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Establishing Good Credit

Aug 17, 2007
There is an old saying about credit, "bad credit is better than no credit." This is true to some extent because retailers, credit unions, banks, lenders of all things big and small must decide how well you keep your promises to repay a debt. If they see a pattern of late payments, which will bring down your credit score, at least they will see that you paid. If you have no payment history, they will have no idea what kind of risk you are.

Put yourself in their shoes: would you prefer to loan money to a stranger who paid back late or a stranger you know nothing about? You are a stranger to the lending institution and they want to know how much of a risk you are. Something is better than nothing.

Though the exact mathematical formula used to calculate your FICA (or credit) score is a proprietary secret, there are a number of things you can do that will bring your score up over time.

Getting Started

When first out of high school or college, credit offers fill the mailboxes of young adults every day. While they all sound tempting, the best way to build credit is to find the card with the lowest interest rates and throw all of the others away. If you don't qualify for any credit card, consider a secured credit card. These lines of credit require you to make a deposit at the lending institution then borrow against it using a credit card. This can be costly, but not as much as a very low credit score or no credit at all.
Then, use your card wisely.

1.Use it sparingly.
2.Don't max it out or use all of the available funds.
3.Pay off most of the balance each month (it's good to carry a small balance) or at least...
4.Pay it on time.
5.Don't be late with utility bills, car payments, rent or student loan installments.

Once you have firmly grasped one line of credit, you might feel confident to add to your credit card collection. Don't be too anxious. Asking for credit affects your credit score negatively, especially if you're turned down, and it's important to note that every time you apply for any sort of credit, when they view your credit score, a few points are removed, lowering your credit score every time you apply for a line of credit.

The Top 6 causes of Lowered Credit Scores:

1.Delinquent payments on bills and credit lines.
2.Bankruptcy, civil judgments, and being reported to a collection agency.
3.Unpaid or late payments in recent history.
4.Short term record of credit accounts.
5.Multiple accounts opened within the previous six months.
6.Sizeable debt or a large number of open accounts.

Keeping an Eye on Your Credit

Another recent increase in credit problems includes identity theft. For these reasons, you should check your credit once a year. You may not necessarily need to pay for a credit report, though. You are entitled to one free credit report per year from any of the "Big 3" credit agencies: Equifax, Experian and TransUnion. Also if you have been turned down for credit you also entitled to a free credit report.

Once you have your report in hand, make sure your information is correct. This includes:

1.Closed accounts. Make sure they really are closed and no longer show up as open.
2.Late payments. If you have made late payments, check that the information is accurate. If a lender lists late payments but you have made all of them on time, contact the lender immediately.
3.Lines of credit that are not yours. If these appear, you may have had your identity stolen. Contact the lenders immediately and close the accounts. Contact your bank and the FBI (this is a federal crime.)

Remember if you've ever filled out a loan application, whether to buy a house, a new car or even for a gas card, someone has looked at your credit report. Namely, your credit score, so it is important to make sure that everything is in order. Keeping all of this in mind, what is the answer to the age old question "What does it take to build good credit?" It is simple. It takes time.
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