Tuesday, February 07, 2006

Got Credit?

How Do You Build Good Credit?
Most people start building their credit history over a period of time as a natural progression into adulthood. However, not everyone likes the idea of owing money. The object is to demonstrate that you can handle your financial responsibilties. The system notes consistent behavior, so don't make any sudden moves.

Apply for a small credit card with your bank or credit union and pay it on time every month. Leave a little balance on the card ($5-$10) to keep it 'active' in the FICO scoring system. If you bank says no, then first establish a savings account and then ask for a card or line of credit for the amount you have in your savings.

Avoid those offers in the mail that say you are pre-approved. Many of these cards are hooks wtih low entry rates and escalating fees. Instead approach your bank or credit union about a small starter card to build your history.

Keep your balances low on your revolving card accounts. The trick with credit cards is to spread your balances across several cards and keep the balance of each card below 30%. that means if you get a $1,000 credit line, don't max it out at $999 and keep it there. This will hurt your FICO score. Keep that $1,000 card balance below $300 and you will be using the system to build a strong history and score. Better yet, set up an automatic payment to your credit card from your bank account to be SURE you don't miss a payment. If you do that...ask your bank to pay the card statement short bty $5-10 to keep your account active in the FICO systmem. Since the card is with them...they should be able to accomodate this small request to assist your building credit. Asking nicely seems to work better with anyone who holds your money and your credit in their hands!!

4 active 'trade lines' with at least 12 months active history on each each (line, credit card, auto payment, student loan, etc) are required for mortgage applicants. If you have less than 4 active lines, you can ask to have an alternative credit report prepared.  If you took out a Student Loan and borrowed lump sums, you may have several actual lines rather than one big one.

What is Alternative Credit?
If you don't have time to use this method over a year or more, and your lender is willing to work with you...you can build an Alternative Credit Report. This is done by submitting letters from at least 4 sources where you have been paying your bills on time for the last year. Rent, phone bills, cellphone bills, utilities and auto insurance are good bets. Your mortgage lender will handle getting this report created for a flat fee by submitting these to their credit reporting agency who compile your report. They actually call each creditor and verify the information you submitted is correct. Many lenders are fine with this practice, especially on First Time Homebuyer loans.

Update on Alternative Credit:
Very few lenders are allowing alternative credit reports due to the tighter standards in this economy. Most lenders are requiring a minmum of 620 or 660 FICO scores. That's your middle number of three scores so if you have one account in arrears that report to more than one agency (say Equifax and Experian) then that one missed payment will lower your middle score. And they want to see 12 months of good history on 3 active trade lines. So if you don't have 3 cards or reporting lines it's important you have other good account history to present.

Don't Blow It!

Once you have established a credit report... your credit picture will continue to build over time as you use it and pay your bills on time. Good behavior pays off!

Easy Does It!

Don't apply for several cards at once and rack up your charges. Plastic is rather tempting if you aren't used to using it. A slow build up works best. Yes, you can have too many cards! How many varies...it's an individual issue. It becomes obvious you have too many if you can't pay them all and keep your balances below 30% of the available balance. So keep it simple with two or three: a gas card, a bank card and a favorite department store card are fine. If you have a car loan, computer finance or education loan that you are paying off now..they will count as trade lines. Don't go overboard with the plastic quotient.

Interesting point: old credit is good credit. So even if you aren't using your old cards, just leave them open and keep an eye on the statements...updating in them of any change of address or name changes. New credit lines are less 'valuable' in the scoring system and can have a negative impact if you apply for a rash of new cards all at once.

Another guard against losing your hard earned credit: Avoid using your debit cards online. This does nothing for your credit (and could expose you to fraud). Another good reason for having a small credit card with a limit is that anyone trying to use your card illegally can only go so far and you are protected in the case of theft or product problems...just be sure to report if it's stolen or suspicious charges appear on your statement.

The very last thing you need to do is have a creditor close a card or report it as a collection because you can't make your payments. Credit is a privilege..so treat it that way and you will be enjoying great credit and the rewards of low interest rates for a very long time.

Wishing you every credit sanity! 

© 2006 susan templeton