Credit Comprehension

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Young woman with hands full of shopping bags

If you’ve ever been short on cash and asked a buddy to spot you, then you’ve used credit. Credit’s role is to provide funds today that must be repaid at a later date. Unlike borrowing from your pals, however, you’ll pay – in the form of interest – for the privilege of using other forms of credit!

In our society, access to credit is a must. Few of us could buy a car, home or other big-ticket item without it. Maintaining a solid credit rating and payment history will ensure your ability not only to get credit in the future, but to qualify for a lower interest rate. If you don’t have a credit history, how do you get one?

Build a Good Credit History.

Building a good credit history is one of the smartest things you can do. But first you must demonstrate that you’re a good risk before lenders will extend credit to you.

Recent changes in the law make it a bit more difficult for people under 21 to gain access to credit cards. You’ll either need a parent or legal guardian to co-sign for you or you’ll have to submit proof that you have your own steady income to get a card in your name.

Can’t qualify for a low interest credit card from a major credit card issuer? You may want to consider the following alternatives to establish a credit rating:

  • Apply for a credit card issued by a local store. Often, local businesses are more willing to extend credit to someone with no credit history.
  • Apply for a secured credit card. Basically, this type of card requires you to save the money first as collateral for your line of credit. Your credit line will be a percentage of your deposit, typically from 50 percent to 100 percent of your account balance. Bear in mind that some secured credit cards charge application and processing fees, and many carry a higher interest rate than traditional, unsecured cards.

If you have to rely on someone with an established credit history to co-sign your credit account, realize that this individual is committed to repay the loan if you don’t.

Once you demonstrate that you’re a responsible credit manager by paying your bill on time and in full, major credit card issuers and lenders may be more willing to extend credit to you.

Manage Your Credit.

What’s the easiest way to manage your credit? Don’t spend money you don’t have. It’s that simple. The fastest way to get in trouble with credit is to spend with the attitude, “I’ll pay it off later!” If you don’t have the money to buy items now, what makes you think you’ll have enough dough to pay the bill when it comes?

It’s best to pay off your credit card balance at the end of each month before interest can accrue. For big ticket items, that’s not always possible. Make sure you have a repayment plan in place before you say, “charge it!”

Making only your minimum required monthly payment is not an ideal repayment plan. If you paid only the minimum due on a $1,000 balance at 18 percent interest, it would take you eight years to pay off the debt! Always pay more than the minimum payment to stay on top of your credit card debt (unless you're following the debt snowball plan) (PDF).

Maintain a Good Credit Score.

Your credit score is the tool lenders use to determine the likelihood that you’ll repay money you borrow. The FICO score, developed by the Fair Isaac Corporation, is the most widely used credit evaluation system; scores range from 300-850. A higher score means lower interest rates and access to more credit.

Before you can understand how to maintain a good credit rating, you must first know how it’s figured. Your “magic number” reflects five general categories:

  • Payment history (35 percent);
  • Amount owed (30 percent);
  • Length of credit history (15 percent);
  • Amount of new credit available (10 percent); and
  • Types of credit used (10 percent).

The best way to maintain or boost your score is to pay your bills on time and in full, don’t use all the credit that’s available to you and limit new lines of credit. For more information, check out

Monitor Your Credit Report.

Your credit report is similar to a report card; it “grades” your experience handling credit. Just like you closely monitor your grades during a semester, you’ll want to keep tabs on your credit report to make sure nothing is falsely reported or new credit isn’t taken out in your name without your knowledge. Many experts recommend viewing your report annually or biannually.

To monitor your credit history, contact the major consumer reporting agencies for a copy of your credit report.

The Annual Credit Report Service (877.322.8228, will provide one free copy of your credit report per year as required by the Fair Credit Reporting Act. Equifax, Experian and TransUnion will provide additional copies of your credit report and your credit score for a small fee. Instructions for ordering your report and addressing any errors are available online.

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