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 Credit
is a valuable commodity. Having the ability to borrow funds enables
us to obtain things we would otherwise have to save for years to
afford: homes, cars, a college education. Credit is an important
financial tool, but it can also be a dangerous temptation, leading
people into debt far beyond their ability to repay. That is why
learning how to use credit wisely is one of the most valuable financial
skills anyone can learn.
What Lenders Look For
Before creditors lend money, they need to be assured that the funds
will be repaid – in other words, is the prospective borrower
creditworthy? To find out, they ask for various types of information.
Creditors obtain much of this information from your credit report,
a computerized profile of your borrowing, charging, and repayment
activities.
Income & Expenses
Lenders will look at what you earn and your regular expenses, such
as rent, utilities, food, and other ongoing items. The amount left
tells them whether you can afford to take on additional debt.
Assets
Do you have assets that can serve as collateral? Lenders will look
for things like bank accounts, insurance, and valuable items such
as a house, if you own one.
Credit History
How do you manage debt? If you have credit cards or have borrowed
money before, you have a history that indicates to prospective lenders
whether you are creditworthy by revealing details about the amount
of debt you already have, how many credit cards you have, and whether
you make payments on time.
It is easy to qualify for credit if you have a good history, but
what if you have never used credit before? This is a common problem
for people who have just started working, those who have worked
in the home and not at a salaried job, people who always pay in
cash, and widows and women who have recently been divorced and who
have not had assets or accounts in their own names. For them, the
first step is to establish a credit history.
How to Establish Credit
Begin by opening individual savings and checking accounts in your
name. Over time, your deposits, withdrawals, and transfers will
demonstrate that you can handle money responsibly.
Applying for a loan is another option, but be aware that this method
of establishing a credit history will cost, since loans require
the payment of interest.
You could take out a bank loan secured by the funds you have on
deposit or by items you own, such as a car. You could also ask a
friend or relative who has good credit to cosign a loan, which means
that he or she shares the liability for the loan with you.
You could also apply for department store gasoline or credit cards,
which generally are easier to obtain than major credit cards. Before
you apply for any credit, however, make sure you understand the
terms. For example, how long is the grace period – the time
you have to pay the current balance in full before finance charges
are incurred? Is there an annual fee, or other fees, associated
with the credit? If you believe that you will carry a balance, you
need to know how finance charges are calculated.
Patience is important in this process. It takes time to establish
credit, to build a record of consistency in making payments that
demonstrates your creditworthiness. And it is much better to go
slowly and assemble a strong record than to apply for too many credit
cards or a loan that is larger than you can handle.
Start slow, be cautious, keep track of your overall debt, and pay
on time. Most important, remember that credit represents real money
and has to be repaid with interest. Those are the keys to establishing
good credit.
Protecting Credit
Once you have obtained credit, it is essential to protect it. This
means safeguarding your credit, debit, and ATM cards, as well as
your account and personal identification (PIN) numbers.
Carry only the cards you expect to use, and keep the others in a
safe place. Maintain a list of account and telephone numbers of
the companies that issued your cards. Then, if the cards are lost
or stolen, you can notify the companies quickly. If your notification
is received before the cards are used, you have no liability; if
it is received after the cards are used, your liability is $50 for
each card.
Be cautious about giving your account number out, especially over
the telephone on a call you did not originate. Save sales receipts
to compare with your bill, and when you discard documents with account
numbers on them, be certain that the numbers can’t be read
– shred if possible.
Improving Poor Credit
If you have fallen behind in your payments, the only alternative
is to begin immediately to repair your credit record. Here’s
how:
- Face up to the problem. Recognize that you are
overextended, and contact your creditors to see if they will set
up a new payment schedule that you can maintain. Contact creditors
to try to work out a payment plan that you can live with. In any
case, never ignore bills.
- Immediately stop purchasing with credit. Take
your credit cards out of your wallet. Store them in a spot that
is inconvenient to reach, or even cut them up.
- Consider consolidating debts. You may find it
easier to make a single payment rather than several, and you might
obtain a lower interest rate that will make it easier to keep
up with payments. Remember that debt consolidation is not a cure-all:
you have to learn to control your spending to avoid future debt,
too.
- Contact a credit counseling organization. You
can obtain referrals for organizations in your area through the
National Foundation for Consumer Credit.
- Don’t expect miracles. Don’t believe
companies that promise to fix a poor credit rating quickly and
painlessly for a fee. As long as it is accurate and timely, negative
information cannot be removed from your credit record. The only
way to improve a credit record is to let time pass and establish
a record of on-time payment.
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