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Basic Credit Education
How credit report scores affect your life, approval for secured or unsecured loans, acceptance for secured, gold or platinum unsecured credit card offers, the interest rates and terms for home and auto loans and so forth.
Define Credit: In a nutshell, credit is a promise to pay, either in full at a later date or by making incremental payments over a short or a long term period. Whenever you purchase a product or service with a promise to pay later, you are using credit as a borrower. Whenever you lend money to someone with the understanding he/she will eventually pay you back, you are extending credit as a lender. The Terms of the Credit typically depend upon the relationship between the borrower and the lender. Between strong relationships, security (collateral) may not be required, nor a credit check. Many creditors; however, will require the borrower to have either a strong credit score which indicates a high likelihood the borrower will repay and will not be a high risk to the lender. For large credit amounts, in addition to a good credit history the lender will typically require security such as property with a value which meets or exceeds the amount of the credit extended.
Define Credit History: Credit History details how you have used credit in the past, whether you repaid credit extended to you and if you paid timely. Your credit history is reported in your credit report and credit score. When you are a new credit consumer and do not have a credit history, the lender might use other factors such as employment and salary to assess your financial trustworthiness, or the lender might require that someone (cosigner) who does have favorable credit agree to repay your charges if you fail to do so. In such instance, you are both equally responsible and liable.
How to get Credit: To obtain credit with a financial institution, you must first submit an application. The lender will use personal identification information such as your social security number to research your credit history. If the lender determines that you are not a high risk borrower, then it will extend credit to you. Once your credit application is approved, the lender will present the terms for obtaining and using the credit. The terms include; but are not limited to, the payback period and frequency, interest rates, fees, due dates of payments, what happens if you are late on a payment, and any other costs for using the credit.
How to Build Good Credit: To build good credit you must consistently use credit wisely and make payments timely. Whether you are a first time credit user building a credit history or if you're trying to rebuild credit which you had destroyed, limit yourself on the amount of credit you use. Use just one credit card and make small purchases which you can payoff quickly without building a high debt balance. Instead of using a credit card to buy things you don't have the cash for, use it specifically to establish a good credit history and payoff balances in full each month. When you make purchases with a credit card because you don't have enough cash, you're setting yourself up for failure. What happens if you still cannot payoff the charge with your next pay check? What if you have a financial emergency? Use your credit card only when you do have the cash to payoff the charge.
Since credit cards are the number one credit line, review these Dos and Don'ts for using credit cards responsibly:
Do
- Stick with just one credit card, so you can keep your payments manageable.
- Stop receiving other credit card offers so you won't be tempted to open new credit cards. How to Opt-Out of Credit Card Mail Offers.
- Put money aside to pay your credit card bill and make sure you don't spend it on something else.
- Make wise decisions about purchasing items you need versus those you simply want. Tell yourself "no" when you want to use your credit card to make a purchase but can't pay your bill in full at the end of the month.
- Let your creditor know in advance if you won't be able to make your monthly payment on time. The worst thing you can do is simply forgo your credit card payment, no matter the reason. Most creditors will assist you if you let them know before you miss your payment. Simply call your creditor, briefly explain the situation, and ask that any late fees be waived.
- Stay within 30% of your credit limit. A large part of your credit score considers the amount of debt you have. Keeping your balances low helps you maintain a good credit score. Not only that, lower balances are easier to manage than those that are higher.
- Negotiate a lower interest rate. Especially if your current rate is higher than offers you receive. Your interest rate determines how much you pay for carrying a balance on your credit card. Evaluate the interest rate on your credit card periodically to be sure you are getting the best deal possible.
- Sign up for online account access so you can monitor your credit card balance and pay your bill online.
Don't
- Use your credit card to make everyday purchases. Items like food, clothing, and gas shouldn't be purchased with a credit card. Using your credit card as a substitute for cash is a habit that can quickly lead to debt. For ordinary purchases, leave your credit card in your wallet and use cash or debit card instead.
- Get into the habit of making minimum-only payments. Making only the minimum payment each month increases the amount of time it will take to pay off your debt. It also increases the amount of interest you end up paying. To pay your debts off quicker and cheaper, you should pay as much as you can on your balance each month.
- Use your credit card to buy things you can't afford. Living a borrowed lifestyle is the quickest way to get into debt. If you can't afford a purchase today, chances are you won't be able to afford it tomorrow, or even next month.
- Close out a credit card without knowing how your credit will be impacted. There are times when closing a credit card can hurt your credit score. Avoid closing cards that still have a balance or those that make up a significant amount of your credit history.
- Don't use your credit card if you know you don't have the money to pay your credit card balance.
Important Credit Facts:
- Credit isn't cash nor a cash substitute - The easier it is to get approved for credit, the easier it is to forget that it's not cash or a cash substitute.
- Having good credit is important - Much more than just loans and credit cards revolve around a good credit score. Whether you get a new job; or advancement, the amount you pay for insurance and for other products/services, can be affected by your credit score.
- Good credit doesn't happen overnight - You already know the value of good credit, so take steps to build the kind of credit history that always gets your applications approved with low interest rates and no security deposit.
- There's no 'best credit card' which fits everyone - Since there are so many different types of credit cards, it's just as easy to get one that doesn't fit you as it is to get one that does fit you. Review credit card Terms, Conditions and Details before applying.
- Debt can happen to you - Too much debt can have a negative influence on your credit, making you at least appear to be a high risk to lenders.
- Creditors share your information, both good and bad - Creditors and lenders report your every action to credit bureaus. They share this information whenever you make a new application for credit. Your credit information is compiled in a credit report and scored using a credit score.
- You can get a free credit report - Federal law entitles you a free copy of your credit report from each of the three credit bureaus each year. This free credit report doesn't require you to signup for any other products or services, so you have absolutely no obligation.
- You can ask for a lower interest rate - High interest rates make credit expensive. With a good credit score (700 or higher) and a good payment history, you're in a good position to negotiate a lower interest rate.
- It's possible to have too many credit cards - It doesn't take long to build a collection of credit cards. As soon as you get one credit card, it seems every other creditor wants to offer theirs too. Having too many credit cards can affect your credit score and make it hard to keep up with your credit card payments.
- Closing credit cards can hurt your credit - When your creditor makes you angry, the first thing you want to do is close your credit card. Closing your credit card might hurt you a lot more than it will hurt your creditor.
The Importance of a Good Credit Score: Society is becoming increasingly dependent on using credit to make purchases and decisions. These days, good credit is used for more than just getting a credit card or a loan. More and more businesses are making the case that your credit should be used to make decisions about extending goods or services to you.- Shelter - When it comes to where you live, your credit is important. Mortgage lenders want to know that you won't default on your mortgage. If you don't have good credit, the lender will consider it risky to give you a mortgage loan. This could result in a higher cost of borrowing or worse, a denial of the loan. Don't think that because you're not on the market for a new home, that your credit won't be called into question. Your credit is used for rental decisions, too. Landlords consider your lease as a loan. You're being loaned a place to live and the landlord wants to know you'll pay back this loan. If you have bad credit, you can get denied for an apartment.
- Transportation - Unless you have the cash to purchase a car, you'll have to get a loan. Your credit not only affects whether or not you qualify for a loan, but also the amount and interest rate of the loan. Generally, loan applicants with good credit qualify for larger loan amounts with lower interest rates.
- Employment - Many employers conduct credit checks as a part of the hiring process. If you haven't demonstrated financial responsibility, a prospective employer might be hesitant to hire you. For example, the employer might believe your level of debt is too high for the salary offered.
- Entrepreneurship - Many people have dreams of starting their own business. Most business startups require a sizable amount of cash that you might not have available. In that case, you'll need to obtain a small business loan. Among other things, you need to have good credit to qualify for the business loan.
- Utility Services - It might be somewhat shocking to learn that your credit is needed to establish utility service. Your electricity company contends that you're borrowing one month of electric service. So, before turning on your electricity, the company will check your credit. This applies to most utility services including cable, telephone, water, and even cell phone.
Since your credit is defined by how you've paid (or not paid) your bills in the past, many businesses – landlords, mortgage lenders, utility providers, and even employers – use your credit to predict your future financial responsibility. Anytime you need to borrow money, or even services, your credit is called into question. This is why maintaining good credit is so important.
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