Know Your Credit

minnesota auto service
GOOD CREDIT AND HOW TO GET THERE
Ask most people and they'll tell you it's better to have good credit than bad credit. Yet there are many people who burden themselves, often out of ignorance, with a negative credit history. Read on to learn what exactly determines a good credit record and what you can do to improve yours.

Establish a Good Credit History
It may seem like the old chicken-and-the-egg dilemma but you need to get credit in order to build a good credit history. If you have never had credit before you may have trouble getting your first loan or credit card. AFSAEF's brochure "How to Be Credit Smart" recommends the following options for establishing credit for the first time:
    Open a checking and savings account at a local financial institution. If you handle the checking account responsibly and prove to be a valued account holder, the institution may grant you a small loan or offer you a credit card.
    Apply for a dealer's charge card. This can be the first step toward applying for a major credit card, once you have shown an excellent credit payment record.
    Take advantage of credit cards that are often offered to college students or recent graduates. "Affinity group" credit cards are often made to members of a particular union, professional group, or interest group.
    Apply for a secured credit card. Designed for people who have no previous credit history, this card requires a minimum deposit that usually equals the amount of credit available on the credit card.
    Apply for financing with an automobile finance company. Dealers sometimes promote special programs tailored to soon-to-be or recent college graduates and borrowers with limited credit.
    Obtain a student loan if college-bound. Remember, a student loan is a real loan and getting behind in payments can hurt your creditworthiness.
Remember, your credit record begins once you have been granted credit, and this will form the basis upon which creditors evaluate you for credit in the future.For more on getting and keeping good credit, you can order a free brochure entitled, "How to Be Credit Smart" from www.afsaef.org.
Back to Top
What Contributes to a Bad Credit History?
Your credit history records how well you have managed credit, going back as many as 10 years. It also contains information such as employment history and the number of inquiries that have been made about your credit record. Lack of recent or consistent employment, missed or late payments, a large number of open credit accounts, or a large number of recent credit inquiries (which is used to determine how many times you have applied for credit) could all raise concerns for creditors who are considering your application for credit.

Of course, it's better to catch yourself before you start developing a negative credit history. AFSAEF's "How to Be Credit Smart" suggests you look for the following "red flags" which might indicate that you are headed toward credit problems:
    Not knowing for sure how much you owe. If you can't figure out where your money goes each month, it's time to establish a budget. Start by keeping a record of everything you spend and where you spend it.
    Making minimum payments on your credit card or other revolving loans. If you can only afford the "minimum payment due" on your bills each month, you may be headed for trouble. Not only will it take longer to pay off your debt, but this means you're paying finance charges on your unpaid balances.
    Borrowing money earmarked for other financial obligations. Juggling your bill-paying each month or depleting your savings to pay your bills doesn't fix the problem. It buys time, but it doesn't control your problem of overspending. Figure out where your money is going, what you can do without, or where you can cut back.
    Working a second job to keep up with your spending. Once in a while, it may be necessary to get a second job to meet personal financial obligations. However, depending on this additional amount every month to offset increased spending can be a trap. Find a way to live within your means.
    Being consistently late with bill payments. If you find yourself falling behind in your bill payments or routinely making late payments, it's time to re-examine your finances and establish new priorities.
    Being denied credit. Creditors deny credit to people who they believe are already over-extended or who have had problems paying their bills in the past.
If you're seeing more than a few red flags in your behavior, it's time to contact your creditors and seek help from a credit counseling organization, such as Amerix [www.amerix.com/creditassistance] or Consumer Credit Counseling Service [www.cccsatl.org].

For more on getting and keeping good credit, you can order a free brochure entitled, "How to Be Credit Smart" from www.afsaef.org.
Back to Top
What Creditors Look For
If you lend a friend some money, you expect him to pay you back. And if he doesn't pay you back, you're much less likely to lend him money again — you may even warn others about the risk of lending your friend money. The same holds true of creditors, which is why establishing and maintaining a good credit history is so important. In general, creditors look for what the Federal Reserve Board calls "the three Cs": capacity, your ability to pay off the debt which can be based on income, employment history, and number of dependents; character, your historical tendency to pay off debt and keep your debts at a reasonable level; collateral, if you do default on a loan, whether or not you have assets that could be used to secure or repay the debt.

Bear in mind, creditors cannot use the following information to deny you credit:
    Age — though you must be old enough by state law to qualify for credit (18 or 21 years old depending on your state of residence)
    Gender
    Marital status
    Race
    Color
    Religion
    National origin — while you cannot be declined based on national origin, your immigration status may be considered
    Receipt of public assistance or Social Security — however, a creditor may consider related circumstances, such as age of dependents or other factors that might affect your likelihood to continue receiving such payments
For more information on your rights in applying for credit, visit the Federal Reserve Board's online Consumer Handbook at www.federalreserve.gov/pubs/consumerhdbk/.
Back to Top

Improving Your Credit Record
Only time and solid credit performance can improve a negative credit record. Here are some recommendations that can help you improve your credit standing:
  • Make sure you pay off your debts promptly and reliably.
  • If you have trouble controlling spending, look into a consolidation loan from your bank. Then you can save your credit cards for emergencies.
  • Set and stick to a budget that helps you keep your debt at a manageable level.
  • Ensure your credit reports are accurate by regularly checking it and rectifying discrepancies with the credit reporting agencies.
  • If you're having trouble qualifying for credit, consider a secured credit card. These cards use collateral to alleviate risk for the lender.

If you have been denied credit, you are allowed by law to request the reason(s) you were denied and the name of the credit bureau that supplied the credit report. You are also entitled to a free copy of your credit report from that credit bureau within 30 days of the decision (this is usually limited to one request per year). Credit bureaus are sometimes able to recommend steps toward repairing your credit record (see their Web sites for details).
Back to Top
Back to top