Building Credit History

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© Family Economics & Financial Education – Revised April 2005 – Credit Unit – Understanding Credit Reports

Building Credit History: Building a credit history is important for consumers planning on purchasing big ticket items, such as a house, on credit. Generally, people have to establish a credit history before they purchase those big ticket items. Credit history affects a young adult’s ability to rent an apartment, buy a car, purchase appliances and may affect employment opportunities. Strategies to build a credit history include having:

␣Store accounts (JCPenney or Sears cards);

␣Credit card accounts (even with a co-signer); 

Loan from financial institution.

An example of implementing a strategy to build a credit history is to acquire a small loan from a financial institution. By paying the loan off in timely payments, a positive credit history is developed.

Although the following are all positive financial practices, a credit history is not established if a consumer performs the following actions:

␣Having no history of credit use;

␣Not having any credit accounts in own name;

␣Paying cash for all major purchases;

␣Paying phone and utility bills on time.

Positive Credit History: Although there are many ways for a consumer to build a credit history, it is important the credit history be positive instead of negative. A consumer must work on building and maintaining a positive credit history. Strategies for building and maintaining a positive credit history include:

␣Practicing good banking techniques such as keeping a checkbook balanced and not bouncing any checks;

␣Paying bills consistently and on time;

␣Keeping public records free of bankruptcy;

␣Having no criminal record;

␣Keeping a reasonable or small amount of debt;

␣Apply for credit sparingly, thus keeping credit inquiries you requested to a minimum;

␣Holding a low number of credit/store cards;

␣Checking credit report annually to remove errors;

␣Maintaining reasonable amounts of unused credit.

General Rule – The percentage of current credit used (or debt owed) compared to the total credit available is reviewed by lenders. Keep the amount of credit used currently at 25% of the total amount of available credit. For example, if Sue’s total amount of credit available is $1,000; her current amount of credit used should not exceed $250. Lenders will view those consumers who practice this general rule as individuals who can manage their debt effectively.
Negative Credit History: If a consumer is irresponsible with his/her credit, he/she can develop a negative credit history. There are many ways a consumer can ‘hurt’ their credit history. Habits performed on a daily basis which may seem unimportant or a simple mistake as well as large financial mistakes can be hurtful to one’s credit history. Ways a consumer may develop or keep a negative credit history include:

␣Bouncing checks;

␣Routinely paying bills late;

␣Having a criminal record;

␣Holding large amount of debt;

␣Obtaining a high number of credit inquires;

␣Carrying many credit/store cards;

␣Having a public record of bankruptcy;

␣Defaulting on a loan;

␣Holding an unreasonable amount of unused credit;

␣Having any credit/store cards surpassing the credit limit;

␣Not paying utility or cell phone accounts consistently and on time.

Credit Reporting Agency (CRA): By law, consumers are able to obtain a free copy of their credit reports once a year from each of the three national credit reporting companies by visiting or by calling 1-877-322-8228. Checking your own credit beyond this can damage your credit score. When a creditor looks at a person’s credit report, they are often looking at their credit score. A credit score is a mathematical tool created to help a lender evaluate the risk associated with lending customer money. It is a numeric “grade” of a consumer’s financial reliability. Credit scores range from 150-850, with 850 being the best score. A credit reporting agency keeps records of a consumer’s credit transactions and compiles credit reports. There are three main credit reporting agencies in the U.S.: Equifax, Experian, and TransUnion. These credit reporting agencies acquire information from several different types of lenders. Lenders who report consumer’s credit transactions may include:

␣Store accounts;

␣Credit card companies;

␣Mortgage and other loan lenders (including student loans;

␣Financial institutions;


␣Utility accounts (telephone, power, gas, and water);

␣Cell phone companies;

␣Delinquent accounts.
Credit scores affect different areas of financial ability. For instance:

1. Scores affect the interest rate of loans.

a. A high score can insure a lower interest rate on credit.

b. A low score will cause a consumer to pay higher interest rates on credit.

2. Scores affect the ability to receive future loans/credit.

a. Financial lending institutions have guidelines of what score will qualify for a loan.

3. Scores reflect to the lending company whether or not the consumer is a high risk.

a. The lower the score, the higher possibility the consumer has a recurring history of paying bills late and vice versa.

4. Scores affect financial security for a consumer’s entire lifetime.

a. It takes time to improve a credit score, which could take time from building financial security.

Answer the following questions in your notes. Be sure to use the text to formulate your answer:
1. Why is building credit important to a consumer?

2. How is it possible a consumer might not have a credit history?

3. What is an excellent credit score and how can one insure they achieve it?
4. Infer 3 specific consequences if a person has a low credit score.

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