Wednesday, April 30, 2014

Your Credit History, Part III: Building an excellent credit report


And now let’s say that you have taken all or most of these steps on your path to establishing good credit. Let’s talk about the things you can do to improve it:


Other loans
In general, good credit reports include a variety of loans for different purposes. When you get a car loan, it shows as a car loan on your report. A small personal loan shows as personal.

So, if you need a new laptop, request a small loan to buy it. Pay it off as soon as possible. Personal loans often have a 5-year repayment period, but if you can afford to pay it off in less time, then do so. 



Safety in numbers
Some years ago I decided that I wanted that very stylish new computer by that fruit-named

Computers and other pricey technology can often be

bought using small credits. 
company (yes, you know which). It was that pretty, white computer that looked like a monitor except that the computer was inside the monitor, and that was it, the computer. Of course I wanted one. And the fruit-named company was offering 0% financing for 12 months for select customers.

I knew I could well afford it, so I called them up and applied for their credit over the phone. And while I had an impeccable record on all my loans, I was denied by the fruit company. When I raged on the phone, unbelieving, telling the guy on the other side that they could not possibly turn me down, he told me simply that I needed five credit references and only had three. Which was true, but I still raged.

So, I was angry for a couple of months, and then went ahead and bought the computer once I stopped being angry at them, and I paid for it using my platinum card (points, points, points!). This incident taught me that it’s not only important to be good when borrowing, but that they also look for people to prove this by having several loans and/or credit cards. Exaggerated, if you ask me, but II don’t make the rules.

Aim to have several sources of credit that show on your report. Which leads me to…


No safety in crowds
It’s fine to have several small credit cards and various loans. However, have caution when it comes to the limits on your cards. Both too much and too little affect your credit report.

Credit cards that have $0 balances, that you keep around for emergencies are a good idea,
Know the right amount of credit
cards to have.
but beware: they can affect you negatively in that they show up as prospective loans. If you have a $10,000 limit on a credit card with a $0 balance, some lenders may view it as a $10,000 loan that can happen any time. If you want a card for emergencies, then have no more than one $0 balance card open and make it the one with the lowest limit.

Another solution is having several $0 balance cards is to divide various monthly expenses among them: Card A for gas, card B for meals; card C for groceries, for example. Try to avoid owing over 30% of the credit card limit on your cards at the end of each month, and remember to pay them off monthly if you use them for your regular expenses. This will leave you contingency money for emergencies, while you also put the cards to proper use.


If you are denied once, don’t try elsewhere
Each credit request that you make shows on your credit report. Don’t apply at three different places to get the best possible rate on a car loan, and don’t go somewhere else if you have been denied. Every time you get turned down reflects worse on the next request. 


Paying for utilities
While paying the electric, gas, and phone bills in time doesn’t show on the mayor credit reports, paying late and not paying them does indeed show there. That’s the case with many of the payments that we make each month, and it’s why you should always pay all your bills before their due date.

Moving
I was born in the United States, grew up in Spain, studied college and worked again in the United States, and now, after spending a short period of time back in Spain, live in Finland. What I’m trying to say is that I have moved a lot.

The first time I moved I forgot to inform my one credit card company. I also forgot all about that bill; they called me about 50 days after my last bill to ask me why I had not paid them. In my case it was an honest mistake, and very few times in my life have I been so mortified. The lady calling was nice and changed my address over the phone, and I mailed them a check that very day. But that mistake remained 5 years on my credit report.

If you move, use the postal service’s change of address. Also, if after a couple of months you’re still receiving mail at the new address with those postal service stickers that show that those letters in question are still being forwarded, it means that the company in question has not found out your new address yet. Call them. The post office only forwards for a few months and after that, any company that did not update your address will have the mail returned to them. If that mail is bills, you will be late paying them.


Check your credit
In the electronic era, having all this information at our fingertips comes at a price. Identity
ALWAYS notify of your move before it happens.
theft rises every day. I’ve already mentioned before that you can request your report once a year for free by visiting this site. If you do not have access to a secure computer you can request it by calling 877 FACTACT (877) 322-8228.

Review your report, and make sure that you recognize every account on it and that your information is accurate and complete. Yearly monitoring of your report is good for your finances in many ways.


Other general things that lenders like to find on credit reports are...

  • Long term employment with one company
  • Long term relationship with one financial institution. Keep your deposit accounts (savings, checking) in one place
  • Long term living arrangements. Living in one place for long periods of time denotes stable finances
  • Retirement plans, savings, stocks and bonds. These are signs of financial stability and financial planning.

Final notes
All in all, everything you can do to establish or improve your credit, save for a few quirky exceptions, is common sense. Sometimes it is not easy to handle one’s finances properly. I’ve been there, in my early days of living alone, I messed up now and then, and years later I saw those mistakes on paper.

If you are new to the United States, or young and trying to get started on your credit, these guidelines are a pathway to financial security. Don’t hurry, and always try to handle your money in good faith. If you’re having problems obtaining your first credit sources, talk to the credit union loan officers for help. Credit unions distinguish themselves for their human approach to personal finance, and do understand about helping you get started.

If you are not trying to establish your history but to mend it because you have or have had financial hardships, again, time, patience, and honesty are your best allies. Think about what purchases you truly, honestly need, and shop wisely. Try to work with what you make each month, learning to make ends meet, using a fixed personal budget*, and maintain good relations with the financial institutions that know you. The credit union is far more likely to work with you than a bank, particularly if you have your salary deposited there. There is no harm in asking for help. Helping is, after all, what credit unions were made for.

In the month of May we will be explaining how to make your personal budget. Read more here.

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