How To Build a Good Credit Report (Score) while Young. Why It Is Important

Most of us don’t have a grandfather who left us  millions in trust, or hit the lottery, or found a huge amount of cash while cleaning a dead relative’s house.

Sadly, a majority of us depend on our credit for a majority of purchases,  from getting a cell phone to getting a car or a loan to buy a house or rent an apartment.

Unlike what common sense tells most people: PAY your bills in cash, this is NOT the best way to build your credit.

Why not? If you pay everything  in cash, you have NO credit history. A history of being a person who pays debts on time.The lenders want to see you are a good “risk” and they will get their loan back. If you have no credit history, how would they know? Sure, they could ask your mom or sister… just kidding.

What is a credit report:

A credit report is a system used by the lenders to decide whether or not to give you credit, a loan, and how much interest to charge you on the loan. The higher your FICA SCORE the better off you are. The potential lenders buy the credit reports from one or all of the three major credit reporting companies (more about them later.)

The credit report is based on your history of paying all your bills in time. When I say ALL, that includes credit cards.

The first thing you must do when you turn 18, is to apply for a credit card. It will probably have a low limit (you may spend up to $300.00) That is fine. Take it, make small purchases on it and PAY on TIME. After a while, you will notice the credit company will increase your limit of spending and probably lower the interest you have to pay for balances NOT paid within 30 days. PLEASE note, you do not pay interest if you pay ON TIME.

What to watch for when you get credit card offers: FEES. They would advertise flying miles, trips, bonuses, but if they have an annual fee of $75 look for another card which has NO fees and gives you rewards.

After a while of paying your first credit card on time, you already have started establishing good credit. Apply for a 2nd. card and proceed with the same steps: PAY on time, no fees to have the card. Do not have more than two good credit cards, and pay on time, is my suggestion.

After a while, if you are one of those teens who starts working at 14, ask your parents to go with you and open a bank account. At the beginning it will probably be joint with your parent or guardian, but try to deposit into your account the money you earn working your  summers. Well… at least what you don’t spend on your first date.

Continue this process.

DO NOT apply for store credit cards which have huge interest rates on unpaid balances. The temptation of getting 10% OFF when you apply goes puff the second you have outstanding balances at 27%.

A misunderstanding I noticed is the difference between companies that charge for your credit report, and the ONLY place where, by Federal Law, you are entitled to one FREE credit report from each of the reporting agencies every 12 months.

 

The companies who charge you, are actually selling you a PROTECTION service which generally includes monitoring of possible identity theft. Just  be aware what you sign for.

Intersections Inc. (http://www.creditreport123.com) rates ALL TOP TEN such companies.

Also, breaks down the scores. NOTE: your credit report is a report and your SCORE is calculated based on your report. You get a FREE annual credit report annually, but to know your score, which determines your fate with lenders, you will probably have to pay.

Anyway, here is the break down on the SCORE. From 300 (worst– pay with the cash under the mattress) to 850 points (go wild, get a million dollar card) the lenders will BEG YOU to borrow! Still continue to pay on time as your credit report could change overnight and as a result your score.

According to Intersections Inc.

300-580 — very weak score

580-620 –weak

620-680– fair

680-720– good

720-8500 – EXCELLENT!!!!!!

As a suggestion, and with the alarming numbers of hackers and identity theft issues, I suggest you check your annual credit report FREE three times a year.

How you do this:

There are THREE major reporting agencies. Expirian, Equifax, and TransUnion.

DO NOT get all reports at one time. Order one from each, every  three months.

The web site which offers true FREE credit reports, with no strings attached is:

http://www.usa.gov/topics/money/credit/credit-reports

It will also have a link to: http://www.annualcreditreport.com

 

The THREE MAJOR NATIONAL CREDIT REPORTING AGENCIES ARE:

Equifax — 1888-397-3742

Fraud Hot line– 1888 766-0008

Experian — 1888-397-3742 (same telephone # for FRAUD)

TransUnion– 1800 916-8800

Hot line: 1800-680-7289

You could request and receive your credit report on line, or order toll free, at 877-322-8228

With the risk of repeating myself and being boring (which the topic in itself is depressing:(

I will reiterate why it is important to build and MAINTAIN good credit.

ALL lenders, from the small purchases of cell phones to buying cars and homes and renting apartments REQUEST your credit report. BASED on the credit report your  FICO score is calculated (see chart above)

If you have excellent credit you are a GOOD RISK. That means your lender has a good chance to get his loan back from you. As a result, a reward for your good financial habits, the lender will offer you a LOWER interest rate.

The report contains ALL your information, name, addresses, place of employment, marital status, late payments, bankruptcy, if you were sued or arrested.

The credit reports are vital for you to obtain loans, some jobs, buy a house or a car.

 

If you monitor your credit report three times a year, it is also more likely to catch an identity theft, or sign up for one of the security companies mentioned above, and pay extra. It is probably worth it.

A WORD OF CAUTION

Since about 60% of marriages end up in divorce, it is wise to keep SEPARATE credit cards, or if they are joint, and God forbid you are among the unfortunate 60%, make sure you take your name OFF the joint card. Even if you are divorced, if your divorced spouse continues to use the joint card and your name is still on it, if the spouse stops payments on the card, YOU ARE RESPONSIBLE, even if you are divorce.

Enjoy this beautiful day, and pay your bills on time!!!

Rodica