  Credit cards, loans and other types of credit are convenient to use, make managing your money easier, and can be especially useful during emergencies. Credit makes it easier to pay for large expenses such as cars and home improvements, and a mortgage can put you in a home without needing cash for the entire purchase price. Credit Is a Powerful Tool. But credit is also a big responsibility. When you use credit improperly, it can lead to unmanageable debt and financial crisis. The more you know about credit, how to manage it and the warning signs when you may need help with managing credit, the easier it is to use this powerful tool wisely. TYPES OF CREDIT You can obtain a loan for a specific purpose, such as financing a new car, paying college tuition and buying or renovating a home. You can get a debt consolidation loan, which combines all current debts from various creditors into a single reduced-interest payment plan. And you can get a credit line linked to your checking account that gives you bounce-proof protection if you write a check for more than what you have in your checking account. Loans are generally divided into two types: secured and unsecured. A secured loan is a loan which is guaranteed by collateral of some kind. Collateral is an item of equal or greater value than the amount of the loan, such as a car, a home or a cash deposit. An unsecured loan is not guaranteed by anything. Credit cards are perhaps the most common type of personal credit. Using a credit card is like getting a loan. Every time you charge something, you're borrowing the money until you pay it back. If you decide to pay the money back over time, the credit card company adds finance charges to your account that you must pay along with the purchase amount. HOW MUCH CREDIT CAN YOU AFFORD? If the lender is unable to collect on the loan, whether secured or unsecured, there are consequences for the borrower. Defaulting on a loan is serious business, and can impact your credit rating, resulting in an inability to take out new loans, and in more serious cases may lead to legal action. Set A Realistic Budget...And Stick To It! That's why the first step in using credit wisely is figuring out how much credit you can afford to take on. You need to take a long, hard look at your current and future financial situation before you take on any new debt. As part of this analysis, you should look at your debt ratio and set a realistic budget for debt repayment. Debt ratio Debt ratio looks at how much you owe compared with how much you earn. It usually gives a clear picture of your financial well being. The lower your debt ratio, the more you have left over to save or spend on other things. Your debt ratio is the percent of your monthly take-home pay that goes to paying debts and monthly obligations. You calculate it like this: Take the amount needed to repay debts each month, including rent or mortgage, and divide this by your take-home pay (your net pay after deduction of tax).
Many experts recommend that no more than 15- 20% of your monthly household take-home pay (excluding rent or mortgage) should be used to pay debts and make loan payments. Furthermore, no more than 40% of your monthly take-home pay should go to paying all debts, including mortgage payments. TOP 10 TIPS FOR GOOD CREDIT Become a Responsible Consumer After you've decided on the type of credit you need and how much you can afford, follow these steps for maintaining a good credit history.
Creditors look at several key indicators when you apply for credit. You have considerable control over these factors based on how you manage your credit, so it's important to always keep them in mind. Credit scoring Credit scoring is a system used by banks and other lending institutions to determine whether or not you are creditworthy. It is weighed even more heavily when you apply for unsecured credit - credit lines and credit cards that do not require collateral. Creditors collect information about you and your credit experience from your credit application and your credit report. This information may include your bill-paying history, the number and types of accounts you have, late payments, collection actions, if you have applied for new credit recently, outstanding debt and how long you've had existing accounts. Using a statistical program, creditors compare your information to the credit performance of consumers with similar profiles. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic scoring model developed by a credit scoring company. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. The total number of points - a credit score - helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due. The three Cs of good credit Client History: How responsible you are about paying bills on time. Capacity: Your ability to pay back a loan based on your income and financial position. Collateral: Security for the lender in case you don't pay back the loan. A house, for example, would be used to collateralize a mortgage. Positively changing your "three Cs" will help improve your credit standing. The first two Cs are extremely important in developing what is called your "credit score" or "credit rating". MAINTAINING GOOD CREDIT A few simple rules can help you build and maintain a solid credit history.
YOUR CREDIT HISTORY What Your Credit History Says About You Your job, your income, your status - none of them say more about your personal and financial future than your credit history. A good credit history means you'll have an easier time getting credit when you want it - for a new home, new car or a credit card - and sometimes even with lower rates. Your credit history is publicly available information on how you have handled your past financial relationships. It usually contains the information listed below. Identification: Your name, address (including past addresses), Social Security number, and birth date. You supply this information every time you apply for credit. Filling out forms consistently (such as entering your name the same way every time) helps reduce errors in your report. Employment: Your current job and employer. It may also include past employers. Credit: Creditors supply monthly details such as your outstanding balances, credit limits, monthly payments and payment patterns over several years. Information about closed accounts remains on your report for seven years. Prospective creditors often use this section to evaluate patterns in your handling of credit, especially for the last two to three years. Public record: This includes bankruptcy, tax liens, and judgments against you and, in some cases, overdue child support. Information remains on your report for seven years, except for bankruptcy, which can remain for up to ten years. Unresolved judgments can remain on your report for seven years or until the governing statute of limitations has expired, whichever is longer. Inquiries: If you request credit from a lender, their inquiry will appear on your report for two years. Inquiries made in order to solicit your business will appear only in your copy of the report. Promotional inquiries: Your report may contain a list of companies that have made promotional inquiries about you. Firms and banks that are interested in contacting you with credit offers make these inquiries because you fit a certain set of criteria. They only appear in your copy of the report. Under the Fair Credit Reporting Act, you can tell the credit bureaus to make your name unavailable to unsolicited card issuers. A phone request will be in effect for two years, while a written request will be permanent. By law, certain personal facts - your race, religion, health status and politics - cannot appear in your credit report. Read Your Legal Rights for more information on restrictions. CREDIT REPORTS If you've ever had credit, a credit bureau (also known as a credit reporting agency) probably has your credit history. Credit bureaus collect and sell information to creditors, insurance companies, and others about how people repay their debts. Credit bureaus don't decide whether you will get credit. They simply report how you've handled your credit in the past. Bureaus can report information that is up to seven years old, except for bankruptcy information, which can remain for up to ten years. In addition, they can report your lifetime credit history if it's used to evaluate you for credit or life insurance valued at $150,000 or more, or for a job paying at least $75,000. Credit bureaus get most of their information from the same sources that ask for it: employers, banks and finance companies, landlords, mortgage lenders, credit card companies, major stores and court records. Lenders and landlords use your credit history to assess your ability to repay, and sometimes employers look at it to make a judgment on your client history. So a good or bad credit history can make all the difference in getting the loan you need, an apartment you like, or the job you're counting on. Who can view your credit report? Creditors, insurance companies, some government agencies, landlords, employers and you are allowed to see your report. To request a copy of your report, contact one of the major three credit bureaus listed below. Information may vary, so you might want to contact all three. If you have been denied credit, the creditor must tell you which credit bureau it used to get information about you. If you act within 60 days, you can get a free copy of your credit report. You may also get a free copy if you are unemployed and looking for work, receiving public assistance or believe you've been the victim of financial identity fraud. Otherwise, the credit bureau may charge a reasonable fee for supplying you with your report. CREDIT BUREAUS There are three major credit bureaus and they are listed below. Equifax 5505 Peachtree P.O. Box 740241 Atlanta, GA 30374-0241 1-800-685-1111 www.econsumer.equifax.com Experian (formerly TRW) National Consumer Assistance Center 701 Experian Way P.O. Box 949 Allen, TX 75013 1-888-397-3742 www.experian.com/consumer Trans Union Corporation National Disclosure Center 760 Sproul Road P.O. Box 390 Springfield, PA 19064 1-800-888-4213 www.transunion.com What if there's a mistake? If you find a mistake in your credit report, notify the credit bureau right away. Be sure to have your identifying information ready. Under law, the bureau must investigate your complaint. It must also correct or remove any information that isn't accurate. If an error is found, the bureau must send a revised report to anyone who asked about you in the past six months. At your request, the bureau must also send a revised report to potential employers who have requested it within the last two years. If you disagree with the bureau's conclusion, you have a right to include a brief explanation in your credit report. |
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