Pony Up to Good Credit
Ever been short on cash and asked a buddy to spot you? Well, simply put, that is the role of credit: to provide funds today that must be repaid at a later date. Unlike borrowing from your pals, however, you will pay - in the form of interest - for the privilege of using other forms of credit!
In today's society, access to credit is a must. Few of us could buy a car, home or other big-ticket item without it. Maintaining a solid credit rating and payment history will ensure your ability not only to obtain credit in the future, but to qualify for a lower interest rate. If you do not have a credit history, how do you get one?
Building a Good Credit History
Building a good credit history is one of the smartest things you can do. If you are at least 18 years old and have a regular source of income, you are well on your way! However, with new credit rules in effect, it is become a bit more difficult. No one under 21 can obtain a credit card unless they have an adult co-signer on the account or can prove they have enough income to repay the debt.
If you cannot qualify for a low interest rate credit card from a major credit card issuer, you may want to consider the following alternatives to establish a credit rating:
apply for a credit card issued by a local store. Often, local businesses are more willing to extend credit to someone with no credit history.
apply for a secured credit card. Basically, this type of card requires you to save the money first as collateral for your line of credit. Your credit line will be a percentage of your deposit, typically from 50 to 100 percent of your account balance. Bear in mind that some secured credit cards charge application and processing fees, and many carry a higher interest rate than traditional, non-secured cards.
ask someone with an established credit history - perhaps a parent or other relative - to co-sign your credit account. By co-signing, this individual commits to repay the loan if you do not.
Once you demonstrate that you are a responsible credit manager by paying your bill on time and in full, major credit card issuers may be more willing to extend credit to you.
Managing Your Credit
Saturday Night Live said it best - "Don't Buy Stuff You Can't Afford." (opens in new window)
What is the easiest way to manage your credit? Don't spend money you don't have. It is that simple. The fastest way to get in trouble with credit is to spend with the attitude, "I'll pay it off later!" If you do not have the money to purchase items now, what makes you think you will have enough to pay the bill when it comes?
It is best to pay off your credit card balance at the end of each month before interest can accrue. For big ticket items, that is not always possible. Make sure you have a repayment plan in place before you say, "charge it!"
Making only your minimum required monthly payment is a costly repayment plan. If you paid only the minimum required by a credit card company on a $1,000 balance at 18 percent 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 the likelihood that you will repay money you borrow. The FICO score, developed by the Fair Isaac Corporation, is the most widely used credit evaluation system; scores range from 300-850. A higher score means lower interest rates and access to more credit.
Before you can understand how to maintain a good credit rating, you must first know how it is determined. 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, do not use all the credit available to you and limit new lines of credit. For more information, check out Myfico.com.
Monitor Your Credit Report
Your credit report is similar to a report card; it "grades" your experience handling credit. Just like you closely monitor your grades during a semester, you should keep tabs on your credit report to make sure nothing is falsely reported or new credit is not taken out in your name without your knowledge. Many experts recommend viewing your report annually or biannually.
To monitor your credit history, contact the major consumer reporting agencies for a copy of your credit report.
Equifax: 800.685.1111 (Equifax.com)
Experian: 888.397.3742 (Experian.com)
TransUnion: 800.888.4213 (TransUnion.com)
The Annual Credit Report Service (877.322.8228, AnnualCreditReport.com) will provide one free copy of your credit report per year as required by the Fair Credit Reporting Act. 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.
New Credit Card Laws (PDF opens in new window)