How to Establish, Use, and Protect Your Credit
What you need to know
Good credit is valuable. Having the ability to borrow funds allows us to buy things we would otherwise
have to save for years to afford: homes, cars, a college education. Credit is an important financial tool, but
it can also be dangerous, leading people into debt far beyond their ability to repay. That is why learning
how to use credit wisely is one of the most valuable financial skills anyone can learn.
What Lenders Look For
Before creditors lend money, they need to be assured that the funds will be repaid. In other words, is the
prospective borrower creditworthy? To find out, they ask for various types of information:
- Income & Expenses
Lenders will look at what you earn and your regular expenses, such as rent, utilities, food, and other ongoing
items. The amount left tells them whether you can afford to take on additional debt.
Do you have assets that can serve as collateral? Lenders will look for things like bank accounts, insurance,
and valuable items such as a house, if you own one.
- Credit History
How do you manage debt? If you have credit cards or have borrowed money before, you have a history
that shows prospective lenders whether you are creditworthy by revealing details about the amount of debt you already
have, how many credit cards you have, and whether you make payments on time.
Creditors obtain much of this information from your credit report, a computerized profile of your borrowing,
charging, and repayment activities.
- It’s easy to qualify for credit if you have a good credit history, but what if you have never used credit
before? This is a common problem for people who just started working, those who work in the home,
people who always pay in cash, and those who do not have assets or accounts in their own names. For
them, the first step is to establish a credit history.
How to Establish Credit
Begin by opening individual savings and checking accounts in your name. Over time, your deposits, withdrawals, and transfers will demonstrate that you can handle money responsibly. Applying for a loan is another option, but be aware that this method of establishing a credit history will cost, since loans require the payment of interest. You could take out a bank loan secured by the funds you have on deposit or by items you own, such as a car. You could also ask a friend or relative who has good credit to cosign a loan, which means that he or she shares liability for the loan with you.
You could also apply for department store and gasoline credit cards, which generally are easier to obtain than major credit cards. Before you apply for any credit, however, make sure you understand the terms. For example, how long is the grace period or the time you have to pay the current balance in full before finance charges are added? Is there an annual fee or other fees associated with the credit? If you believe that you will carry a balance, you need to know how finance charges are calculated.
Patience is important in this process. It takes time to establish credit and build a record of consistency in making payments to demonstrate your creditworthiness. And it is much better to go slowly and develop a strong credit record than to apply for too many credit cards or a loan that is larger than you can handle. Start slowly, be cautious, keep track of your overall debt, and pay on time. Most importantly, remember that credit actually represents real money and has to be repaid with interest.
Once you have obtained credit, it is necessary to protect it. This means being careful with your credit, debit, and ATM cards, as well as your account and personal identification numbers (PIN). Carry only the cards you expect to use, and keep the others in a safe place. Maintain a list of account and telephone numbers of the companies that issued your cards. Then, if the cards are lost or stolen, you can
notify the companies quickly. If your notification is received before the cards are used, you have no legal responsibility for the bills; if it is received after the cards are used, your legal responsibility is $50 for each card. Be cautious about giving anyone your account numbers, especially over the telephone when someone calls you. Save sales receipts to compare with your bill, and when you discard documents with account numbers on them, be certain that the numbers can’t be read.
If you disagree with an item on a bill, you are responsible for notifying the creditor in writing within 60 days of receiving the bill. You should include your name, account number, the item you believe is in error, and the reasons why.
How to Establish, Use, and Protect Your Credit Common Reasons for Denying Credit
Among the most common reasons people are turned down when they apply for credit are:
• Too little time in current job or at current residence.
• Too much outstanding debt.
• Unreasonable purpose for requesting credit.
• Cosigner cannot take on additional debt liability.
• Errors on applicant’s credit report.**
• Strict creditor’s standards.
In general, creditworthiness must be determined on the basis of criteria that relate to your ability and willingness to repay debt. You cannot be denied credit based on your sex, marital status, race, religion, national origin, age, or dependence on income from public assistance.