For many people, credit is a mystery. Understanding it, and just as importantly, managing it, are not even possibilities. Most of us know that credit is important because it determines whether or not we can qualify for a new car or a house, but most people have no idea how to find out what their credit score is, how to repair their credit by having negative inaccurate items removed, or what to do to build new credit and maintain it. When you know the basics of credit, it's pretty easy to take control of your credit by repairing it, building new credit, and maintaining a good credit score.
Let's start simple. There are three major credit bureaus that monitor your spending habits and financial history, both good and bad. When you apply for credit, the lender or creditor will request a report from one or more of these bureaus. Depending on what information is on those reports, you'll be approved or denied for the credit you've requested, and if you're approved your credit score will be used to determine how high your interest rate will be.
Repairing and maintaining your credit affects your financial future
Keeping your balances right around 35% of their limits seems to be the magic number
But why is credit so important? Lucy Duni, vice president of Consumer Education at TransUnion's TrueCredit.com says that "Actively working to maintain a good credit score is the foundation for creating a positive financial outlook, and the best time to start is now." She goes on to explain that "by training themselves to follow a few simple guidelines, consumers can rise to the top of their credit game and compete more effectively for the ultimate credit prize - low interest rates."
Here are the basics of how to repair your credit and start building a good score.
- Pay your bills on time, no matter what. Do whatever you have to do to remind yourself of payment dates. Ideally, you can set up an automatic withdrawal, and many financial institutions now offer online bill payment options that can be automated as well. Even if you can only make the minimum payment, make sure you pay your bills on time.
- Keep your balances at 35% of the credit limit or below. One of the things lenders evaluate on your credit reports is your credit limits and balances. If your balances are at or near their limits, you may be less likely to get approved. Keeping your balances right around 35% of their limits seems to be the magic number, and does the most good for your credit.
- Monitor your credit reports regularly. There are several reasons to make regular check-ups on your credit. Identity theft is becoming more and more prevalent, with almost 10 million consumers saying they had been a victim of identity theft in the last year according to a Federal Trade Commission study released in 2003. But just as important as protecting yourself from identity theft, monitoring your credit report regularly can help protect you from yourself. By checking your reports on a regular and consistent basis, you'll be able to see how purchase decisions and your financial habits affect your score. Knowing the effect of what you're doing may be damaging your reports is the first step in correcting it and starting to repair and rebuild your credit.
- If you're a co-signer on a lease or a loan, make sure you keep tabs on it. Co-signing for a relative, spouse, or roommate is a nice gesture and can really help them out. Just make sure it's not going to hurt you. When you co-sign on a loan or lease, you're taking legal responsibility for that loan or lease. Any activity, good or bad, will affect both of your credit reports.
- Don't be too eager to close credit cards or other credit lines. Canceling credit cards and other lines of credit can be a bad idea, because it makes your credit history appear shorter. It may also increase the amount of available credit you're using (remember the 35% magic number?). Keeping lines of credit open, especially older ones, can be a real benefit to your credit report.
Start repairing your credit right now
Now that you know the basics, there's no reason for you to put it off any longer. Start repairing and maintaining your credit today. It makes a difference in what your financial future will be, and there's no reason to put it off any longer. Changing your credit can change your life.