Building Credit

From buying a pack of gum at the quickie mart to financing skyscrapers in New York, people use credit every day.


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From buying a pack of gum at the quickie mart to financing a car to paying for college, most of us use some form of credit every day. Credit offers a way for us to get the things we want without having to carry cash, and it allows us to buy things we might not be able to afford all at once by allowing us to pay for the item over time.

What is credit? At the most basic level, credit is a promise that you will repay any loan according to the terms of the agreement between you and a lender. The lender, which could be a financial institution, merchant, credit card company or other type of lender, charges interest for the use of the money.

If a friend has ever asked if he or she could borrow your money, you may have asked yourself whether they would be willing and able to pay you back. Lenders ask themselves similar questions and have come up with a system to rate the likelihood that people will repay their debts. This system consists of credit reports and credit scores.

Your Credit Report

A credit report is a detailed financial report card that contains detailed personal and financial information dating back 7 years or more. You actually have three credit reports, each assembled by the three major credit reporting agencies/bureaus (Experian, Equifax, and TransUnion). Credit reports include your:

  • Social security number and date of birth
  • Current and previous addresses
  • Current and previous employers
  • Credit inquiries (for example, a check performed when you applied for a loan)
  • Information about bankruptcies, foreclosures, tax problems, and any criminal arrests or convictions
  • How much you have borrowed through loans and credit cards, and what percentage of your total available credit is being used
  • Your repayment history for each account
  • And any accounts that have been turned over to a collection agency

A credit report filled with missed payments and other negative items will make it more difficult to to be approved for car loans, non-government education loans, home mortgages and any other kind of loan.In addition, the loans will be more expensive since the interest rate will be higher to offset the increased risk of default. And the penalties don't stop there - banks, insurance companies, credit card companies, utilities, landlords and even employers all have access to your credit report and use it to make decisions about you. In fact, many employers use credit reports as a factor in making hiring decisions.

Finally, if you have a credit card balance or outstanding loans such as private education loans, your interest rate can actually be increased because of a negative item on your report, even on accounts that have paid on time every month. Given the pervasive use of credit reports, it's not difficult to understand the importance of maintaining good credit.

Besides paying all bills on time and using credit responsibly, you should review your credit reports at least once per year. By reading through your report, you can spot errors and even identity theft. The government requires the credit reporting agencies to offer consumers the ability to obtain a free report once per year through the website. Please note that the credit reporting agencies may also try to sell you services when you receive your report, even when going through the government-mandated website. While it can be a bit confusing, these extras are not required in order to receive your report. There are many websites that offer so-called "free" credit reports, which try to sign you up for a credit monitoring service as a condition of receiving your report. These credit monitoring services are not only unnecessary for most students, but they can cost $150 or more per year.

If you do find errors on your credit report, call the credit bureau immediately. Under the Fair Credit Reporting Act, the bureaus have 30 days to investigate and to correct any erroneous information. We also offer a supplemental module dedicated to understanding your rights and responsibilities in the event of identity theft.

Your Credit Score

If your credit report is like a report card, your credit score is your overall credit grade. A credit score is a three-digit number that summarizes everything about your credit report into one number. Credit scores range between 300 and 850, with around 700 being average. The higher the score, the better.

Credit scores are created by the Fair Isaac Corporation, which is why credit scores are sometimes called FICO scores. Scores are determined using a proprietary formula that takes into account factors such as repayment histories, the number and age of open credit accounts, the percentage of available credit used, and even the number of recent credit inquiries.

The interest rate you receive on most loans is based, to a large degree, on your credit score. The best way to earn and maintain a high credit score is to build a solid credit history - and there are no quick fixes, no matter what the providers of fee-based "credit repair" services claim.

There is currently no way to get a truly free credit score on your own. You may obtain a score through the FICO website or through the credit bureau websites. But be cautious about signing up for an expensive credit monitoring service unless you want the service and do not mind paying a monthly fee. Expect to pay around $15 for a score that does not involve a recurring charge that you will have to cancel. Unless you are planning to finance a major purchase in the near future, there is really no benefit to knowing your credit score.

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