+ Know Your Credit Report

A credit report is created by a credit bureau. A credit bureau is a company that collects your payment history from creditors, lenders, utilities, debt collection agencies, and courts. There are four major credit bureaus in the United States. They are Innovis, TransUnion, Experian, and Equifax. You have a seperate credit report from each bureau. Each bureau looks at the different type of debt you have, and your consistency in paying your debts on time. That information is used to create your FICO score. When you apply for a loan, the lender will use this score to help determine if you can afford the loan. The lower your credit score, the higher your interest rate will be.

Get your MyFICO.com credit booklet

FICO scores range from 300-850® - higher is better.

Credit scores are based on a variety of information and calculations. Below is a chart of the items that factor into the calculation.

FICO Pie Chart
What affects your credit score, Source: myfico.com

The Fair Credit Reporting Act (FCRA) was designed to help ensure that credit bureaus furnish correct and complete information to businesses for use when evaluating your application.

Your Rights under the Fair Credit Reporting Act

 

 

Important information from the Federal Trade Commission

annualcreditreport.com is the ONLY authorized online source for you to get an annual free credit report under federal law. You can get a free report from each of the three national credit reporting companies every 12 months. Some other sites claim to offer "free" credit reports, but may charge you for another product if you accept a "free" report.

+ Spending With Credit Cards

Credit

Credit is money available for a person to borrow. Credit plays an important role in our lives. We may want to make future large purchases, such as a home or vehicle, and may not have the available cash. In addition, renting an apartment, obtaining insurance or applying for a job may require your credit history to be pulled. Without credit, it can make some basic things more difficult. Credit cards are one way of building good credit, if used correctly.

What is a credit card?

A credit card is pre-approved credit which can be used to purchase items now and defer payment until later. The longer you carry a balance, the more you pay for the total price of the goods or services. The terms and conditions of the credit card affect your overall cost.

Should I have a credit card?

Credit cards can assist you with money management and can help you to establish a credit history. Having a credit card can come in handy if you have an emergency. You can buy a necessary item you now and pay for it later. But be very careful! Acquiring a large amount of credit card debt while you are in school can have huge consequences for the rest of your life.

What should I know before getting a credit card?

It is important to compare terms, fees, APR and total finance costs before you agree to open a credit or charge card account. Know there is a strong urge to spend more when it comes to using credit cards. Be cautious of spending more than you can pay back by month's end.

What should I know before making a purchase on a credit card?

You should know exactly which items you need to purchase with a credit card, and plan in advance for the purchase. You should be aware of the interest rate your credit card company will charge you for the purchase. You must always know the balance due on your credit card, your monthly payment and have a plan in your budget for paying your balance in full.

Try our Credit Card Calculator to see how long it takes to pay off your card balance.

What can happen if I make poor choice while using a credit card?

If a credit card is used improperly, it can cost you huge sums of money. Most college students are dumbfounded by how fast their balance becomes ridiculously large. Add in penalties and fees and soon, a large amount of debt has accumulated. Credit card debt can lead to a poor credit rating, which can haunt you forever. Imagine losing out on your dream job/home/car because you had poor credit due to poor choices with credit cards.

Making smart decisions about credit cards will make it easier for you to stay in school and for you to live the kind of life you want after graduation.

+ Choosing a Credit Card

Often times you will receive multiple credit card offers in single week. How do you make sense of all the offers and decide which one is best? Each one has its own flashy gimmick to grab you and make you want to apply. "Low APR!" "No Annual Fee!" "Cash Advances!" which one is best?

Here are some tips on comparing credit cards, and remember you DO NOT have to accept or apply for each credit card you are offered.

Important Things to Remember

The Schumer Box

Schumer Box Example
Credit card companies are required to provide certain information in any offer that they make to you, under the federal Truth in Lending Act (TILA).

You can find this information printed in what's known as the "Schumer box" (after the U.S. Senator from New York who drafted the bill).This box will appear on the back of the letter offering you credit, or on another sheet of paper enclosed in the same envelope.

This box lists all fees charged for ownership of the card for using it. By using the Schumer Box, you can compare the total costs of each card and decide which one is best for the way you plan to use it.

Disclosures in the Schumer Box

Some very important information is displayed in the Schumer Box, including the following:

The issuer must make it clear whether there is an introductory or promotional rate and, if so, how long it will last. Pay close attention to the fine print of what disqualifies you from the "teaser"rate. It can be as little as one day late from the due date or a dollar over the credit limit. Look for a "universal default clause". If you are reported late by another creditor, your APR can be increased even if you are paying your bills on time with that creditor.

The issuer must also disclose the regular APR for purchases, cash advances and balance transfers as well as any penalty rate and what actions on your part will trigger the penalty rate.

+ Maintaining Your Credit

Don't: Close Credit Card Accounts

Credit scores are built on ratios and calculations. Doing away with unused lines of credit seems to make common sense, but not so much to a credit scoring model. "Many of the things that can lower your credit score are kind of counterintuitive," says Melinda Opperman, counselor and vice president of community outreach for Springboard, a consumer counseling organization. When you close an account, it no longer adds to your total amount of available credit. "There is a big chunk of your credit (score) that is factored on the amount owed...30 percent of your credit score. So one-third of your score measures the amount of debt against the credit limit," Opperman says. Without changing your level of debt, lowering the credit available to you throws off your ratio of debt to available credit (utilization ratio).

Do: Use Your Credit Cards

Again, this may seem a bit counterintuitive, but letting your credit lines collect dust is not the best thing for your credit score. Hoarding credit cards in case of an emergency may backfire. Lately lenders have taken a use it or lose it attitude. You may have a couple negative affects if a lender closes an account for nonuse: Just as if you had closed the account it reduces your available credit and affects your ration of available credit to used credit. The account no longer contributes to your credit history.

Keep in mind, if an open account is unused long enough, the company can stop reporting it to the credit bureaus. If the account isn't reported, it is not contributing to your available credit, which, again, affects your credit utilization ratio. It is best to use all your credit lines periodically.

Your credit score isn't a merit system, but a predictive model that tells lenders what you might do in the future.

According to Barry Paperno, consumer operations manager for Fair Isaac and head of myFICO.com's consumer education and advocacy, "The FICO score looks at how recently the information was reported, so, if say, a credit card trade line (credit card account) hasn't been reported in X number of months, then we will not include that information for certain calculations, basically any calculations that look at dollars," He added, "That includes the amount of debt you're carrying relative to the amount of credit available."

Don't: Run Up High Balances

Using too much credit sends up red flags for lenders. You really need to use credit just right. Too much or too little use both have negative affects. The FICO score in particular favors an abundance of credit that is not utilized too little or too much. Low balances on several cards rather than one large balance is generally more favorable in the scoring models.

Do: Have Long Term Relationships With Your Credit Accounts

New is not always better especially when it comes to your credit score. There are a couple of reasons. First, new credit accounts lower the average age of your credit history. For example: If you've had one credit card for 20 years and then five others that are spanking new, the credit score is going to take the one account you've had for 20 years, 240 months, and the five accounts that you've had for one year. That's five accounts times 12 months and it would then average all of those accounts together so it only looks like you've had credit for four years. Transferring balances from one card to the next to take advantage of introductory rates can also have the same effect. Also, applying for credit causes a "hard" inquiry on your credit report which can affect your score negatively.

Inquiries aren't extremely damaging to a credit score, but multiple "hard" inquiries in a short period of time does raise questions in a lenders mind. Many banks and credit card companies try to avoid consumers that appear to be desperately shopping for credit. That said, credit scores do take smart loan shopping into account. When shopping for products such as auto loans or mortgages, you are not dinged for each individual auto or home loan-related inquiry within a 45 day window. Experts recommend doing all comparison shopping within that period of time if possible to minimize credit negative affects on your rating.

Do: Pay Fines and Non-Credit Card Bills on Time

Did you know, even something as simple as overdue book fines at the library or a parking ticket can hurt your credit score? If it gets turned over to a collection agency it can and will. Many public institutions and municipalities will use credit to get people to pay their fines and fees.

Any business, from garbage collectors to cell phone companies, can turn an overdue bill over to collections. Most of the time they don't report the positive side to your credit history while you are paying on time. However, once the collection agency receives the account they normally will start reporting the negative side immediately. Don't let something like a small parking ticket ruin your credit. Pay everything on time just as if it was a loan or credit card. It can all affect your credit score.

Don't: Ignore Mistakes on Your Report

In order to dispute something on a credit report, you obviously need to check your credit report first. You are entitled to get a free report from each credit bureau once per year. If you haven't checked yours this year go to annualcreditreport.com and get started. If you have items to dispute follow the procedure on the site or use the bankrate checklist.

Unlike other issues that affect credit scores, mistakes sometimes can be remedied easily and quickly, so it's worthwhile to keep tabs on your report. Checking it often and carefully is also one of the best ways to catch identity theft early.

Don't: Make Late Payments or Skip Payments

It seems almost too obvious, but it is worth repeating, making late payments and/or missing payments entirely will quickly and negatively affect your credit score. Fortunately, as it happens, not all missed and late payments are counted equally in credit scores. According to MyFICO.com's Paperno, the FICO scoring model evaluates missed and late payments by several different criteria, including how recently it happened, how severely late the payment was and the frequency of missed or late payments. The recentness of the incident has the most bearing on the FICO score. "Believe it or not, a 2-year-old incident of a payment being 90 days late is not as bad as a recent 30 days late (payment). The older one may have been one blemish in a long history but a 30-day this month can lead to a 60, which can lead to a 90," Paperno says. "The score is a predictor of future risk, and all of the factors that are looked at are viewed as to how well they can predict the future. So the more fresh or recent the information is, the more predictive it is," he says. "Lenders are always looking to spot potential problems as early as possible."

The further back in time the mistakes are, the less impact they have on your credit score. Obviously, the fewer mistakes you make, the better it is for your credit score. Once the mistakes are several years old they may not affect the credit score at all.

+ Credit Card Terminology

The credit card industry is full of confusing terminology. Here are some definitions that might be helpful.

Annual Fee: Is a fee charged once per year for credit card ownership.

Annual Percentage Rate (APR): Annualized interest rate charged to the cardholder on the amount borrowed.

Balance Calculation Method: This is the method used to determine the balance for which finance charges are accumulated.

Cash Advance Transaction Fee: Is a fee charged for a cash withdrawal from a credit card account.

Charges, Payments, and Credits: These are transactions that occur with the use of a credit card.

Closing Date: Is the last day for transactions to be reported on the statement.

Credit Line/Limit: Is the maximum amount of charges allowed to an account.

Due Date: This is the date the company requires a payment to be received. Normally this means physically received in their office and posted to the account. Watch out for teaser rates that go up if you are more than a day late.

Due Date: This is the date the company requires a payment to be received. Normally this means physically received in their office and posted to the account. Watch out for teaser rates that go up if you are more than a day late.

Grace Period: Is the amount of time, in days, allowed to the cardholder between the day the items are charged on the credit card and the day finance charges begin to apply.

Late Payment Fee: Is a fee charged when the minimum monthly payment is not received by the due date.

Minimum Finance Charge: Is the minimum amount to be charged for use of a credit card.

Minimum Payment Due: Is the minimum amount that must be paid each month on the account.

New Balance: Is the total amount owed on a credit card.

Past Due Amount: Is the previous amount due which was not paid before the due date.


Montana University System Seal

GetMoneySmarts.org is a product of the Montana University System, Student Financial Services, a program within the Office of the Commissioner of Higher Education.