Good credit is essential. Without a good credit rating, you might be denied credit cards, car loans, or mortgages. At the very least, a poor credit rating will mean you pay more for these things. Even when renting an apartment, poor credit might mean you pay a higher deposit. You might also have much higher interest rates, which could cost you thousands of dollars extra on a car, or tens of thousands of dollars extra on a mortgage.
In today's tough economy, lenders are becoming even harsher while evaluating credit. Basically, they want to know that you have not only the means to pay debt, but the financial responsibility to do so. Many people have a lot of money, but bad credit because they are irresponsible about paying their bills on time! The FICO score is a number from 350 to 850 that lenders look at to determine your risk profile. (The higher the number, the better your credit.) These days, lenders are requiring ever-higher credit scores to get the best interest rates on loans. They can also see your credit report from the three major credit bureaus (Transunion, Experian and Equifax), which will list any delinquent payments, defaulted loans, or other credit problems, as well as who the lender or company was, and when they occurred. Here are some things they'll look for and what you can do to help your own credit.
Availability of credit.
This is the reason to not max out your credit cards, aside from leaving credit open for an emergency as well. Lenders look at the percentage of credit you are using as compared with the amount of available credit. If you, for example, are only using ten percent of your credit (a $100 balance on a $1,000 limit credit card), it shows restraint. It might also demonstrate that you don't outspend your means.
What to do: Try to pay your credit card balance off every month, or at least keep a very low balance. Don't cancel cards you have paid off: it will hurt your debt-to-credit ratio overall.
Timely payments.
If someone is lending you money, don't you think they want to know you'll pay it back? Defaulting on a loan will severely hurt your credit score. In addition, late payments, especially a history of late payments, may shy creditors away, or make them consider you a risk. Different companies have different standards to determine when they will report a payment as late, but the rule is about 30 days. Utility companies can be severe, and turn off your gas, water or electric service if you miss more than one payment in a row, or your payment is over 30 days late, or, in some cases, less than that. Credit reports will usually reflect the number of accounts where you have been 30 days late with a payment, 60 days late, and 90 days or more. After 90 days, your creditor might send your account to collections. Not to mention, late payments will almost always incur extra fees!
What to do: Pay everything not just on time, but before it's due. Don't wait until the last day possible; you could forget to make a payment, run out of time, run out of money, or have an emergency that keeps you from making it. Try to avoid mailing checks, which can get lost in the mail or arrive late. Instead, make a budget, and pay all bills automatically with your checking account a week before they are due, which will give them more than enough time to process. Most banks have online automatic bill pay systems, often for free with a checking account. This means the bank will send a check to your creditor well before your bill is due. If you don't have bill pay, you can pay most bills, including cell phones, car insurance, credit cards and some utilities online. Most of these also have automatic withdrawal services. Make sure to keep your check book balanced and write down the withdrawal dates on a calendar so you don't overdraft your checking account!
Credit inquiries.
Lenders will want to see if you've been shopping around for credit, or jumping from one low-interest card to another. The more inquiries, the worse your score. If you've just bought a car and opened two credit cards, a company isn't likely to rush to give you even more credit.
Length of credit history.
If you've never had a credit card or loan, you must have good credit, because you're starting with a blank slate, right? Wrong. Lenders want to see that you've been using credit for a long time. This shows you are used to working with credit, and that you are a loyal customer.
What to do: It's important not to cancel your oldest credit cards, even if you've paid off your debt and have sworn cards off forever. Some people take their credit cards and freeze them in water-filled Ziploc bags so they are safe, yet not easily accessible. You might also put them in a safe deposit box or home safe, so they are ready for an emergency, but not in your wallet where they can be used or stolen. However, with some cards, you might want to charge something small every few months and then pay it off right away, to keep the card active. Additionally, if you've never had credit before, or have had negative credit in the past, you might have to start out with a secured credit card or low-limit card in order to prove you can handle the responsibility of credit. Check out the http://primarycardaccount.com for some great ways to use secured cards to build your credit.
Credit variety.
Lenders want to see that you have experience with several types of credit, and are therefore fiscally responsible. These types include unsecured credit, like credit cards, and secured credit, often times installment loans: car payments, mortgages, student loans and other types of financing.
What to do: Without overburdening yourself, try to maintain two types of credit. For married couples, you might want to have one car loan at a time, as well as a major credit card. Or a department store line of credit and a student loan. Most people will have some type of installment loan for most of their lives, be it a car loan, student loan or mortgage. However, even after you pay off your loan, it will reflect positively on your score for at least seven years, provided you make your payments on time and don't hurt your score in other ways.
Because identity theft is rampant, and easy in today's technology driven world, and because mistakes can happen, it's important to check your credit report regularly. You can get one free credit report from each of the three bureaus once a year through annualcreditreport.com. While each may have different items reported, make sure they are all correct. If you have a negative item that is accurate, there's nothing you can do about it except wait and try not to do anything else that will reflect negatively on your credit report. Items, both positive and negative, will fall off the report in about 7 years. If a negative item is more than 7 years old, you can contact the credit bureau to have it removed.
If you have problems managing your credit, believe you owe too much, or need to reduce your monthly payments because of job loss or low income, you can qualify for credit repair and debt management. In addition, with poor credit or a history of debt management systems, it may be hard to build your credit back up.
Credit is a life long process, and while it requires some work, it is definitely rewarding.
Portuguese
Spanish
French