University of Wisconsin - Extension

Chilton, Wis. --Why is a good credit rating important? And what can you do if you don’t have one?

Having good credit is essential if you want to borrow money to purchase a home or car, rent an apartment, establish accounts with utility companies, or get credit cards.

It might even help you obtain a job. Employers, insurers, landlords and utility companies all have the ability to access your credit history. “Based on what they see, they have the right to withhold services, refuse to rent to you or sell you an insurance policy. A potential employer may even remove you from consideration for a job,” Teri Zuege-Halvorsen, UW-Extension family living educator in Calumet County.

If you pay your bills on time--including payments on money you have borrowed--you will be able to establish a good rating. If you are rejected when applying for credit, it may be because you have never had credit or because your credit is in need of repair.

Lenders assess whether or not you are a good risk by seeing how you’ve handled your finances in the past. This is where your credit report and credit score become very important. Credit reports include the history of your finances from the past seven to ten years. Your credit score summarizes the information in your credit report by a numerical value.

How do people or organizations find out if you have good credit? The process begins when credit bureaus receive information from organizations such as banks, credit card or utility companies when you apply for credit. All updates on your existing accounts, address changes or other changes will also make it to the credit bureau records.

Lenders will review your credit history and score to determine if you are a good risk before they lend you money. They want to know that you are going to be able to pay back the principal and interest. In addition, they use your credit score to determine the annual percentage rate of any loans or credit cards. People with high credit scores will be offered the lowest rates.

Before you apply for new credit, be sure to research your current credit rating. You can check your detailed credit reports once a year, free of charge at http://www.annualcreditreport.com. Also, websites like http://www.Credit.com, http://www.CreditKarma.com and http://www.Quizzle.com allow consumers to check their credit scores free. Although these are not officially the same as the widely used FICO score developed by Fair Isaac Corp., they still provide a sense of your credit situation.

If you are turned down for credit, Zuege-Halvorsen offers these suggestions.

--First, check for errors; they are common on credit reports. The reports include information on any debts that went into collection or any old debt that has not been repaid. Other information that would be considered negative includes late payments on loans or credit cards, bankruptcy, foreclosure or court judgments. If you find incorrect information, fill out a dispute form from the credit reporting agency or write a letter that explains the mistake. The credit reporting agency has 30 days to review the dispute and take action. It cannot put disputed claims back on the report unless the company that provided the information confirms the claim’s accuracy. The agency will also give you contact information for the company that reported the claim. If the claim is accurate, it goes back on the report. If it is not accurate or the company that made the claim does not substantiate it, the claim is removed from the report and you are given a corrected copy of your new report.

--Don’t max out your credit cards. Cards charged to the limit can negatively affect your credit. Pay off the balances before you apply for new credit.

--If you can’t keep up with payments, consider working with a nonprofit credit-counseling agency. Be careful of “debt-settlement” services that say they’ll help you settle debts for a fraction of what you owe. These offers too often come with high up-front fees that may damage your credit score even more. Reputable credit-counseling agencies (see a list of agencies backed by the National Foundation for Credit Counseling at http://www.debtadvice.org) offer debt-management plans designed to help you pay off debt in three to five years. Creditors may even waive some fees in these plans.

--When you’re paying off credit, start with the card with the highest balance relative to your credit limit. Your credit score is based on how much of your limit you are using, so keep all balances below 50 percent of your limit—or even less if you can.

--When you cancel credit cards, don’t forget to call or write the company. Just cutting them up isn’t enough. If you want to cancel cards, keep the oldest and cancel the newest. Having older lines of credit helps your credit rating.

--Ask only for the credit you need and apply to only one source at a time. If lenders see that you have filled out too many credit applications, they may turn you down. Your credit report will show if you were approved or not.

Your credit score is one of the most important pieces of your credit history. It is calculated from a variety of different information: 1) payment history (most important factor); 2) amounts owed (second most important factor); 3) length of credit history; 4) new credit; and 5) types of credit used.

If you don’t have a credit history or are in the process of repairing your credit, there are a few things you can do to build a good credit history.

--Get a secured credit card from your local bank--backed by the money you have in your account. Be sure to check that your bank will report to one of the credit reporting agencies.

--Find someone to cosign a loan for you. A friend or relative with good credit is a good choice. If you do this, make sure that you make the payments and make them on time or you will not only damage your credit but also that of the cosigner. In addition, the co-signer will become responsible for the payments.

--Get a credit card from a local bank, credit union or department store. As with the secured card, check to make sure the card issuer reports to the credit reporting agencies.

Consumer Action ( http://www.consumer-action.org/) can provide you with more information. If you wish to file a complaint, go to the Federal Trade Commission website at www.ftc.gov

For more information on managing your finances, contact your local county Extension office.