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:
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:
␣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:
␣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 annualcreditreport.com 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:
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.