Establishing and Building Good Credit 101

What is Credit?

Credit is money granted by a creditor or lender to a debtor or borrower(you), who defers payment of the debt. In exchange for the credit, the lender gets back the money, usually paid on a monthly basis, plus interest. The debtor gets the use of the money to pay for and take possession of things today and the creditor gets back more money than s/he loaned out. Modern society is dependent upon credit to generate sales; it enables people to have the things they want and need, but can't afford to pay for right away. By establishing good credit, you are seen as a trustworthy consumer who will pay back the money that was "loaned" to them in a timely fashion.

What Exactly Is A Credit Report?

A consumer credit report is a document that contains a factual record of an individual's credit payment history. Credit grantors are permitted by law to review your credit report to objectively determine whether to grant you credit. There are 190 million credit active people in the United States who have a charge account, car loan, student loan, or home mortgage. As those people pay their bills, most lenders report credit payment information to credit bureaus. So most of the information in your consumer credit report comes directly from the companies you do business with.


What Information Does A Credit Report Contain?

A consumer credit report contains four types of information: identifying information, credit information, public record information, and inquiries.

Identifying information includes:

* Your name.
* Your current and previous addresses.
* Your Social Security number.
* Your year of birth.
* Your current and previous employers.
* If you're married, your spouse's name.
* Credit information includes credit accounts or loans
* you have with:
* Banks.
* Retailers.
* Credit card issuers.
* Other lenders.

Most information, whether positive or negative, remains on your credit report for 7 years from the date it is first reported, and then cycles off automatically. If there is inaccurate information in your credit report, you have the right to dispute it and have it removed.

Public record information includes any information that's contained in state and county court records, like:

* Bankruptcies.
* Tax liens.
* Monetary judgments.

Bankruptcies can remain on your credit report for up to 10 years. Other public record information can remain for up to 7 years.

Inquiries indicate to other credit grantors that you have applied for new credit that could result in additional debt. Potential lenders view multiple recent inquiries on your credit report as a sign that you are overextending yourself. Most inquiries stay on your credit report for up to two years.

(A credit risk score may also be included when your report is provided to a credit grantor, although it is not included on consumer review reports. The ways to calculate and use a credit score vary widely, so a score has little meaning outside of the context of a particular lender's unique guidelines for use. Therefore, it is not included on consumer review reports.)

What Is A Credit Bureau?

A credit bureau or credit reporting agency is in the business of gathering, maintaining, and selling information about consumers' credit histories. It collects information about consumers' payment habits from credit grantors like banks, savings and loans, credit unions, finance companies, and retailers. The credit bureau stores this information in a computer database and sells it to credit grantors in the form of credit reports. When you apply for a new credit card or loan, the credit grantor orders your credit report from at least one credit bureau and analyzes the information to decide whether to grant you credit. The credit bureau charges the credit grantor a fee for every credit report sold.

Although credit reporting agencies provide your credit report to lenders when you apply for credit, they do not make actual lending decisions. It is up to the lender to evaluate your credit report and any other factors they consider important and then decide whether or not to offer you credit.

Tips in Establishing Good Credit

In order to establish good credit, you need a good credit history. But to have a good credit history, you need to establish good credit.

In order to build your credit history, it is important to always pay your bills on time and to never borrow or spend more than you can afford. You will damage your credit history by paying bills late or not at all.

If you are a young adult, a college student or a new immigrant, you can begin to establish credit in many ways. In fact, you may already be building a credit history. For example, if you own a cellular phone or a pager, you have already begun to build your credit. From here forward, as you continue to pay bills on time and responsibly handle creditors, you will begin to build positive references on your credit report.

If you already have a credit card, you are well on your way to building your credit history. In fact, personal finance expert Gerri Detweiler advises that a major credit card, issued by a bank or other financial institution, that is paid on time over a period of time, is one of the strongest credit references on a credit report. However, a credit card may not be appropriate for everyone. Before obtaining a credit card, you should learn everything you can about your obligations as well as the terms and conditions associated with using the card.

If you have never borrowed money from a financial institution or made bill payments in your name, then you probably do not have a credit history. Nevertheless, many card issuers offer cards designed specifically for those with little or no credit history. For example, secured cards may be an appropriate first step, or you may consider using a co-signer on your credit card application. Again, it is important to understand as much as you can about the responsible use of any financial tool before applying for and accepting a payment product.

Who May Check My Credit Report?

Federal Law carefully regulates how credit reports can be used and by whom. Individuals have the right to obtain their own reports, and businesses must meet the following requirements before they can access credit information:

* A background Proof of a permissible purpose under federal law
* check and on-site inspection of the business
* A current business license
* A signed contract requiring the business to use the data properly

Information gathered from various websites