February 19th, 2007 12:14 EST
The Real World - Full of Credit Confusion
For many young people stepping out into the real world for the first time, managing their finances is a struggle. Understanding the ins and outs of credit can be just as daunting. Even though some experts believe that not all debt is bad, predominantly they agree that financial mismanagement spells trouble and should be avoided.
Credit can be a very valuable financial tool when used wisely and with forethought, " said Rod Griffin, a consumer affairs specialist at Experian, one of the three major credit bureaus in the United States. I often hear young people say they have a credit card for emergencies. I remind them that pizza and beer on Friday night "or cool stereo speakers are not emergencies. "
Becoming financially responsible begins with one principle. The most important thing for young people to understand about credit is that it is not free money, " Griffin explained, you must repay the debt plus any interest and fees. That means you have to have a plan for repaying the debt and should set yourself a deadline for having it repaid. "
Some credit mishaps remain on credit reports for 10 years, so it is important for young people to become educated on establishing and maintaining good financial habits. Here`s how to stay solvent and build good credit.
Credit " The basicsPut simply, credit is the ability to borrow money, with the promise of repayment at a later date including interest. When you make your scheduled payments of the debt on time, you are building a good credit history. Your credit history shows how you have managed debts. Experts stress that credit is a privilege, not a right. You have to earn good credit and are sometimes rewarded for it; but when you make a mistake it is your right to fix it.
It is important to realize that from the moment you apply for any type of loan or credit card " be it Macy`s, The Gap, or financing for a used car " you started a credit history. Establishing and maintaining a positive history is essential because it allows you more leverage in the future. Lenders want to see that borrowers have a handle on their debt. You also stand a greater chance of procuring lower interest rates with a good credit rating. Negative credit shows lenders that you are unable to manage debt, and they may be reluctant to grant you more credit. If they do, expect a higher interest rate.
Your credit report is what a lender uses to judge your history. It includes such information as:
- A list of all your debts and a history of how you`ve paid them.
- Any outstanding bills that have been referred to a collection agency.
- Tax liens or bankruptcies (bankruptcy stays on your report for 10 years).
- Inquiries made about your credit history (happens when you request credit).
Your report is gathered by a credit reporting agency, also known as the credit bureau. The three major agencies are Experian, Equifax, and Trans Union. Lenders use a score to determine how much of a risk you pose considering your history of repayment. This computerized calculation varies from lender to lender so it is advised that you ask them to explain it to you.
The credit bureau is not responsible for issuing or denying credit, only for collecting consumer data, which is sold to creditors. Generally you are entitled to a free credit report once a year, but you can also purchase more from any of the major agencies.Building/Maintaining Good Credit
If you are new to the credit game there are ways for you to start building a positive credit history. In essence responsibility is the key to financial stability. Follow these four steps:
- Pay your bills on time. This shows lenders that you are responsible.
- Pay at least the minimum amount required. Pay more if you can afford to, but never pay less.
- Keep your balances low. Refrain from maxing " out credit cards. Only buy what you know you can afford to repay at any one time.
- Don`t apply for too much credit. They may feel that you won`t be able to manage it all.
To maintain good payment habits follow these simple rules:
- Place bills in a designated area when they arrive. You don`t want lost or forgotten bills.
- Make a list of bills to pay each month. This helps you to keep track of when things are due.
- Develop a monthly schedule for paying bills. Write it down on a calendar.
- Pay your self first. Experts stress that before you pay any bills, put money away in a savings account, mutual fund or 401K. This helps for a rainy day and establishes good saving habits.
Correcting Credit Catastrophe
Financial difficulty affects almost everyone at some point. In situations where you have become overwhelmed by debt, lost your job, or even fallen sick, there are still things you can do to get back on the right track. When faced with a financial crisis follow these expert recommendations:
- Seek financial counseling. If you`re unsure of what to do contact a credit counselor for help. The Consumer Credit Counseling Services (CCCS) have professionals who can assist you.
- Contact your creditors and lenders and explain your situation. Don`t be afraid or embarrassed to inform creditors. Some may even help restructure your payments.
- Make a list of all your debts and create a budget. This allows you to put your situation in perspective and have a plan of action.
- Check your credit report frequently. This practice ensures that it is accurate, and alerts you to problems.
- Be honest with your lenders about what you are able to pay and when. Experts warn not to make promises you can`t keep.
- Don`t be discouraged. It will take some time but be patient and persistent. Don`t run away from your debt.
Even if you do everything right, bad credit may strike from outside forces. According to a September 2003 report released by the Federal Trade Commission (FTC), 9.91 million people were victims of identity theft last year, costing consumers $5 billion. If you think you`ve been a victim of fraud or identity theft, the FTC recommends that you:
- Contact any of the three credit bureaus and place an alert on your credit file.
- Close all accounts that you think may be affected.
- File a police report and get a copy to submit to your lenders.
- File a complaint with the FTC.
The bottom line is that it is possible to have good credit and recover from mistakes despite your age or situation. Financial responsibility starts with understanding how lenders view credit and avoiding pit falls.
The way you manage your finances in your early twenties will significantly impact your financial health later in life, " said Colleen Martin, Vice President of Corporate Affairs at Trans Union. And only you can ensure that your identity is safe from predators. Be vigilant, responsible, and fiscally sound.