Here are the top dos and don'ts to follow for building or improving your credit, protecting your identity, and guarding personal information from loss or theft.
1. Know What Your Credit Is
Did you know there are companies that keep track of whether or not you pay your debts and if you make payments on time? And that these companies make this information available in the form of a credit report and score?
A bad credit history can haunt you for a long time—seven years or more. That’s why the best thing to do is learn how to maintain good credit before there’s a problem. While this might seem complicated at first, it gets easier once you understand the basics of credit and how it works.
Credit is more than just a plastic card you use to buy things—it is your financial trustworthiness. Good credit means that your history of payments makes you a good candidate for a loan, and creditors (those who lend money) will be more willing to work with you. Having good credit usually translates into lower payments and more ease in borrowing money.
Bad credit, however, can be a big problem. It usually results from making payments late or borrowing too much money, and it means that you might have trouble getting a car loan, a credit card, a place to live, and sometimes even a job.
2. Understand Your Credit
Most creditors use credit scoring to evaluate your credit record. This involves using your credit application and report to get information about you, such as your annual income, outstanding debt, bill-paying history, and the number and types of accounts you have and how long you have had them. Potential lenders use your credit score to help predict whether or not you are a good risk to repay a loan and make payments on time.
Many people just starting out have no credit history and may find it tough to get a loan or credit card, but establishing a good credit history is not as difficult as it seems.
- You might apply for a credit card issued by a local store because local businesses are more willing to extend credit to someone with no credit history. Once you establish a pattern of making your payments on time, major credit card issuers might be more willing to extend credit to you.
- You might apply for a secured credit card. Basically, this card requires you to put up the money first, and then lets you borrow 50 to 100% of your account balance.
- You might ask other people who have an established credit history to co-sign on an account. By co-signing, the person is agreeing to pay back the loan if you don’t.
3. Read the Fine Print
When applying for credit cards, it’s important to shop around. Fees, charges, interest rates, and benefits can vary drastically among credit card issuers. And, in some cases, credit cards might seem like great deals until you read the fine print and disclosures. When you’re trying to find the credit card that’s right for you, look at the:
Annual Percentage Rate (APR)
The APR is a measure of the cost of credit, expressed as a yearly interest rate. Usually, the lower the APR, the better it is for you. Be sure to check the fine print to see if your offer has a time limit. Your APR could be much higher after the initial limited-time offer.
This is the amount of time you have to pay your credit card bill after the date of the credit card purchase and before the date the company starts charging you interest on the unpaid amount.
Many credit card issuers charge an annual fee for giving you credit.
Transaction Fees and Other Charges
Most creditors charge a fee if you don’t make a payment on time. Other common credit card fees include those for cash advances and going beyond the credit limit. Some credit cards charge a flat fee every month, whether you use your card or not.
Customer service is something most people don’t consider, or appreciate, until there’s a problem. Look for a 24-hour, toll-free telephone number.
Creditors may offer other options for a price, including discounts, rebates, and special merchandise offers. If your card is lost or stolen, federal law protects you from owing more than $50 per card for unauthorized charges.
4. Improve Your Credit Record
A lot of people spend more than they can afford and pay less toward their debts than they should. To get control over your finances, and to manage your debt, try:
In many cases, people design and then stick to a budget to get their debt under control. A budget is a plan for how much money you have and how much money you spend. Sticking to a realistic budget allows you to pay off your debts and save for the proverbial rainy day.
Many universities, military bases, credit unions, and housing authorities operate nonprofit financial counseling programs. A credit counseling organization isn’t necessarily legitimate just because it says it’s nonprofit. You may want to check with the Better Business Bureau for any complaints against a counselor or counseling organization. Visit www.bbb.org for your local Better Business Bureau’s telephone number.
Creditors may be willing to accept reduced payments if you’re working with a reputable program to create a debt repayment plan. When you choose a credit counselor, be sure to ask about fees you will have to pay and what kind of counseling you’ll receive.
Finally, bankruptcy is considered the credit solution of last resort. Unlike negative credit information that generally stays on a credit report for seven years, bankruptcy information can stay on a credit report for as many as 10 years. Bankruptcy can make it difficult to rent an apartment, buy a house or a condo, get some types of insurance, get additional credit, and, sometimes, get a job. In some cases, bankruptcy may not be an easily available option.
When to Contact Creditors
If you’re having trouble paying your bills, contact your creditors immediately. Tell them why it’s difficult for you, and try to work out a modified plan that reduces your payments to a more manageable level. Don’t wait until your accounts have been turned over to a debt collector. Take action immediately and keep a detailed record of your conversations and correspondence.
5. Keep Your Record Clean
It’s easy to qualify for credit if you have a good credit history, but what if you have never used credit before? This is a common problem for people who just started working, those who work in the home, people who always pay in cash, and those who do not have assets or accounts in their own names. For them, the first step is to establish a credit history.
Patience is important in this process. It takes time to establish credit and build a record of consistency in making payments to demonstrate your creditworthiness. And it is much better to go slowly and develop a strong credit record than to apply for too many credit cards or a loan that is larger than you can handle. Start slowly, be cautious, keep track of your overall debt, and pay on time. Most importantly, remember that credit actually represents real money and has to be repaid with interest.
Good credit is important, now and in the future. In most cases, it takes seven years for accurate, negative information to be deleted from a credit report. Bankruptcy information can take even longer to be deleted—up to 10 years, depending on the type of bankruptcy.
6. Know What Creditors Look for on Credit Reports
Understanding what types of information most creditors evaluate is important. Your credit report is a key part of your credit score, but it is not the only factor. Other factors include:
7. Obtain a Copy of Your Credit Report
Credit reporting agencies don’t share files, so you’ll need to contact each reporting agency to make sure the information about you is correct. The three major credit reporting agencies are: