Fully understanding how credit works
– and the impact your decisions have on your future buying power – is vital to making good decisions when it comes to credit card. Let’s start with the basics. Virtually everyone has a credit report. If you’ve ever applied for a credit card, used credit or made payments on something, those transactions are all included in your credit report. There’s other vital information included in that report as well.
Many people have the idea that the government compiles and controls credit reports. That’s simply not true. There are three major credit reporting companies in the United States and similar entities in foreign countries. All three are private businesses that create a product (credit reports) and offer a service (providing those reports).
When you apply for credit, the lender will typically check with one, two or all three of the credit reporting companies. The information on your credit report will decide (or at least play a role in) the creditor’s decision. What is on your credit report?
Some people think that only specific items show up on a credit report – such as payments on credit cards – but that’s also not true.
So what do creditors see on your credit report?
There’s vital identifying information about you, including your address, phone number, social security number and employment. Those are all basically used to verify what you’ve probably already filled in on your credit application.
The credit report also contains information about your bill-paying habits. You’ll see information about each creditor that you’ve done business with over the past few years (usually seven) along with comments about your payments – whether you paid on time, were late (how often and how late) and how the account stands at that particular time.
In addition, the potential creditor will see how much you currently owe. Why is that important? It helps him determine your ability to repay this particular loan or to make payments on this credit purchase.
Another thing that will show up on your credit report is a record of each time you’ve applied for credit. That means that it does matter whether you intend to take a credit card or not, and that you shouldn’t apply for every credit card offer that appears in your mailbox. Excessive requests for credit cards may very well impact your ability to get credit.
Remember that your creditors turn the information in to the credit reporting companies. That means that some information may not be included on the report. For example, if you’ve made payments on a car at a “buy here, pay here” car lot, that dealer may or may not report your payment history. While it’s up to the creditor to decide, it’s also the creditor’s right to make the report. That means that you should always make payments on time, whether it’s to a major credit card company or the hardware store down the street.
Get Copies of your Credit Report
With that in mind, you should also get a copy of your credit report at least once a year. Because people submit the information for your credit report, people enter the data for your report, and people request that data, there’s a potential for mistakes. A potential creditor may get the wrong report because he wrote down the social security number wrong. A creditor may have mistakenly entered your name with the information from another client. Any number of mistakes can happen. By checking your credit report periodically, you’ll not only catch mistakes but you could be protecting yourself from identity theft.
Once you get a credit card (or two or more), remember that each payment you make will affect your credit report and your ability to get credit in the future. That means that you have to remain proactive in your handling of credit cards. Here are some steps you can take to remain in control.
Keep track of your charges. If you have any doubt as to your ability to make the payment on time, put off your purchases.
If you have a problem making a payment on time, call the credit card company. The first instinct of most people is to dodge the company’s calls. That’s a mistake. If you take the first step and call the company before they start calling you, it’ll be noted on your account that you’re making an effort to keep your account current. If you are facing a long-term problem with making payments on your credit card, tell the company. You may lose your charge privileges, but that’s going to happen anyway. Meanwhile, the credit card company may be able to work out a payment plan that you can meet to get you back on track.
Problems with your credit report
If it’s a long term problem and there’s more than one or two companies involved, consider calling in the pros. A counseling service can sometimes make payment arrangements that you can’t get on your own. At the very least, they’ll help you establish a workable budget and act as intermediaries to the creditors.
Life today without credit is almost impossible. Even for those who choose the “pay as you go” method, there are going to be big dollar items that are financed over time. For those who depend on credit card for many of the everyday purchases, using credit cards and other methods of credit responsibly is the key.
Floyd Davis is an internet blogger and more of his articles can be seen here