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Published: October, 2012; Vol 9, Num 5

 

Budget Basics lll:

Manage Your Credit

Good health is essential to living a good life. So is good credit.

Good credit determines your ability to get a loan to buy a car or a house, pay college tuition or start a business. It also will determine your interest rate. Good credit not only affects your ability to borrow but also your ability to get a credit card that comes with perks such as cash back or free miles for airline travel. And for those seeking jobs outside construction, your history of good credit just might be the deciding factor.

Establishing credit, however, can be a challenge. No lender wants to be the first to extend the lifeline. That said, you can take steps that will increase your attractiveness or, in other words, demonstrate to lenders that you are a good risk.

  • Keep your checking account in good standing. Get overdraft protection. A history that does not include bounced checks shows that you know how to manage money.
  • Consider a department store credit card. Department store cards usually have low credit limits and less stringent approval requirements (but beware…these cards often have higher interest rates than bank credit cards). This can make them easier to obtain than a bank credit card. Get one (not several) and always make your payments on time. A history of good payments on a department store credit card can ease the path to a bank credit card later.
  • Look into a secured credit card. Unlike regular credit cards, a secured credit card is linked to a bank account in which you have deposited the same amount of money as that which is on the secured card. Should you fail to make your payments, the bank will take your deposit and use it to make the payment due The purpose of having a secured credit card is to establish credit history so that, down the road, you will be able to obtain a regular credit card or a loan. Therefore, be sure that your secured credit activity is reported to the credit bureaus.

Use credit cards wisely

Today’s average consumer has a total of 13 credit obligations. Nine of these are credit cards: bank cards, department store cards and gas cards. The others are installment loans such as car and mortgage payments.

Your Credit Report Determines Your Credit Score

Your credit report affects your ability to get a loan. It contains your bill-paying history, the number, type and age of your accounts, any collection actions against you and your outstanding debt. All add up to a credit score that indicates how likely you are to repay a loan and pay your bills.

Creditors want to see scores of 700-plus.

You are entitled to a free copy of your credit report at least once every 12 months. It is important that you review it to ensure that the information is accurate.

Request your copy at www. annualcreditreport.com or call 1-877-322-8228.

For a fee, your credit score is available through these national credit bureaus:

Households with credit card debt are, on average, in the hole to their plastic for $15,799. The average credit card balance carried by college students is $3,173. These debts include the fees associated with making minimum monthly payments, for paying late and, sometimes, simply for having the card.

Every credit card comes with spending limits and protections established through the U.S. Fair Credit Billing Act that cover problems such as being overcharged. However,the fact that people typically possess several credit cards on which only minimal monthly payments are required makes it very easy to spend more than they can really afford. A decline in credit scores can result, and this often leads to increased interest rates (APRs) as well as denials for future credit, not to mention getting into a hole so deep you can't get out. When you use credit cards, it is essential that you:

  • Control your spending. Never borrow more than 20 percent of your annual after-tax income. Never let your monthly debt payments exceed ten percent of your monthly net income.
  • Avoid going over your limit.
  • Pay your bills on time. By paying at least the minimum amount due by the due date, you avoid a late fee, and you prevent possible damage to your credit score.

Credit is another name for financial trustworthiness. When yours is damaged, your name is tarnished. Wise use of your credit cards can help you avoid a circumstance that can take years to remedy, if ever.

[Janet Lubman Rathner]