Credit

What Is Credit?

Credit is your reputation as a borrower. It tells others how likely you are to repay your loans. Credit is made up from information about your borrowing history. Most of the information comes from your credit reports.

What is a Credit Report?

A credit report contains information about your borrowing history. Lenders (and others) provide information that ends up on credit reports. They report how much you’ve borrowed, how you’ve repaid, and other details about your borrowing behavior.
When somebody wants a credit report, they request one from a credit reporting company – or “credit bureau”.

What is Credit Used For?

Credit was originally used for lending decisions. Nowadays, credit scores and reports are used in other areas of your life. Consumers and lawmakers constantly watch what credit is used for, and figuring out if it’s fair or not.
In addition to lending decisions, credit is used for insurance and employment approvals.
There is a lot of confusion around what is credit related information. The most important information used in a credit decision is information from your credit reports and details that you include in an application.

What is a Credit Bureau?

Credit reporting agencies collect – and then distribute – all of this information about you. They are information warehouses, and if they have erroneous information your credit can suffer.

What is Credit Scoring?

Credit bureaus have a ton of information. There are hundreds or thousands of lines of information about you in their database, and it’s difficult for lenders to sort through all of it. As a result, most companies use credit scores instead of reading through everything in your credit reports.
Credit scores are numbers generated by a computer program that runs through your credit reports. It looks for patterns, characteristics, and red flags in your history. Based on what the program finds, it spits out a credit score.

What is Credit Used For?

Credit Tips

Control spending on your credit card. A good guideline tip is never to borrow more than 20% of your annual after-tax income. Never let your monthly debt payments exceed 10% of your monthly net income.

Already above the recommended debt guidelines? See these credit tips for expenses you can cut. When you apply for credit, lenders carefully evaluate how much money you owe compared to your income.

If you use a credit card, pay your bill on time. By paying at least the minimum amount due by the due date, you avoid a late fee and you prevent possible damage to your credit record. Similarly, avoid going over your limit. Are you not receiving your statements? Call your issuer to make sure your current address is being used.

Are you considering using your credit card to get cash from an ATM? Taking a cash advance should be considered a last alternative. Cash advances typically start accruing interest charges from the day you take the cash from your credit line. And, you pay a fee for accessing the cash portion of your line.

Often, your use of a credit card acts as your agreement to the credit card issuer’s terms and conditions. Read all the fine print associated with your account before you use the credit card. Using a credit card is your responsibility. How you manage it shows creditors how reliable you will be in paying all your obligations.

8 Tips to Improve Credit Scores

Sometimes your credit report contains errors. When this happens, you can miss out on opportunities that you otherwise deserve. It’s essential that you get those errors corrected in case anybody is asking about your credit. The process is tedious, but well worth your time to improve your credit score.

Pay on time, no magic secret here
If you can’t pay on time, notify your lender that you need to work something out
Get current on past due accounts
Keep low balances relative to your credit limit - 35% or lower is best.
Don’t open new accounts just to lower your used credit capacity as having too much capacity is a risk too
Consider keeping old accounts open if you’ve been a good borrower
When shopping for new credit, keep it all within a short time frame such as 14 days or less
Borrowers with a bad history can improve credit scores by opening a new account and managing it responsibly

Types of Credit Category

Installment debt (where you pay fixed monthly installments to eliminate the debt) is better than revolving debt (open-ended credit card debt)
Certain finance company debts (like buying a product with retailer financing) can lower your score
A variety of loan types is helpful. They’ll know you’re a seasoned borrower if you have a mortgage, an auto loan, a few credit cards, and a student loan. If all you have is credit card debt, you’ll appear inexperienced

In general, you need to know that it takes time and discipline to improve credit scores. The above rules should become second nature to you. Finally, don’t fall for any promises to improve credit scores overnight (or for a fee). In rare circumstances, you can get legitimate errors removed from your credit reports more quickly than normal – but not true information about mistakes you’ve made.

The only person who can make a large dent in your credit score is you.

Information in this article was derived from the About.com Web site.

Managing Credit Wisely

Quick Tips for Managing Credit

Here are’ a few important steps to help consumers use and manage their credit wisely.

1. Pay on time.

Paying your credit card account on time helps you avoid late fees, which can pile up. In addition, it enables you to maintain a good credit history. Ultimately, a good credit history can qualify you for lower rates in the future. If your bill is due at an inconvenient time of the month for example, if it’s due on the 10th and you get paid on the 15th ask your credit card issuer to change your billing cycle to fit your cash flow. It can be as easy as a phone call.

2. Stay below your credit limit.

Every credit card has a limit of how much money you can charge. Going over this amount will accrue a fee and increase your interest rate. To avoid this, keep a record of your spending, and check your balance online or over the phone. Remember that some merchants, such as hotel and car rental companies, put a “hold” on your credit card based on their estimate of the amount you will charge. This can reduce your available credit until the final charge is processed.

3. Understand account fees.

Credit card issuers charge fees for cash advances, transferring balances and having a payment returned. Some issuers charge a fee when you pay your bill by phone find out the rules of your account. If you need a cash advance, withdraw enough money so that you don’t have to take a second cash advance and incur a second fee later in the month. Read your credit card agreement to learn more about the fees that your credit card issuer charges.

4. Pay more than the minimum amount due.

Even if you can’t pay your balance in full each month, pay as much on the account as you can. Over time, you’ll pay less in interest charges and you’ll pay off your balance sooner.

5. Watch for changes in the terms of your account.

Credit card issuers are allowed to change the terms and conditions of your account. When this happens, they will send you “change in terms” notices, which often include new fees, interest rates and billing features. At this point, you can decide whether you want to change the way you use the card. For example, if cash advance fees increase, you may decide to use a different card for cash advances. If you have a card with a variable rate or if you have an introductory rate that is ending, be aware that credit card issuers are not required to send you a notice. Interest rates are listed on your monthly bill so read your bill carefully and take note of any changes.

6. Sign up for online account servicing.

Online account services also allow you to monitor account activity on a daily or hourly basis and sign up to pay your bills automatically online. In addition, credit card issuers offer the option to receive your statement notification via email. This allows you to view your statement instantly, rather than waiting for them to arrive in the mail. Visit your credit card company Web site to learn how to sign up for online servicing.

Information in this article was derived from the Federal Reserve Board Web site