Brighter Planet

Good credit, bad credit

We put these tips together to help you build and keep tabs on your credit.

How can I use credit wisely?

Using credit wisely means borrowing only what you can comfortably pay back. Monthly payments (add them all up) should not be too big to make while you meet your other monthly obligations (food, gas, insurance etc.). It is your responsibility to ensure your financial health by preparing budgets and managing your expenses.

It can take several years to build good credit. It’s really not that hard once you understand how it works. When you have good credit, you need to maintain it. A few bad experiences can ruin your reputation. Bad credit will cost you higher interest rates to borrow money. Over the life of a home mortgage loan, for instance, that can cost you thousands of dollars in interest.

Is there anything else on my credit report that I should be aware of?

Yes. There are:

• Little things You may think paying your phone bill or utilities late is no big deal, but it can be reported to credit agencies and become a negative item in your credit file.
• Who else is asking Your credit report shows inquiries from companies requesting your credit history, such as when you apply for credit (car or personal loan, mortgage, or credit card). Many inquiries over a short time period might tell a lender that you are trying to borrow a lot of money.
• Time What you have done in the last 24 months is most important to calculating your credit score. Relevant information from the past 7 or more years is also a factor, such as U.S. Government insured or student loans default information. Lawsuit or judgment information can be reported for 7 years or until the statute of limitations runs out. Bankruptcies can be reported for 10 years.

How can I find out what credit agencies are saying about me?

The first step to better credit is to know what the records show about you. You are entitled to receive one free credit report every 12 months from each credit agency. You can order it at www.annualcreditreport.com, call 877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. When you order, you need to provide your name, address, Social Security number, and date of birth.

In addition to your free report, you can order your score good for 30 days for $5.95 per agency. If you find any credit disputes, credit agencies have 45 days to pull your credit reports. You can also purchase packages with your credit report, score, and monitoring tools.

What if I’ve already gotten my free report for the year?

You have a choice of ordering your free report from all three free credit agencies at one time or you can order one now and the other two later. You can also pay for another report. Or you may qualify for an exception if:

• you were turned down for credit, employment, or insurance within the last 60 days
• you were charged higher rates and fees or deposits
• you are unemployed and plan to seek employment in the next 60 days
• you are on welfare or were a victim of fraud

What if I don’t have a credit history? What if I am provided a counter offer?

You may not have a credit history if you pay cash for everything. While an aversion to debt can be good, if you try to get a mortgage with no credit history, you may be denied a loan or charged a higher interest rate that will cost you dearly over the course of the loan.

Utility companies, insurers, or financial institutions are making a bet that you will make your payments. If you apply for credit with little or no payment history, you may be asked to:

• Provide a co-signer, an adult with good credit who agrees to be responsible for the account with you and will pay the loan if you do not. In essence, you are piggybacking off their good credit.
• Open an account and deposit a sum of money as collateral or security for the lender. You may be limited to charging up to the amount you deposit. If you do not pay the loan back, the lender has the right to take cash in the account.

As you demonstrate your trustworthiness, the lender may relax the requirements.

I’m not sure that I want to pay fees or interest on a credit card.

You don’t need to. Look for a card with no annual fees. Look for a card with 0% on balance transfers from other cards. Look for a card with low interest rates – you’ll find that in the fine print of Annual Percentage Rate (APR) which is the effective interest rate the borrower pays. Lenders are required to disclose the APR so that you can compare lenders and loan options.

And just because it’s called credit and you have a credit limit doesn’t mean that you should spend up to that limit if you can’t afford it. You don’t eat everything in the refrigerator, do you? You don’t drive 90 mph on the highway just because your car can, do you?

Finally, pay your statement when it arrives. No checks in the mail or dog ate my homework excuses. Read the fine print on your agreement. Generally you are not charged interest if you pay the entire balance by the due date. If you pay the minimum amount, you are charged interest on the full balance. If you pay after the due date, you are charged a late payment fee as well as interest. Paying your statement on time is one of the easiest things you can do to keep your credit clean.

Do I have to fill out all parts of the application for the Brighter Planet Visa Card?

Yes. Lenders ask questions so they can make an informed decision on your creditworthiness. If you leave answers blank, they may not have information needed to approve your application. If you just started a job, list the salary and any estimated annual commissions you will be receiving. Be honest.

If I get turned down, when is it safe for me to apply again?

Applying for a first or second credit card and being turned down will not hurt your credit score. Checking your own credit report will also not hurt your score.

What you do next depends on why you were turned down. If you were declined for poor credit, you will have to clean up your credit reports before reapplying and that may take time. If you were declined for lack of credit history, you can re-apply with a co-signer or offer to proceed with a secured credit card.

What does it mean for my credit to be good or bad? Does it really matter?

Your credit score is a window into your financial capability, just as your heart rate is a window into your physical well-being. A good credit score means that you pay your bills promptly and manage your expenses. A bad credit score means that you do not. A good credit score means you get better loan rates and spend less money on interest than those with bad credit scores.

It really matters—the cost of bad credit will hit you in the pocketbook or prevent you from doing what you want to do. Think about when you want to have your own a cell phone, rent an apartment, get car insurance, sign up for utilities for your home, get a credit card, take out an auto loan, or buy a house. If you have bad credit, you may be turned down, charged a higher interest rate, asked for a co-signer or asked to make a cash deposit.

Ask yourself a question: would you lend yourself money? If the answer is no, it’s time to get to work. Employers, landlords, and utility, insurance, and financial companies all have one thing in common before they make a decision on you: they check your payment history by accessing your credit file. People will not lend you money or do business with you if they conclude that you will not pay your bills on time.

What is my credit report? How is my score computed?

Your credit report is a permanent record of your credit history. It includes current employment and work history, home address and last address, account and payment history with lenders (credit cards, auto loans, student loans, mortgage holders) and utilities (gas, electric and phone), defaults (when you do not pay a loan back) and bounced checks. Public information relevant to your creditworthiness such as bankruptcies, legal judgments, and marital status is also included.

Your credit score is computed using your history as a guide. It is like your fingerprint, except that it can and will change over time. The most commonly used score is called FICO, which is short for Fair Isaac Corporation, a publicly-traded company with the symbol FIC. Fair Isaac’s credit scoring formulas are weighted by:

• Payment history 35%
• Amounts owed 30%
• Length of credit history 15%
• New credit 10%
• Types of credit use 10%

What do the numbers look like? How do people access it?

Your FICO score is your computed financial risk, or the level of risk that you present to a potential lender. It can range from a low of 300 to a high of 850:

• Below 580 Considered high risk, you will be denied credit or charged loan shark rates.
• 580–650 You may get a counteroffer, such as collateral deposits or higher interest rates.
• 650–750 You’ve got a good record and will likely get approved.
• Above 750 You’re good to go and will get the best interest rates.

Each of three major credit reporting agencies in the U.S. – Equifax, Experian, and TransUnion – report your credit score to lenders and other inquirers. They all use FICO as the basis of their scoring. Sometimes they add proprietary algorithms or draw on additional information, coming up with slightly different (and on occasion very different) credit scores for the same person.

More information

Web sites and books that you may find helpful are:

• Mint: Refreshing Money Management
• The Motley Fool
• Credit.com Educational Services
• Federal Trade Commission
• Credit Info Center
• Generation Debt: How Our Future Was Sold Out for Student Loans, Bad Jobs, No Benefits, and Tax Cuts for Rich Geezers—And How to Fight Back by Anya Kamenetz
• The Mindful Money Guide: Creating Harmony Between Your Values and Your Finances by Marshall Glickman