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.
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.
Protecting Credit
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.
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.
If you are denied credit, the creditor must provide you with a written
statement of the action and your rights, as well as the reason for denial or
how to request the reason.
Improving Poor Credit
If you have fallen behind in your payments, begin immediately to repair your
credit record. Here's how:
- Face up to the problem.
Recognize that you are overextended, and contact your creditors to see if
they will set up a new payment schedule that you can maintain. In any case,
don't ignore your bills.
- Immediately stop purchasing
with credit. Take your credit cards out of your wallet. Store them
in a spot that is hard to reach, or even cut them up.
- Consider consolidating debts.
You may find it easier to make a single payment rather than several. You
might also get a lower interest rate that will make it easier to keep up with
payments. Remember that debt consolidation is not a cure-all. You have to
learn to control your spending to avoid future debt.
- Don't expect miracles.
Don't believe companies that promise to fix a poor credit rating quickly and
painlessly for a fee. As long as it is accurate and timely, negative
information cannot be removed from your credit record. The only way to
improve a credit record is to let time pass and establish a record of on-time
payment.
Divorce and Credit
Aside from its non-financial effects, divorce can cause problems with your
credit record. The end of a marriage does not erase the debts you and your
former spouse took on as a couple. Even if your former spouse is ordered by the
court to pay debts from the marriage, you can become liable if they are not
paid. Here are a few suggestions to protect your financial standing:
- Decide how to divide or dispose of property. If necessary, you can use a
mediator to work through this with your former spouse.
- Close or separate joint accounts. Decide with your former spouse who will
be responsible for paying bills, and notify your creditors of your divorce.
- Establish independent credit, if you do not already have it.
- Make sure bills are paid.
