Debt isn’t always bad. It give you the flexibility to take advantage of opportunities, to move ahead faster. And there are some important purchases you simply can’t afford to pay for up front.
But we’re bombarded with advertising. And, unlike our parents, after a couple of decades of wage stagnation it’s far more tempting to “buy now, pay later.” The resulting unchecked debt erodes or even destroys financial security. It’s easy to become overwhelmed with just the minimum payments. With compounding interest that can have the effect of paying 2 or even three times the price of everything you buy with a credit card. And still being in debt.
The current crisis is a reminder of the need to keep a low balance in order to have ample available credit as an emergency fund. Or just a convenient way to pay hotels and travel expenses a year or two down the line. It’s also crucial for getting approved for an auto or home loan, or even getting hired into a new job.
Establish and Maintain a Positive Credit History
Are a student, recent graduate, or non-working spouse? You need to establish credit in your own name. And regardless of your stage in life you need to maintain a positive credit history. Here are our top tips for doing just that.
- Do use credit cards for large purchases of durable that are really needed, such as furniture or appliances.
- Keep each month’s charges below what can pay off in a month or two. For many cards there’s no interest charged on items paid off the same month as the purchase was made.
- Pay significantly more than the minimum listed on the bill. The credit card company wants to make money off interest. That minimum is typically less than the charges that monthly, so the balance grows and your available credit shrinks. And interest fees mount.
- Always pay absolutely no later than the due date and never miss a payment.
Your Credit Score
The above tips are doubly important. They affect your credit score, a summary number ranging from 300 to 850. Most scores are in the range of 600 to 750.
A good score is vital for getting auto, home, and other loans approved. Even for the ability to rent an apartment. And it affects the interest rates you’ll be offered on loans and cards. A low credit score can put you into a “high-risk” group where you can be paying twice as much for car insurance as you would otherwise.
There are three major credit bureaus: Equifax, Experian, and TransUnion. They keep track of how each person uses credit (in amazing detail) and compile it into reports that they sell to banks, credit card companies, and insurance companies. Even to retailers, landlords, and prospective employers. (Fortunately the Fair Credit Reporting Act –FCRA — requires them to use the info in a confidential manner.)
A report typically includes the following.
- your name, address, social security number, and your marital status
- your employer’s name and address
- estimated income
- a list of everyone who has requested your credit history in the last 6 months
- a list of your charge cards and mortgages, and
- their terms
- how long you’ve held them
- the charge limit
- the amount currently owed
- when you last paid
- how much was paid by the due date
- the latest you’ve ever been on a payment
- how many times you’ve been late or not met the minimum
- past accounts now closed
- any repossessions, liens, bankruptcies, foreclosures, or court judgments for money owed
- who “owns” the debt (you alone or you and a spouse or co-signer)
- any bill disputes
And you thought it was just a single number for your credit score!
Fortunately some major negative factors can be included only for a limited time — 7 years for delinquent payments and 10 years for bankruptcies.
It’s important to monitor you credit report for mistakes and identity theft. Laws require that the three bureaus provide you with a free report once a year. You shouldn’t have to pay anyone! It’s a good idea to space your requests out over a year, asking one agency every 4 months or so you can have more up-to-date information as well. If there’s anything you need to dispute, write the agency and ask them to verify it. If they can’t within a reasonable time (around 30 days) they must delete it.
Wondering if you’ve overextended your credit?
Do you not know the total of how much you currently owe? Are balances growing each month? Are you using credit cards for what you used to pay with cash? Are you struggling just to make minimum payments? Don’t have any savings or emergency funds safe in the bank? Receiving overdue notices?
If you answer any of these “yes,” then it’s time to take action without delay.
Our expertise and experience can guide you through the processes in the fastest and most painless way possible.