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6) Building and Maintaining Your Credit

Used wisely, credit is a great financial tool. Good credit enables you to enjoy a higher standard of living, for example, by making it possible to purchase a car, pay for an education, or buy a home without saving up the total cost of such big-ticket items. As a safety net, good credit helps consumers meet emergency expenses. As a convenience, good credit helps wise consumers manage cash flow and purchase goods without carrying around a lot of cash.

Used unwisely, however, credit can pave the road to financial ruin. Unfortunately today, many people are discovering that harsh reality. Household debt in relation to disposable income is at record highs. Rather than stepping up to a brighter future, overextended consumers find themselves stepping down to bankruptcy court. Not only is the overall number of consumer bankruptcies at historic highs according to the Federal Reserve, but a growing number of people filing for bankruptcy are age 25 or younger and college educated.


Building Credit is a Bigger Job Than Getting Credit

For adults who came of age in the nineties and after, getting credit was no problem. Credit card companies stuffed the mailbox daily with attractive offers—soon the wallet held a dozen. Auto dealerships were fighting to offer first-time buyers a "hot deal." Buy that house full of furniture, the latest computer, a high-tech home entertainment center? No problem, just sign the line for instant credit and no payments till the next century.

Managing that credit well is another story. It's so easy to fall into the "buy now, pay someday later" mentality, isn't it? Pretty soon, you may notice the following the danger signs.


Danger Signs That You're Courting Credit Troubles

These are just a few signs that overwhelming debt may be lurking in your future, if it's not already at the door:

  • The number of credit cards you have: experts recommend keeping only two or three. If you need a card with no annual fee, low competitive interests rates, and no traps, be sure to check out the VISA cards offered by your credit union.
  • Paying only the monthly minimum on credit card balances: spending more than you pay off monthly piles on debt over time.
  • Frequently paying bills late: this trouble sign also goes in your credit record.
  • Skipping payments because you don't have the cash: another blotch in the credit record.
  • Using credit to pay for such necessities as food or gasoline because you are short of cash.
  • Frequent impulse purchasing using credit: "I want it, I'll buy it (even though I won't have funds to pay for it anytime soon)" is another attitude that piles on debt.


Protecting Your Credit and Building It The Right Way

The techniques and tools that protect your credit are those that also build good credit in the first place.

1. Budget—to keep spending within your income.
Yes, making a budget (and sticking to it) is a pain in the anatomy—but a pleasure to the pocketbook. Experts advise that the best way to start creating a budget is to keep track for a time of all your expenses, not just the monthly fixed expenses but particularly all cash expenditures. When you know where your needs are and where your money typically goes, then you can plan how to allocate your income to meet necessary expenses and accomplish your financial goals. The following sites offer some good basic budgeting guides:

2. Pay bills on time every time.
Paying on time shows potential creditors that you are responsible.

3. Pay more than the minimum on credit card balances.
In fact, pay off the total charges each month unless you have planned a larger purchase (such as large appliance or a computer) and budgeted to pay it off in a specific time. If you pay only the minimum on lots of cards, you'll pay down almost no debt while racking up lots of interest charges.

4. Avoid practices that can appear as red flags on your credit history.
A couple of the more common red flags are:

  • Carrying high balances on one or more credit cards: if you appear to lenders to have too much debt for your income (debt-to-income ratio), they may turn you down for additional credit, perhaps when you apply for that new car loan or a mortgage for your dream home.
  • A large number of credit applications: generally if the applications are bunched around one activity such as applying for a mortgage, lenders don't count that against you. But if you appear to say yes to every retail, gas and bank credit offer, red flags wave.

5. Check your credit report regularly for errors.
As required by an amendment to the Fair Credit Reporting Act, as of September 1, 2005, all individuals in all U.S. states and territories are able to request one free report annual from each of the three major credit reporting agencies. Every consumer also has access to a free credit report if you've been turned down for credit or in other circumstances. You may order your free reports online at the official website (www.annualcreditreport.com) or make your request by toll-free phone call to 877-322-8228. You may also order by mail using the order form included in this useful fact sheet from the Federal Trade Commission (FTC): "Your Access to Free Credit Reports". A good article from the Federal Trade Commission (FTC), "How to Dispute Credit Report Errors" tells you how to check the report and get any errors corrected.

If you wish to review your credit report at more frequent intervals than annually you may purchase individual reports from the three major CRAs: Equifax, Experian, and TransUnion. Some state laws also provide for consumers to receive two reports annually.

6. Make a plan to pay off current debt in a timely manner.
First, do you know if you have too much debt? "Knee Deep in Debt" from the FTC may help you give your finances a debt check-up.


When Money Matters Are Getting Really Desperate

If you feel you're already drowning in debt, take a deep breath, don't panic, and get some help:

  • Talk to your credit union: many credit unions provide resources for members such as discussing whether using a home equity loan to consolidate debt might be appropriate or recommending reputable credit counseling services.
  • Consider credit counseling: there are reputable nonprofit agencies such as Consumer Credit Counseling Services (CCCS) and others which have more interest in padding their own pockets than helping you rescue yours.
  • Avoid "credit repair services:" such outfits advertise widely, but at best they charge you good money to do nothing more than you can do yourself for free. At worst, they are simply scams to steal your money. "Credit Repair: Self-Help May Be Best" from the FTC show you how to take steps yourself.
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