Credit 101 Either you know how it works or you don’t. After 3 years in banking I quickly realized that not many Americans know how credit works or just how important it is. Your credit report is a record of your financial accountability and your score is a numerical measure of just how responsible you have been or are being when it comes to financial obligations. The lowest score is 300 and highest achievable is 850.
Now financial obligations, per se, are anything you pay on a month to month basis, but not all those things report on your credit. The biggest misconception comes with cell phone bills. You may have had your credit pulled to get a contract with the company and sure enough if you default on your payments it will go on your credit as a negative item but if you pay your balance in full on a month to month basis it does not appear on your credit bureau. With that being said, neither does your rent. The Good You can only build good credit by being lent money and repaying it as agreed.
If you have good credit, great job! It’s not an easy thing to do, especially if you are under 25. Here are some rules of thumb to help you maintain and continue improving your score: A) keep your debt to income ratio below 50%, you can calculate this by adding up ALL your monthly obligations reported on your credit and divide that number by your monthly income, before taxes B) keep your balances at or below 30% of your available credit, example a credit card with a $1000 limit should maintain less than a $300 balance C) be careful canceling cards, if you cancel your oldest card you may be cutting years off your report which will drag your score down, example: opened Citicard in 1999 then Sears in 2002 means you have a credit history of 11 years, close your Citicard and now you only have a history of 8 years and your score will suffer.
The Bad You will also have credit if you never borrowed money but chose to not pay an obligation. A credit card builds credit so does a car loan. If you never had either that does not mean you don’t have credit. In lots of circumstances I have seen a credit report with a score and the only items listed were collections accounts. Someone may think they have no credit because they never borrowed money but in fact they have bad credit which could be the result of unpaid cell phone or utility bills or even medical bills. How would you know if you had bad credit as a result of unpaid obligations? Letters are mailed to the last known address in multitudes; phone calls are made bordering harassment from the creditor seeking their payment. If you are experiencing either of the above, your credit may be on the line. However if you don’t recall getting either, relocation may be to blame. The creditor could be sending letters to a former address or calling an old number. The bill will have to be satisfied regardless. The good news is, most collection companies will settle with you. This means as long as you agree to pay in full (vs. on a monthly payment plan) they can greatly discount your outstanding balance. The item will still appear on your report for up to 7 years from the date of delinquency but it will show a zero balance.
The Indifferent You if you don’t belong in either category above but need to start building your credit, there are many ways to do so. Some individuals have the luxury of having parents who are financially responsible and start to build their child’s credit for them by co-signing on a loan or a credit card. Again the key word is financially responsible meaning the parents have to have a good score to successfully co-sign. We all can’t be so lucky though. For the rest of us there are few other options, one being a store credit card. The limits are low and the interest is high but it starts the process. As long as monthly payments are being made in time and balances are kept low, you will have a good score in about a year and save on interest. If you pay off your balance in full at each billing cycle they may raise your limit which builds your score even higher. Keep in mind if you carry a balance you are tacking the interest onto the balance. Sure you got a 10% discount at the store for applying but if it has a 20% interest rate, there really is no deal at all. Always be sure to ask the interest rate before applying. They will be high in the beginning but if you pay your balance in full each month you don’t have to worry about it.
The Truth The Federal Trade Commission set forth regulations to enable consumers to receive a free copy of all three credit bureau reports on a yearly basis; most of the time the reports are the same in content but not always. The ONLY site to truly offer your free credit report is the FTC organized site http://www.annualcreditreport.com./ Other sites may offer a free credit report with a 30 day trial, and then you have to worry about remembering to cancel your membership before you billing cycle kicks in. Those sites give the same information they just charge you for it. At http://www.annualcreditreport.com/ they may offer different memberships but you just click “no thanks” and it will take you to your report without having to enter credit card information. This entitles you to report only, scores cost, however if your report don’t look too hot your score most likely isn’t too hot either. After any delinquencies are paid in full, time will heal all wounds.
