Establishing Credit History
In today’s world, an individual’s credit history is vitally important. For a lender deciding whether to make a loan, having no credit history can tell as much about a person as having too much credit. Either way, credit history plays a key role in one’s ability to obtain and maintain wealth.
Establishing credit history is critical. When you buy a car or a home or anything that requires more money than you have immediately available, the lender is able to find out whether you have a successful record of paying off debts. Some lenders may deny the loan if you have bad credit, or a history of not paying back loans, and may decline you financing if you have no credit history. Likewise, if you have never owned a credit card, you may find that lenders are unwilling to take the risk of lending you the amount of money that you have requested.
Those who are just establishing credit or have a history of bad credit may be forced to accept higher cost loans. For this reason it is critical that borrowers read the fine print of any loan agreement. Remember- taking out a loan that you cannot repay will only worsen your credit for the future.
The following are some facts that every consumer shopping for credit should know, as well as some recommendations to help you manage your credit wisely:
Credit Report and Credit Scores
Your credit report, which gives a history of your borrowing, is used by lenders to assign a credit score. A credit report includes your name, address, and social security number. It includes your history of paying off credit card debts, public record information such as tax liens, court judgements for money owed and any other loans you have outstanding. Lenders may access your report from a credit bureau and use this report to determine whether or not they are willing to take a risk on lending to you.
Credit scoring can help a lender determine the likelihood that the borrower will repay the loan. The scores are based on lenders’ experience with millions of previous borrowers, as well as your own credit history, including your history of making payments on time. The fair lending laws do not allow credit-scoring models to take such information as race, gender or age into consideration.
FICO scores refer to Fair Isaac and Co. credit scoring that has become the most popular credit scoring method in the lending industry. Mortgage lenders and credit card issuers are far more likely to issue a loan when the borrower has a high FICO score. FICO scores have recently become available to the public, although there may be a fee. See the reference list below for how to obtain your FICO score.
Shopping for and Managing Credit
From the time that you obtain your first credit card or loan, there are certain things that you should consider carefully. Making wise decisions and being cautious will help you avoid the pitfalls of credit.
Shop for the lowest interest rate and for cards with low or no annual fees.
Pay bills as soon as they come in and definitely by the due date noted on your bill.
Only spend what you can afford. Remember credit is a LOAN.
Pay credit card bills in full each month, or at least pay more than the minimum amount due.
Don’t accept a credit card or take out a loan simply because the issuer thinks that you qualify for it. Only you know what you can afford to pay back.
Don’t "max out" your credit card. You may have trouble paying it back and it will reflect poorly on your credit report.
Discuss any financial troubles you may have with your creditors and with a legitimate credit-counseling agency (see the resource list attached here for assistance).
Remember that your co-signor’s credit history and ability to pay is as important as your own if you hold a joint account.
Rights and Responsibilities as a Credit User
Credit is a privilege that carries with it important rights and responsibilities for a consumer. The following tips will help you make the most of your credit:
Read and understand the fine print
Remember that if you enter into a credit agreement with a spouse or a significant other, you will be held responsible for any debt the other party incurs on that credit card.
Make sure the issuer reports to a credit agency. If it does not, your positive payment history will not be reflected in your credit report.
You have the right to view your credit report and to dispute inaccurate information. Studies have shown that credit reports often contain errors. It is your responsibility to identify any errors that may exist on your credit report.
Be aware that when you apply for a loan, the lender will most likely charge you for the cost of obtaining your credit report. The charge is usually not more than $15. Remember to look at all fees that you are being charged and question the costs if they seem too high.
