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Understanding Credit

“Cash was tight, but I had a wallet full of credit cards. Before long, the accounts were up to their limits and the monthly payments were too big for me to manage.”

“Buy now, pay later” is the American way. Credit allows you to have and use the things you want and need, even if you do not have the cash right then and there to cover their cost. Credit makes it possible to own a house, drive a car and get a college education even if you’re not rich. With a mortgage, a car loan or an education loan, you can pay for these things in smaller amounts over a longer period of time instead of paying for the whole thing at the time you buy.

When you depend too much on credit, though, its benefits quickly turn into dangers. The result of using credit is debt: money that you owe to a creditor, which may be a credit card issuer, a bank or a finance company. Not only does the creditor expect you to repay the amount you borrowed, you also have to pay finance charges. A finance charge is the dollar amount that credit costs you. If you rely on credit too often, you might soon find yourself over your head in debt.

Steps toward better credit

“My credit history is so bad. I wish I could just start over.”

If your credit history is bad and your score is low because of too much spending and poor bill-paying habits, don’t despair. With a little time and a bit more discipline, you can improve your credit profile. Credit scores change with each new piece of information about you. Because the scoring system gives extra weight to the most recent activity, the positive steps you take today may make a quick improvement in your score. Here are some suggestions:

  • Pay all your bills on time. Late payments will cause you to lose points.
  • If you owe a lot on your credit cards, stop using the cards and make at least the
    minimum payment every month.
  • If you do not have a current source of credit, get one, use it and start making regular
    on-time payments to prove that you can. One way to get credit is to obtain a “secured” credit card issued by a bank that requires you to keep a small amount of money on deposit for the bank’s protection in case you miss payments.
  • Do not apply for more credit than you need. Applications will show up on your credit report and may cause potential creditors to think you are about to take on more debt.
  • Don’t ignore your debt obligations. If you are experiencing problems paying your bills, contact your creditors immediately and try to work out a reduced payment plan. If you can’t work out a reduced payment plan with your creditors, consider contacting a credit counseling service for assistance. Your creditors may be more receptive to accepting reduced payments if you enter into a repayment plan with a reputable credit counseling service company.

Bad credit hurts

People may also want to check your credit history before they give you a job, a lease on an apartment or a house, a bank account, telephone service or an insurance policy. If your score is low, you may have to explain why. If your score is too low, you may not get what you want or you may be asked to pay more for it.

Your credit history

“I just saw a great apartment that I want to rent, but the landlord asked me to sign a consent to a credit check. What if those bills from my student days are still on it?”

If you have never seen your credit report or if you have not checked it within the past two years, you should request a copy from at least one of the reporting agencies (See below).

Check the report carefully to make sure there are no errors reflected in your credit report. You can correct a mistake by showing proof of the error to both the entity that reported the inaccurate information and the reporting agency, but it may take some time and effort.

Your credit score

The information in your credit history is used to create your credit score, a three-digit number that shows how likely you are to pay your debts, based on statistics of how millions of other people pay their debts. The higher your score, the more likely you are to be a good credit risk for a creditor. For example, FICO credit scores, which are produced by Fair Isaac and Co. and used by more than 70 of the nation’s 100 largest financial institutions, range from the 300s to about 850. Usually you need a score at least in the low 600s to get a mortgage. Some companies charge lower interest rates to people with high scores.

Where to Find Your Credit Information

You can request your credit report and credit score from these agencies by mail, phone or e-mail for a fee, unless you qualify for a free report because you have been denied credit, employment or insurance based on the report within the past 60 days. Charges vary by state. A typical price for a report and score is $12.95.

Equifax Information Services, LLC
P.O. Box 740241
Atlanta, GA 30374-0241
(800) 685-1111
www.equifax.com or www.myfico.com

TransUnion, LLC
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19022
(800) 888-4213

National Consumer Assistance Center
P.O. Box 2104
Allen, TX 75013
(888) 397-3742

The above credit information was available via Credit Acceptance from their brochure “The Credit You Deserve.”