Protecting Your Financial Future

What is credit and why do I need it?

Having credit allows you to buy things now, and pay for them later. It is similar to a loan, but you can use it gradually, for shopping, travel expenses, emergency protection, and so on. Credit usually costs something (i.e., annual percentage rate, or annual fee), and the amount borrowed must be paid back.

Why is it important to establish good credit history?

Establishing credit, and a good credit history, is fundamental to life in the U.S. Credit entitles you to many conveniences; in fact, there are some purchases or rentals that can not be made without a credit card (for example, renting a car). But you need good credit history, in many cases, to rent an apartment, buy a house or car, and even to have utilities, such as telephone and electrical service. A variety of people and businesses make decisions affecting your future based on your credit history. Good credit history shows that you pay your bills, and pay them on time.

How do I establish good credit history?

The most important thing to do is to consistently pay your bills on time. That means, 1) either pay the entire balance in full by the due date, or 2) pay at least the minimum amount due, by the due date each month, until the balance is paid in full.

How do I establish credit?

While it is true that you can’t establish credit history if you don’t have any credit to begin with, but that you need credit history before you can get credit, these are some ways to start building credit history:

• Open a checking, or savings account at a bank, and acquire a debit card from the bank. This does not create a credit file, but indicates that you have money, and shows how you manage it.
• Apply for a major credit card, such as MasterCard, Visa, or Discover. But before selecting a card for your use, be sure you know the credit terms and conditions that will apply to the credit card account. Remember, also, to only get the credit card(s) you need, and to use it/them responsibly. Pay all your bills on time. This means, pay at least the minimum amount due on each account by the due date. Allow five to seven business days for payments made by mail to be received.

If you don’t qualify for unsecured credit, try these options:

• Apply for department store, and/or gasoline credit cards, which are sometimes easier to obtain than regular credit cards, and establish credit over time.
• Obtain a “secured” credit card. With this option, you deposit money into a savings account; your credit limit then equals the amount of your savings. Create a debt on the secured credit card, wait until the first bill arrives, and then either pay off the entire balance, or make periodic payments. Do not pay in full until the bill actually arrives, as this completes the billing cycle, and shows that you pay on time. Continue using secured credit, until you can establish enough history for unsecured credit.
• Take out a small loan, against the amount you have in the bank, and pay it all back immediately. A loan will create a credit file, and responsible repayment will reflect positively on your credit report.
• Ask someone with established credit history (i.e. a parent) to co-sign for you. Remember that by co-signing, this person is expected to pay if you don’t; otherwise, their credit will be affected. With co-signing, make payments on or before, the deadline. Do not pay in full until the bill actually arrives, as this completes the billing cycle, and shows that you pay on time. Continue using a co-signer, until you qualify for credit without one.

What is a credit report, and how do I get one?

A credit report is a record of your credit history. It is what a lender, landlord, employer, etc. reviews while considering your application when you apply for credit, tenancy, employment, and so on. Equifax, Experian, and TransUnion are the three major credit reporting agencies, or “credit bureaus”, which collect, and report, the information about a consumer’s financial habits that is then compiled into a credit report. Each credit bureau’s report contains the same basic information:

• Name
• Social Security number
• Current address and previous address(es)
• Details about loans and how they’ve been handled
• Public record information, such as bankruptcies, court judgments, etc.
• A list of companies that have reviewed the credit report

To obtain a copy of your credit report, contact any one of the three credit bureaus listed under Useful Information. There is generally a small fee, but sometimes there are special offers to provide these reports to consumers free of charge. If you’ve been turned down for credit, you’re entitled to a free report (within thirty days) to find out why.

Please note that the three credit bureaus are independent of each other. Also, when reviewing your credit report, be sure to correct any errors you find with the credit bureau.