Credit and Debt

What you should know about credit

Most people are familiar with credit cards, but the term “credit” applies to more than just the plastic card you can use to make purchases.

Credit is your financial trustworthiness. It determines how confident a company can be in your ability and intention to pay off your debts.

Good credit is an indication that there is a history of financial responsibility, which can make it easier to borrow money at lower interest rates. Bad credit, on the other hand, can make it very difficult to get a car loan, a credit card, a place to live, and sometimes even a job or car insurance.

Understand your credit score

Most creditors look at your credit score to determine whether your credit is good or bad. Your credit score is based on a calculation that takes into account:

  • Your annual income
  • Your debt
  • Your bill payment history and any collections actions
  • The numbers and types of loans and accounts you have
  • Your credit limits, and what your total debt would be if you reached your total limits

Creditors then use your score to determine the level of risk you pose to them. They’ll conclude that if you have a low score, you’ll be less likely to make timely payments and more likely to default on the loan.

Credit scores are reported by three major credit bureaus: Experian, TransUnion, and Equifax.

What’s in a credit report?

A credit report will contain the following information:

  • Name, address, phone number, social security number
  • Past address(es) and employers
  • Your spouse’s name, if applicable
  • Lender names and account numbers
  • High balances, current balances, and credit limits
  • Loan terms and payment history
  • Whether you have had any charge-offs or repossessions
  • Who has requested your credit report in the past 24 months

The credit bureaus also collect information from courthouse and registry records, so the report may include bankruptcies, tax liens, judgments, or even criminal proceedings.

Correcting and improving your credit report

You should regularly check all of the information in your credit report for accuracy, and dispute any incorrect information directly with the credit bureau that provided the report. They will open an investigation and advise you on how to proceed. You will also want to close any inactive accounts.

There are also two important steps you can take to start repairing your credit if your score is low:

  • Pay down your debt.
  • Pay your bills on time.

Knowing your credit score is important!

Why? Because it is used to determine the interest rate and type of loan a creditor will be willing to give you. If you’re about to apply for credit—especially something significant like a mortgage—find out your credit score in advance. Then you can correct any errors and start improving your score.

Requesting a free copy of your credit report

You are entitled to a free copy of your credit report once every 12 months as well as any time you are turned down for credit based on your report. You can request your report in any of the following ways:

  • Online at www.annualcreditreport.com
  • By phone at (877) 322-8228
  • By mailing a completed Annual Report Request Form to:
    • Annual Credit Report Request Service
      P.O. Box 105281
      Atlanta, GA 30348-5281
  • By contacting one of the three major credit bureaus directly:
    • Experian National Consumer Assistance Center
      P.O. Box 2104
      Allen, TX 75013-2104
      (888) 397-3742
      www.experian.com
    • TransUnion
      2 Baldwin Place
      P.O. Box 2000
      Chester, PA 19022
      (800) 888-4213
      www.transunion.com
    • Equifax, Inc.
      P.O. Box 740241
      Atlanta, GA 30374
      (800) 685-1111
      www.equifax.com

What you should know about credit cards

Although many credit cards look alike, they certainly don’t act alike. Interest rates, late fees, annual fees, benefits, payment terms, and even security measures can vary greatly among them. That’s why it’s so important to read the fine print and ask the following questions:

  • What is the Annual Percentage Rate (APR)? Is the APR for a “limited time only”?
  • Will you be charged different interest rates for purchases, balances, and transfers?
  • Is there an annual fee or other fees?
  • Is there a “grace period” between making a purchase and getting charged interest?
  • Is there a 24-hour customer service number?
  • What type of fraud protection is available?

Keep credit card spending in check

A credit card is essentially a loan that a bank gives you up to a specified amount. In exchange for the loan, the bank charges you “interest” on the amount of money you “borrow” or spend on the card.

It is important to realize that if you don’t pay off the balance in full each month and thus incur interest, you will be paying more for goods and services than they cost when you purchased them.

Because of this, it is best to keep credit card spending in check. If you lack the discipline to do this, you may want to limit yourself to using it only in emergency situations. Or consider getting a “secured” credit card in which you provide funds up front, and a percentage of this money becomes your spending limit.

Next, find out about taxes.



Bookmark and Share