F.A.R.E. Debt Education
Before you start the next module, let’s do a quick review.
In Module One, we discussed Maslow’s “Hierarchy of Needs” and in Guide to Better Budgeting we discussed the importance of creating and maintaining a spending plan.
We continued that discussion in “You and Your Credit” Along with identifying how Credit Scoring and Credit Ratings were created, we also discussed:
- What kind and how long information can be retained on a credit report.
- The three major credit bureaus and their differences and similarities in developing scores.
- How to obtain a credit report and how to identify and correct errors.
In the next module we take a closer look at what is “good” credit and what is “bad” credit.
Good Credit vs. Bad Credit: What’s the Difference?
There are a lot of misconceptions regarding credit, especially in terms of what determines good and bad credit.
What is the difference between good credit and bad credit?
Credit is a necessary part of our society. While good credit will help a person improve his or her quality of life, bad credit can hinder his or her ability to do so.
Good Credit (How do I get good credit?)
In order to get Good Credit, you need to have Credit. The more good reports that go to the credit bureau, the better your credit.
No Credit? No Problem!
How to Establish Credit
If you’ve never had credit in your own name, it can be difficult to get a car loan or credit card. Having no credit history can be as much of a problem as having a bad credit history. Students, other young people, and newly divorced or widowed persons who have always obtained credit jointly with their spouses often find themselves in this situation.
It seems like a vicious circle: you can’t get credit because you’ve never had credit, but you’ve never had credit, because you can’t get credit. What’s a person to do?
Here are a few tips to help you establish credit in your own name:
- One of the best way to establish a credit history is to apply for a small loan or line of credit from your local bank or a credit card from a local department store. Ask whether they report to a credit bureau.
- To get a credit card without a cosigner, you must be at least 18 years old and have a source of steady income. Gas cards are relatively easy to get. Apply for one and use it to establish credit, but pay it off every month to show that you can pay your bills responsibly.
- Increase your chances of getting the loan you’re applying for by coming up with a large down payment.
- If you don’t have a checking account, open one. You have very little credibility with lenders if you don’t have at least a checking account and preferably a savings account as well.
- Being rejected for credit can also look bad. Apply only to cards whose requirements you are likely to meet. Read the small print and call the company to make sure your income and other factors qualify you for the card. Just because you get an offer in the mail doesn’t mean you qualify.
With careful planning and a little knowledge of how lenders issue credit, you CAN establish a credit history fairly painlessly.
Beware! – There are many businesses waiting in line to take advantage of you by charging exorbitant fees or interest rates, so be careful out there.
Hidden and Nuisance Fees
- Transaction Fees
- Late Fees
- Over-the-Limit Fees
- Pay-Off Fees
- Universal Default – The provision, generally buried in the fine print of your credit card agreement, basically says that if you are more than 30 days late on any payment to anyone, the interest rate on your credit card could shoot up and your credit score may be damaged.
Benefits of Good Credit: What can good credit do for you?
- Having a good credit report enables you to borrow more money at better interest rates.
- It can also help you when it comes time to sign an apartment lease agreement or maybe even get a new job.
There is nothing good about bad credit! It is the exact opposite of good credit.
Getting Bad Credit
It is just as easy to get bad credit as it is to maintain good credit. Remember, as we discussed in the last module, your payment history has the biggest impact (35%) on your Credit Score and Grade. Being as little as 30 days late will show up on your credit report and can affect your credit score.
Did You Know?
Everyone knows that an unpaid creditor can leave a mark on your record for years to come.
But did you know that now, even your health club or local librarian can lower your score.
Most people know, and can accept, that an unpaid credit card bill can wind up in a collections account that will devastate their credit scores. But did you know that your credit also could suffer from an unpaid parking ticket, a traffic fine you ignored or a forgotten library book?
A growing number of local and state agencies are using private collection companies to boost their revenues. More than 600 public libraries from Eugene, Ore., to Broome County, N.Y., turn unpaid accounts over to private collectors like Unique Management Services. Cities and courts hire others, including Municipal Services Bureau, to track down overdue parking, traffic and court fines.
Fixing Bad Credit
Credit ratings, even bad ones, can be improved and fixed!
With responsible credit usage and prompt payments, bad credit can turn into good credit over time.
The first step is requesting a copy of your credit report.*
- Equifax – Usually the lowest score
- Experian – Usually the middle score
- TransUnion – Usually the highest score
Understanding your credit report will
- Help you determine if there are errors.
- Make you aware of what steps you need to take to improve your credit.
*For a free copy of your credit report contact the individual Credit Bureaus and request one or go to www.annualcreditreport.com and you can get all three (does not include credit scores).
4 Common Credit Mistakes
Mistakes to avoid when you’re trying to improve your score
- Asking a creditor to lower your credit limits. This will reduce that all-important gap between your balances and your available credit, which could hurt your score. If a lender asks you to close an account or get a limit lowered as a condition for getting a loan, you might have to do it — but don’t do so without being asked.
- Making a late payment. The irony here is that a late or missed payment will hurt a good score more than a bad one, dropping a 700-plus score by 100 points or more. If you’ve already got a string of negative items on your credit report, one more won’t have a big impact, but it’s still something you want to avoid if you’re trying to improve your score.
- Consolidating your accounts. Applying for a new account can ding your score. So, too, can transferring balances from a high-limit card to a lower-limit one, or concentrating all or most of your credit-card balances onto a single card. In general, it’s better to have smaller balances on a few cards than a big balance on one.
- Applying for new credit if you’ve already got plenty. On the other hand, applying for and getting an installment loan can help your score if you don’t have any installment accounts, or you’re trying to recover from a credit disaster like bankruptcy.
About Your Credit Scores
Why are my three credit scores so different?
According to Fair Isaac, the company responsible for creating the credit score concept, this is why:
“…here’s why your FICO® scores may in fact be different at the three credit reporting agencies. The way lenders and other businesses report information to the credit reporting agencies sometimes results in different information being in your credit report at the three agencies. The agencies may also report the same information in different ways. Even small differences in the information at the three credit reporting agencies can affect your scores.”
Taken from the booklet “Understanding Your Credit Score.” by Fair Isaac
4 Credit-scoring Myths
According to Lynn Pullman Weston, contributing editor to MSN Money and author, these are the most common credit-scoring myths:
- Closing accounts can help your credit score – It’s true that having too many open accounts can hurt your score. But once you’ve opened the accounts, you’ve done the damage. You can’t repair it by shutting the account, and you may actually make things worse. The credit score looks at the difference between your available credit and what you’re using. Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score. The score also tracks the length of your credit history. Shutting older accounts can also make your credit history look younger than it actually is, which can hurt your score.
- Checking your FICO® score can hurt your credit – Applying for new credit is generally what hurts your score. Ordering a copy of your own credit report or credit score doesn’t count. Those mass inquiries made by credit card lenders, who are trying to decide whether to send you an offer for a pre-approved card, also aren’t going to hurt you, either — unless you actually take them up on their offers. If you want to minimize the damage from credit inquiries, make sure that when you shop for a mortgage you do so in a fairly short period of time. The FICO® score treats multiple inquiries in a 45-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.
- Credit counseling will hurt your score as much as a bankruptcy – The current FICO® formula ignores any reference to credit counseling that may be in your file. That’s been true for the last three years, after researchers at Fair, Isaac, the company that created the FICO® scoring system, noticed that people getting credit counseling didn’t default on their debts any more often than anyone else. Your ability to get a loan could still be hurt by credit counseling, however. Your current lenders may report you as late, because you’re not paying what you originally owed or because your payments not arriving on the original due date. Late payments do hurt your credit score.
- Your FICO® isn’t the only score you need to check – This came from lenders who thought the FICO® score is offered by only one of the three credit bureaus: Equifax. (As we discussed in Module One) FICO® scores have different names depending on which Credit Reporting Agency is reporting them. That led some lenders, and consumers, to believe there other scores in addition to the FICO® score could impact lending decision.
The Next Step
Stay informed, there is lot of great information on the internet.
Live within your means, don’t celebrate paying off a debt by creating a new one that you don’t need.
If you have additional concerns about understanding your specific credit situation talk to a financial professional to help you continue on the path towards getting and keeping good credit.
In this module we discussed:
- The benefits of having and maintaining Good Credit.
- How to establish credit if you never had it.
- How bad credit can hinder us from getting credit cards, loans, and big-dollar items.
- How to fix bad credit.
- Mistakes to avoid when repairing credit.
- The importance of knowing what is on your credit report.