Thanks for voting!This Guest Post is by Steven Burman, President of Credit Advocate Counseling Corp.
Whether you’re an established savvy Saver or still a work in progress, the benefits of good credit are far reaching and long lasting. Among other things, a solid credit profile and high credit score makes you less risky to lenders. Why it can even lower your interest rates on credit cards and home loans (and save you money). But how do you go about building good credit – and maintaining it for the rest of your life? It’s hard to believe, but there’s not all that much accurate, readily available information out there to help you figure it out. Luckily, there are just a few really important things you need to keep in mind to create, maintain and enjoy a solid credit profile.
In many ways, less is more. Having too much established credit can make you look too “leveraged” or overextended. It’s better to go for quality over quantity when building your credit profile. Establishing a credit card account with at least one major bank almost guarantees that your payment history will be reported to all 3 credit bureaus and establishes your credit “worthiness” to other creditors. When building credit, make sure to take these things into account: payment history, amounts owed, length of credit history, types of credit in use and newly established credit. All contribute to building a positive credit profile and credit FICO score.
Using credit responsibly. Assuming you’ve established a credit card account, it’s important that you manage that account responsibly. When making a purchase on a credit card, don’t just look at the minimum due each month. The truth is, a single purchase may take months, sometimes years, to repay. You don’t want to carry a balance each month, especially if you don’t have a great credit card rate in the first place.
Traps and pitfalls to avoid. One of the best ways to avoid credit card trouble is to be well informed and organized. Read through your monthly billing statements and review all the charges on your accounts. If you don’t understand the statement, call customer service and review the bill until it’s clear. And remember, the new CARD Act of 2009 means creditors will need to give you 45 days’ notice to raise interest rate changes on a card. This new disclosure will help prevent high interest charges on your account without your prior knowledge. You’ll have the right to “opt out” of a particular change and maintain the current rate. The tradeoff? You’ll need to close the account. Also, the new law means you’ll get lower rates reinstated after 6 consecutive months of timely payments.
Clearly, there’s a movement for increased consumer protection. And it starts by taking personal responsibility for your credit profile. If you haven’t started building one, get started. And take good care of it.
Credit Advocate Counseling Corp. (www.creditadvocates.org)is a not-for-profit Consumer Credit Counseling Agency in New York City. Steven Burman recently led a “good credit” workshop at ING DIRECT’s New York Café.
Tags: Credit
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I really wonder when we are going to wise up to the fact that the FICO score, as it is, is only an indication of how you handle debt. And, as such, one must go into debt so that they can, some day, go into even bigger debt. The credit score says nothing about how much a person makes or what their actual ability to PAY on a mortgage is. How does this make any sense? The FICO score needs to be calculated taking these things into account or we need more companies to do manual underwriting of mortgages so that we can all stop the absurd cycle of getting into debt just so that we can. later, get into more debt.
KJ,
All excellent points regarding the limitations of the FICO score. With the advent of new technology, the idea of cultivating an ongoing relationship with a personal banker has just about fallen to the wayside. Unfortunately, a consumer now is extended or denied credit based on how their numbers work on a matrix or algorithm. To make matters even more complicated, these algorithms vary from one institution to another, based on field values which can be adjusted at the bank’s discretion. I do believe it still can be very possible to cultivate a relationship with a personal banker or credit union today. The benefit of these relationships would be the incorporation of other criteria, not found on a FICO score to determine an individual’s creditworthiness.
KJ,
The FICO score is only one input to whether or not a bank will extend you a specific mortgage. They have a fixed ceiling for you based on your salary and debt levels, but it’s still typically higher than any normal person would or should go, although on the edge of reasonable. The FICO score determines what rate they will offer a mortgage to you at, again with other factors (jumbo loan, etc.). Traditionally (prior to housing bubble), banks wouldn’t offer you a mortgage for more than around 3 times your annual salary, and that stayed pretty constant for many years. I’m not sure what they’re doing now, but I recently purchased a house, and that was around the cap that the bank I spoke to was thinking about. I’m not sure that salary or ability to pay are relevant factors for FICO, it’s supposed to basically demonstrate your fiscal responsibility, not ability to pay any specific amount of money in a month. If you make 10k or 100k and are responsible with your finances, I don’t see why they should have a different score. Salary enters the equation elsewhere.