Mission Possible: Get Smart About Credit
Ever been short on cash and asked a friend to spot you? Well, that’s how credit works: to provide money today that must be repaid at a later time. Unlike borrowing from your friends, however, you’ll pay – in the form of interest - for the privilege of using other types of credit!
Access to credit is important. Few people can buy a car, home, or other big-ticket item without it. Keeping a positive credit rating and payment history can help you get credit in the future, qualify for lower interest rates, and possibly help you land the job or house of your dreams!
Defend Your Financial Freedom: Build a Good Credit History
Building a good credit history is one of the smartest things you can do. If you’re at least 18 years old and have a regular source of income, you’re well on your way! However, you must show that you’re a good risk before lenders will extend credit to you.
Consider the following tips to establish a good credit rating:
- Apply for a secured credit card. This type of card requires you to save the money first as collateral. Your credit line will be a percentage of your deposit, typically 50% to 100% of your account balance. Keep in mind that some secured credit cards charge application and processing fees, and many charge a higher interest rate than traditional, non-secured cards.
- Ask someone with established credit– maybe a parent or other relative - to co-sign your credit account. By co-signing, this individual commits to repay the loan if you don’t.
Once you demonstrate that you’re a responsible credit manager by paying your bill on time and in full, lenders may be more willing to extend credit to you.
Managing Your Credit
The easiest way to manage your credit is to avoid spending money you don’t have. It’s that simple. If you have an “I’ll pay it off later!” attitude, it’s easy to get into credit trouble. Chances are, if you don’t have the money to buy items now, you may not have enough to pay the bill when it comes.
It’s best to pay your credit card balance in full each month; that way you avoid paying interest charges. For big ticket items, that may not always be possible. When that’s the case, make sure you have a repayment plan in place before you say, “charge it!”
Making only the minimum required monthly payment isn’t the best repayment plan. If you paid only the minimum due on a $1,000 balance at 18% interest, it would take you eight years to pay off the debt! Always pay more than the minimum payment to stay on top of your credit card debt.
Maintaining a Good Credit Score
Your credit score is the tool lenders use to determine if you’re likely to repay money you borrow. The FICO score, developed by the Fair Isaac Corporation, is the most widely used credit scoring system; scores range from 300-850. A higher score means you have better credit and will pay lower interest rates and have access to more credit options.
Before you can understand how to maintain a good credit rating, you need to know how your credit score is figured. Your "magic number" reflects five general categories:
• Payment history (35%);
• Amount owed (30%);
• Length of credit history (15%);
• Amount of new credit available (10%); and
• Types of credit used (10%).
Want to know the best way to maintain or boost your score? Pay your bills on time and in full, don’t use all your available credit and limit new lines of credit. For more information, check out www.myfico.com.
Watch the Radar: Monitor Your Credit Report
Your credit report is like a report card; it “grades” your experience handling credit. Just like you closely watch your grades each semester, you’ll want to keep tabs on your credit report to make sure nothing is falsely reported or new credit isn’t taken out in your name without your knowledge. Many experts recommend viewing your report at least once a year.
To watch your credit, contact the Annual Credit Report Service (877-322-8228, www.annualcreditreport.com.) You’re entitled to one free copy of your credit report per year from each of the 3 agencies. It is a good idea to get one free report every 4 months i.e. in january get experian, in may get transunion, and in september get Equifax; or make your own schedule! Just check them!
Equifax, Experian and TransUnion will provide additional copies of your credit report and your credit score for a small fee. Instructions for ordering your report and addressing any errors are available online.
Equifax: 800.685.1111 (www.equifax.com)
Experian: 888.397.3742 (www.experian.com)
TransUnion: 800.888.4213 (www.transunion.com)