U.S. Credit History
What is credit history?
Your credit history is the record of how you have paid borrowed and repaid debts. This information is obtained from one or more national credit bureaus. Your credit report may include information about your previous credit performance, current level of indebtedness, length of credit history, types of credit in use, pursuit of new credit, accounts in collection, defaults, bankruptcies, lien, judgments, charge-offs, and other applicable information. A creditworthy person is one who has a positive credit history and meets other requirements as determined by the lending institution.
Why is credit history important?
Having a good credit history will be a central part of making a successful personal and financial future for yourself in US. Your credit history can help open doors to you or keep them locked. People and businesses will use this record of how well you kept your previous payment agreements to judge whether they can risk making a similar agreement with you. Cell phone companies, landlords, lenders, insurers, even possible employers often make decisions about your future based on your credit history.
It is a good idea to check your credit report frequently. Except under certain circumstances, there is a small charge for this service. The three primary credit bureaus are Equifax, Experian and TransUnion. Use caution when requesting a copy of your credit report. Never give personal information to someone unless you initiated the contact, on the telephone, by mail or on the web.
What goes into credit history?
Many factors are considered and put into a mathematical formula. These may include:
- If you pay your bills and loans on time
- How much money you owe
- How long your accounts have been open
- What types of credit you use
- How often and how recently you have applied for credit
- Collection notice and judgments (records of non-payments / disputed payments)
Establishing Credit History
- Open a bank account. Open a bank account and use it responsibly. This is the first step in establishing a financial history. This will not appear on your credit report, but bank account numbers are often requested on credit applications.
- Put utilities (i.e. electrical, gas, water, TV/cable/phone) accounts in your name and pay the bills on time.
- Apply for a credit card. To avoid being denied credit, apply only for those cards whose requirements you are likely to meet. Department store or gas credit cards are usually easier to obtain than a bank-issued card with a Visa or MasterCard logo because the balances do not generally revolve.
- Before applying for credit card, make sure the creditor reports account activity to the credit bureaus. As the purpose of obtaining the card is to establish credit, you want to choose a card that will help you do that. If you want to get a Visa or MasterCard, ask at the bank or credit union at which you have your account.
- A secured card is an option. If you have trouble qualifying for a credit card, you may opt to apply for a secured card. These cards have credit limits based on a required deposit made by you into a savings account. You use the card just as you would any other credit card.
- Department store and gasoline credit cards: Since gasoline credit cards are not revolving (cannot carry a balance forward month-to-month), often they are easier to obtain than regular credit cards. Similarly, some department stores offer revolving credit for a specific purchase and this is sometimes easier to establish. It is also a great way to establish credit.
- Co-signer: One way is to piggy-back onto someone who already has a good credit history established and is willing to co-sign. If you are fortunate enough to know of such a person, you are not only well on your way to establishing credit, but you are very fortunate indeed. But be aware that any default of Credit on your part affects the credit of the co-signer. People who care enough about you to co-sign, do not deserve a bad credit incident through no fault of their own. Once the co-signing has occurred, you simply make payments on or before the due date. In time you will have established a credit history. If you want to accelerate the issue, payoff the debt in full when the first bill arrives but not before. Completion of the full billing cycle is important for a "pays on time" report card to be established. This will not only make your creditor happy but your cosigner as well. The next step is to ask the co-signer to repeat his generosity (if necessary). Then: create a debt, wait until the first bill comes, pay it off in full. Keep repeating until you no longer need the co-signor. Credit history is now established.
Tips for Keeping Good Credit
- Make Payments on Time - It sounds so simple, but life is hectic and things do slip our minds. Establish a routine for paying your bills and keep to it. Mail payments a week before they are due so they arrive on time. Those late fees can add up.
- Pay What You Owe - Of course it is best to pay the entire amount due each month, but at least pay more than the "Total Minimum Due." Never skip a payment.
- Do Not Overextend Yourself - Keep your "available balance" in mind. It is the difference between your credit limit and your balance due. Having an "available balance" means there is credit available in the event of an emergency and you can avoid incurring "Over Limit" charges. Before applying for a new credit card or loan examine your spending and work out a realistic budget. This will allow you to pay your bills and still live comfortably.
- Limit the Number of Credit Cards - Limit the number of credit cards you acquire to help limit your debt exposure and simplify your record keeping. Be aware that excessive credit inquiries over a short span of time may be interpreted as an indicator that you need more credit due to experiencing financial problems.
- Set your own credit limit and start to establish a savings fund for emergencies,
- Use credit wisely - Ask yourself the following questions before purchasing with credit: Is this something I really need, and do I need it now? Do I have the ability to repay? How long will it take me to repay? How much will it ultimately cost me?
- Be aware of the terms and costs when shopping for a student credit card.
- Review your statements carefully and immediately inform your credit card company, in writing, if you notice an error on a billing statement.
- Review your credit reports periodically and check for inaccurate, incomplete or outdated information. Dispute this information, in writing, with the credit bureaus.
- Be honest. If you can't pay your bills on time, contact the creditor and explain the situation. Creditors will often work with you to come up with an alternate payment arrangement.
- Always think ahead. Be proactive, not reactive, about your finances. Plan for different obligations now and after graduation.
- Be organized by filing your statements in a separate folder.
- Keep a list of your credit card account numbers and phone numbers in a safe place in case a card is lost or stolen.
- Report your card as lost or stolen as soon as you notice it's missing.
- Immediately inform your credit card company of an address change.
- Maintain a savings and checking account
- Establish your telephone bill under your name. Remember, you are responsible for additional people on your telephone bill.
- Develop a steady work record.
- Avoid opening joint accounts with a friend or significant other.
- Protect your account numbers, personal identification numbers (PIN's), and social security number. Do not let others use your cards and don't use your cards to pay for other people's purchases!
- Try not to graduate with credit card debt. If you do, make sure you will be able to afford that debt in addition to other new expenses (i.e. student loan payments, rent, utilities, etc.).
- Be sure to pay your student loans as agreed. This long history of paying your bills on time will also help you build a credit history and improve your credit score.
Adapted from http://www.orgs.ttu.edu/indiastudentassociation/backup_2007/40/NewStudentInformation-2006.pdf, accessed 8/28/07