Being out on your own can be fun and exciting, but it also means taking on new financial responsibilities. The decisions you make now about how you manage your finances and borrow money will affect you in the future--for better or worse.
Did you know that there are companies that keep track of whether you pay your debts and if you make payments on time? Then these companies make this information available in the form of a credit report and score.
A bad credit history can haunt you for a long time--seven years or more. That's why the best thing to do is learn how to maintain good credit before there's a problem. While this might seem complicated at first, it gets easier once you understand the basics of credit and how it works.
Credit is more than just a plastic card you use to buy things--it is your financial trustworthiness.
Good credit means that your history of payments, employment and salary make you a good candidate for a loan, and creditors--those who lend money or services--will be more willing to work with you. Having good credit usually translates into lower payments and more ease in borrowing money. Bad credit, however, can be a big problem. It usually results from making payments late or borrowing too much money, and it means that you might have trouble getting a car loan, a credit card, a place to live and, sometimes, a job.
Most creditors use credit scoring to evaluate your credit record. This involves using your credit application and report to get information about you, such as your annual income, outstanding debt, bill-paying history, and the number and types of accounts you have and how long you have had them. Potential lenders use your credit score to help predict whether you are a good risk to repay a loan and make payments on time.
Many people just starting out have no credit history and may find it tough to get a loan or credit card, but establishing a good credit history is not as difficult as it seems.
oYou might apply for a credit card issued by a local store, because local businesses are more willing to extend credit to someone with no credit history. Once you establish a pattern of making your payments on time, major credit card issuers might be more willing to extend credit to you.
oYou might apply for a secured credit card. Basically, this card requires you to put up the money first and then lets you borrow 50 to 100 percent of your account balance.
oYou might ask other people who have an established credit history to co-sign on an account. By co-signing, the person is agreeing to pay back the loan if you don't.
WHAT A DIFFERENCE A WORD MAKES
Credit card--You can use a credit card to buy things and pay for them over time. But remember, buying with credit is a loan--you have to pay the money back. What's more, if the credit card company sends you a check, it's not a gift. It's a loan you have to pay back. In addition to the cost of what you bought, you will owe a percentage of what you spent (interest) and sometimes an annual fee.
Charge card--If you use a charge card, you must pay your balance in full when you get your regular statement.
Debit card--This card allows you to access the money in your checking or savings account electronically to make purchases.
THE FINE PRINT
When applying for credit cards, it's important to shop around. Fees, charges, interest rates and benefits can vary drastically among credit card issuers. And, in some cases, credit cards might seem like great deals until you read the fine print and disclosures. When you're trying to find the credit card that's right for you, look at the:
Annual percentage rate (APR)--The APR is a measure of the cost of credit, expressed as a yearly interest rate. Usually, the lower the APR, the better for you. Be sure to check the fine print to see if your offer has a time limit. Your APR could be much higher after the initial limited offer.
Grace period--This is the time between the date of the credit card purchase and the date the company starts charging you interest.
Annual fees--Many credit card issuers charge an annual fee for giving you credit, typically $15 to $55.
Transaction fees and other charges--Most creditors charge a fee if you don't make a payment on time. Other common credit card fees include those for cash advances and going beyond the credit limit. Some credit cards charge a flat fee every month, whether you use your card or not.
Customer service--Customer service is something most people don't consider, or appreciate, until there's a problem. Look for a 24-hour toll-free telephone number.
Other options--Creditors may offer other options for a price, including discounts, rebates and special merchandise offers. If your card is lost or stolen, federal law protects you from owing more than $50 per card--but only if you report that it was lost or stolen within two days of discovering the loss or theft. Paying for additional protection may not be a good value.
YOUR PERSONAL FINANCIAL INFORMATION
DO THE MATH
Keep in mind that credit card interest rates and minimum monthly payments affect how long it will take to pay off your debt and how much you'll pay for your purchase over time.
Suppose when you're 22, you charge $1,000 worth of clothes and CDs on a credit card with a 19 percent interest rate.
If you pay $20 every month, you'll be over 30 by the time you pay off the debt.
You'll have paid an extra $1,000 in interest. And that's if you never charge anything else on that card!
KEEP YOUR CREDIT RECORD CLEAN
Good credit is important, now and in the future. In most cases, it takes seven years for accurate, negative information to be deleted from a credit report. Bankruptcy information takes even longer to be deleted--10 years.
Know What Creditors Look for on Credit Reports
Understanding what types of information most creditors evaluate is important. Your credit report is a key part of your credit score, but it is not the only factor. You get points for other things like:
oYour bill-paying history
oHow many accounts you have and what kind
oLongevity of accounts
oThe unused portions of lines of credit
Where to Obtain a Copy of Your Credit Report
Credit reporting agencies don't share files, so you'll need to contact each reporting agency to make sure the information about you is correct. The three major credit reporting agencies are: