Why is credit so important?
From my experience working at a car dealership, I know how credit can affect someone, both positively and negatively. For example, if a person has a good credit history and a credit score above 700, I know the bank will likely approve a car loan. On the other hand, if I do a credit check and find that the person has a poor credit score or no credit history at all, I know that the bank will probably deny the loan, even if the person has a steady job and a good income.
Lenders look at credit scores and debt to income ratios, not people, when determining risk. A credit score indicates a person’s repayment reliability or, in other words, the likelihood the person will make their loan payments on time and in full. You should do a credit check before applying for a major loan, such as a home mortgage or car loan, in order to know what interest rates and terms to expect.
How to build credit
There are only a couple ways to build a credit history for yourself. The first way is the most common – simply get a credit card. Using the credit card responsibly for a minimum of six months will provide you with a credit score. Your score won’t be very strong at first, but as you continue to pay your credit card bill on time, month after month, your credit score will improve.
Contrary to popular belief, you don’t have to carry a balance on a credit card in order to build a credit history. Experts suggest using your credit card to buy things you would otherwise pay for with cash, such as gasoline and groceries, and then pay off the balance in full when your credit card statement comes due.
The other way to build a credit history for yourself is to have someone who already has a solid credit history add you as an authorized user to his or her credit card account. For example, if your mom or dad has had a credit card for several years and always paid the bill on time, you might ask to be added as an authorized user and thereby inherit your parent’s account history for that specific credit card.
How to do a credit check
There are three credit bureaus in the United States: Experian, Equifax, and TransUnion. Each credit agency allows you to check your own credit history and score on the Internet, for about $12. Experts agree that you should do a credit check at least once each year to ensure the information in your credit file is accurate, and to check for unauthorized use of your identity.
What’s in a credit score?
Your credit score is based on several factors. First and foremost is your payment history, which is negatively affected by late payments but tempered by time. For example, if you’ve had a Bank One Visa card since 1992 and never missed a payment, your score will probably be very strong. If you were 30 days late one time in 1995, your score today could be slightly lower. However, if you were 30 days late just a few months ago, your score will likely suffer much more. Bottom line: pay your credit card bills on time – always. If you have had a late payment, it will take time for your score to recover.
The other major factor used to determine your credit score is your total amounts owed in relation to your total available credit. Let’s say, for example, that you have two credit cards and each card has a $5,000 credit limit. Your total available credit, therefore, is $10,000. Experts recommend not exceeding 35 percent of your available credit so, in other words, your total balance from both credit cards shouldn’t be higher than $3500.
How to protect against identity fraud
Identity fraud refers to the growing epidemic of thieves who use other people’s names and Social Security numbers to fraudulently open credit accounts, buy merchandise, etc. You can protect yourself against identity theft by regularly monitoring the information in your own credit, in addition to shredding financially sensitive documents before throwing them in your trash for anyone to steal.
By Aaron McCullough