurate information off your report, so stay on top of them.
If you are just starting out, you have no credit. Congratulations. The future is yours to make. There are plenty of companies that will offer you a loan even though you have no credit. Credit card companies and retail stores will often extend a small amount of credit – sometimes a thousand dollars or less – as long as you have a job and the means to repay. The amount of money they are willing to loan you is called your Credit Limit.
When you get a new credit card there is always a temptation to go wild and start charging all kinds of stuff you don't really need and can't afford on our earnings. It is very easy to rack up thousands of dollars in credit card debt when you think all you have to worry about are the minimum payments. When you carry a balance and tack on new charges every month, plus all the interest charges that are added on, it will take you years to pay it off. Everything you have bought will wind up costing you a lot more in the long run.
This is also a sure way to ruin your credit.
In order to establish good credit you need to be responsible when you use your credit card and never use up the full amount of your credit limit. Leave some credit available for a rainy day; those unexpected but necessary expenses. Get into the habit of charging only as much as you can afford to repay. Pay it on time each month without fail.
When you start off by carefully managing your balance and making your payments on time, other credit card companies will see you as a good credit risk and will start sending you offers, with even higher credit limits and at lower rates.
If the rates are low and there is no annual fee, you might want to take advantage of a few. Only a few. Use a small amount of the available credit limit on a few cards, pay them on time, and your credit score will soar. Then, if you borrow money for a car and make your payments on time, your credit score will get even higher. You are now on your way to buying a house.
Be very careful when you accept an offer for a low interest card. If you miss making your payments on time the credit card company can raise you to a maximum penalty rate of 29.99%.
One of the easiest times to apply for a credit card is while you're a college student, even if you don’t have a job. Lenders assume you will get a good job when you graduate or that your parents will bail you out if you run into trouble. It is also one of the easiest and most common ways to ruin your credit. Your parents may not appreciate a $10,000 debt on top of your expensive college tuition. You might not find a job right away, and who wants to graduate with a big debt hanging over their head. So get the card, if you want, but keep the balance as low as you can. As long as it is getting paid each month it builds credit for you, even if your parents are the ones paying for it.
In fact, even if you don’t need to borrow money to buy an item, get the credit card anyway, simply to build your credit history. If you pay off the full amount each month, it doesn’t cost you anything and you demonstrate good money management. But don’t accept a bunch of cards all at once. That looks suspicious, like you are planning to get a bunch of credit cards, buy luxury items, travel around the world and then declare bankruptcy. Come on, everybody has thought about that. So have the lenders. Remember, they know all the tricks.
A secured credit card is a bad idea. Most of the time. These cards require you to deposit money with a lender, say $500.00, and they will give you a credit card with a limit of $500.00. If this is the only kind of credit card you can get, you have some serious problems. Most of the people in this business prey on individuals with bad credit who are desperate to improve their credit. They charge outrageous application fees, annual fees, and excessively high interest rates.
If you belong to a credit union they may have a secured card, and their intent is to help you, not rip you off. Make sure your secured card has no application fee, a low annual percentage rate, converts to a regular card after 12 to 18 months, and is reported to all three credit bureaus. If the issuer doesn't report your card and payment history to the credit bureaus, the card won't help build your credit history.
Gas station or retail store card are the easiest to get, but they charge a very high interest rate. JC Penney, for instance, charges 26.99%.
These cards don't do as much for your credit scores as a bank card (Visa, MasterCard, Discover, etc.), but they will show that you are a good money manager and credit worthy.
It is also important that you establish checking and savings accounts, because lenders see bank accounts as signs of stability. Open them as soon as you can. Many banks and credit unions will let you do it at age 16. If not, you can open a joint account with an adult. But make sure they are responsible. If they start bouncing checks it will reflect badly on you and ultimately screw up your credit.
Establishing good credit is easy when you understand how crucial it is to your financial success and you develop good money management skills from the start. It will help you build a better life for yourself and your family and will save you a ton of money in your lifetime.
Which parts of a credit history are most important?
35% - Your Payment History
30% - Amounts You Owe
15% - Length of Your Credit History
10% - Types of Credit Used
10% - New Credit
- You need to use each of your credit card accounts at least once every six months to create a high credit score.
- Pay your credit card or other loan accounts on time, all the time.
- Set your accounts on automatic payment so you are never late
- Check your credit report twice a year - it's free
- If you only have an occassional problem, ask the lender to forgive any late or penalty fees. They will probably do so, up to a point.
While good credit will open a lot of doors, bad credit will slam that door in your face.
You can be the nicest, smartest, most hardworking individual on the planet, but if you have lousy credit, the world will think you are a deadbeat. Lenders, employers, landlords, insurance companies, electric and gas companies, phone companies and many others will assume you are irresponsible, unreliable and not very smart. For the most part, they will be right, because the only way to ruin your credit is to be at least one of those things.
Sound harsh? Then you have an idea how ruthlessly bad credit will dog your every step in life. Even one late payment can haunt you for years.
In the sections on getting a car loan or a mortgage, we touched on the cost of bad credit; either by being rejected altogether or by having to pay an exorbitant price for the same item your neighbor buys for a lot less. But that’s just the beginning.
When you apply for any job that involves handling money, everything from working at a bank or even McDonald's, your potential employer will pull your credit report. If it is bad, they will assume you are having financial difficulties. But they will not offer you the job that will fix your financial problems. Instead, they will assume you can't be trusted around their money. They won't hire you because they won't take the chance that you might be tempted to help yourself to their money to take care of your pressing needs. And they are probably right, because that has been their experience over the years with people who have bad credit.
Your inability to get a job because of your bad credit will most likely cause your credit to get even worse, which will keep you out of more jobs, and so on, until you end up wondering why the Universe is trying to destroy you.
Try to rent an apartment with bad credit, and the landlord – who will check your credit – won’t rent it to you. They will assume, again rightly so, that you will most likely stop paying your rent at some point and they will be forced to go to court and have you evicted. To landlords, bad credit equals loss of rental income and possible legal fees.
We want you to understand how other people will view you, based on your lack of decent credit. You may have excellent reasons for your bad credit, such as divorce, unexpected medical bills, a lost job, family problems, etc. But that doesn’t matter. You will be lumped in with all the irresponsible scoundrels who foolishly mismanaged their way into bad credit.
While your therapist may care about your financial sob story, nobody else does. And chances are, once you share your misfortune, your therapist will be worried about getting paid as well.
The good news is that it is not difficult to establish good credit and there are a number of steps you can take to repair your bad credit. So let’s take a look at all the different things that become part of your Credit History.
What Kind of Information Is On Your Credit Report?
Your credit report is an ongoing look at your personal information and how you manage your finances. Data is typically submitted to a credit reporting agency by your creditors and debt collection agencies. They also search the court system and public records for any any relevant information that will give your creditors the most complete picture possible of how responsible you have been in the past and how well you have managed your money.
Once a notation is made on your report, it doesn't drop off for awhile. That's not a problem for positive entries, but negative comments by your creditors can affect your buying power for several years. If the comments are accurate, they can stay on your report for seven years. Bankruptcies can remain on your report for ten.
Your Credit History includes:
- Full name and variations of it (such as maiden name)
- Current and previous addresses
- Current and past places of employment
- Driver's license number and state where issued
- Public records and collection accounts
- Current financial obligations
- Dates accounts were opened
- Types of accounts (revolving, installment loan, mortgage)
- Account balances and credit limits
- Payment history for each account, including late payments
- Overdrawn checking accounts
- Inquiries made when you are seeking new credit
- inquiries for promotional mailings
- Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
- Number of accounts you've recently opened and the proportion of new accounts to total accounts
- Number of recent credit inquiries
- The time that's passed since recent inquiries or newly-opened accounts
- If you've re-established a positive credit history after encountering payment problems
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