Life’s journey is not always a straight and narrow road. There are detours, ruts, sharp turns or steep hills, and sometimes you need financial help to navigate through the rough patches. Loans and credit cards will give you this help, and your credit record is what determines what kind of credit you will be given and at what rate. That’s why a good credit record is one of your most valuable assets, and one everyone should protect.
What is Credit?
Credit is defined as the confidence in a borrower’s ability and intention to repay. The level of confidence lenders have in potential borrowers depends on many factors, and since lenders typically don’t know the borrower personally, they use a credit report and a credit score (FICO Score) to determine the borrower’s creditability. FICO scores ranges from as low as 300 (worst) to as high as 850 (best).
Bad credit can affect you in ore ways than you realize. It can cause you to pay a higher interest rate on loans, plus, the amount of credit you can obtain can be affected. It could even cost you a job as many potential employers look at credit reports as a means of determining how responsible an applicant is. But on the other hand, having no credit can be as detrimental as damaged credit. Without a credit history, lenders don’t have an adequate indication of what kind of credit risk you may be.
Your credit report provides a record of how you have used credit. Credit bureaus must adhere to the Fair and Accurate Credit Transactions Act (FACT Act) established by the Federal Trade Commission (FTC). This ACT gives them the right to gather information about individuals as it relates to their eligibility for credit, insurance, or employment. The information can then be provided to creditors, insurance companies, employers, or anyone who has a legitimate business oriented need for the information.
Top 5 Criteria for a FICO Score
- 35% is determined by Payment History
- 30% is determined by the Amount You Owe in relation to your limits
- 15% is determined by the Length of your Credit History
- 10% is determined by New Credit
- 10% is determined by the Types of Credit in Use
Other factors could also be considered by institutions when you apply for a loan.
How Do I Obtain My Credit Report?
There are three major credit bureaus, Equifax, TransUnion, and Experian. These bureaus acquire credit data from creditors such as lenders, credit card companies and retail establishments. They also search court records for lawsuits, judgments, and bankruptcy filings. Under the FACT Act, you are entitled to one free credit report per year.
What If I Find Errors on My Report?
If you find that corrections are needed to your credit report, you should contact the credit reporting agency that provided the report.
Tips for Establishing Credit
- Borrow Against Savings – There are two basic forms of loans, secured and unsecured. A secured loan is backed by assets belonging to the borrower, which decreases the risk to the lender. When a loan is secured by savings, a hold is placed on your savings for the amount you borrow. Payments should be made over several months, making sure all payments are made on time. As payments are made and the loan balance is reduced, a lesser amount is then held in your savings account. ($300 held for loan, $50 payment made, $250 is now held for loan and $50 is available to spend.) It will cost you a few dollars in interest, but it will be worth the cost for a good payment history.
- Take Out A Small Installment Loan – The credit union offers small loans from $250 to $500 to members who need to establish credit. Payments are made over a set period of time with a fixed interest rate. Members who need larger amounts may need a co-signer (someone who becomes responsible if you don’t make the payment), but you will be the one to pay it back. Sometimes these loans may be secured by the product you are purchasing (if you don’t pay the loan, the lender can repossess the property), or by the co-signer.
- Begin with a Single Credit Card – The credit union offers VISA Credit Cards to help establish a credit history from $300 to $1,000. We also offer a savings secured VISA card for those who need larger amounts or who want to improve their credit. Regular timely payments over a 6 month period will help to establish credit history.
Improving Your Credit Score
Just as you can’t establish credit overnight, you also can’t raise your score overnight, but you can do so fairly quickly. Six months of “good behavior” will have an impact. Try these tips to improve your score:
- Make a habit of paying bills and other payments on time – at least the minimum payment required
- Pay down balances on open lines of credit (credit cards). This can be the fastest way to improve your score.
- Avoid opening a lot of new accounts at once and retain your oldest account