Credit

By the end of this lesson, you should be able to:

• Discuss the proper and improper use of credit
• Obtain a credit report
• Take steps to update or correct errors in a credit report

Payments and finance charges

Many people get credit cards to pay for goods and services. If you pay the full amount you owe when your credit card bill arrives, you can avoid paying extra fees. However, if you only make the minimum payment, the interest or finance charges (the amount you pay for using credit) can build up significantly. The more money you owe on your credit card, the higher the finance charges will be.

Let's say you bought a fancy TV that costs $1,000 on a credit card with a 15 percent interest rate. Depending on how long you take to pay off your credit card balance, you could spend hundreds of dollars in interest.

To avoid getting into credit card debt, do one or more of the following:

• Pay off the cards with the highest finance charges first.
• Pay more than the minimum payment required each month, if possible.
• Use cash to make purchases if possible. Use a credit card only in emergencies or when necessary, such as for car rental.
• If you use a credit card, pay the full amount each month instead of letting finance charges accrue.
• Replace higher-rate credit cards with lower-rate ones. Be sure to read and evaluate credit card offers carefully to make sure you are getting the best deal. Often, low introductory offers allow you time to pay off your credit card balances. However, make sure that a 0 percent interest rate doesn't climb to 19 percent or higher in a few months.

The interest rate can make a significant difference in how much you pay for an item. If you purchased a $1,000 item and paid $30 each month at various interest rates, here's what could happen.

Tips for protecting your credit cards

Protect your credit cards and account numbers to prevent unauthorized use by taking these steps:

• Don't give your card number over the phone unless you have initiated the call. Make sure you're giving it to a reputable company or organization.
• Never lend your credit card to anyone.
• Never give your credit card number to someone for a purpose you do not understand.
• Keep a record—in a safe place separate from your cards—of your account numbers, expiration dates, and the phone numbers of each issuer. This will enable you to report a loss quickly.
• Limit the number of credit cards you have, and cancel any inactive accounts. Carry only the cards you think you'll use.
• If carbon paper is used, make sure you get the carbon or that it gets destroyed.
• When you sign a sales slip, draw a line through any blank spaces above the Total line to keep other charges from being added.
• Keep your receipts to check charges when your bill arrives. You have a right to question any unfamiliar charges.
• Never leave your credit card in a purse or wallet that is unattended or in open view in a vehicle, even if the vehicle is locked.
• Before throwing them away, shred any documents and receipts that show your credit card number.
• Shred any offers of pre-approved credit cards before throwing them away.
• If you don't receive your credit card statement on time, notify the company immediately.

Credit reports and ratings

A credit report is an overview of your financial life. It lists—in great detail—information about how much you owe, any loans you have defaulted on, and late payments. It may also reveal whether you've been arrested or sued or have filed for bankruptcy. It is the content of your credit report that makes up your credit rating.

Also known as a credit score, a credit rating is a three-digit number between 300 and 800 that represents your credit risk to lenders. Your credit rating affects your ability to borrow money, obtain health insurance, and in some cases get a job. A bad credit rating can also increase the cost of using credit.

To obtain a solid credit rating, try to:

• Make all payments on time. Late payments can damage your credit rating.
• Open and responsibly maintain a checking or savings account. This shows that you have money to pay bills and that you're setting money aside for the future.
• Get a credit card, and use it only when you can comfortably repay it. To establish good credit, you need to use credit regularly. However, don't overuse it. Lenders may become concerned that you won't be able to pay your bills.
• Avoid applying for too many credit cards. Applying for several cards can hurt your credit rating.

To determine whether you have a good or poor credit rating, obtain a credit report. You are entitled to a free credit report once every 12 months, which you can obtain here. If you want to see your credit score but it has been less than 12 months since your last one, you will have to pay for it. Although some companies offer to sell you a copy of your credit report for as much as $50, basic credit reports are available for as low as $9.

You can order a credit report from one of the three major credit-reporting agencies:

• Equifax, www.equifax.com, (800) 685-1111
• Experian, www.experian.com, (888) 397-3742
• TransUnion, www.transunion.com, (800) 888-4213

Under the Fair Credit Reporting Act, anyone denied credit must be provided a free copy of their credit report if they request one. The credit bureau that provided the initial report to the company that denied credit must provide the report.

Correcting your credit report

Under the Fair Credit Reporting Act, businesses can use the information in your report to evaluate your applications for credit. You have the right to dispute any inaccurate information. Follow these steps when disputing items in your credit report.

• Clearly explain what information should be corrected.
  Contact the credit-reporting agency and tell the person you speak to what information you believe is inaccurate or should be updated. Keep copies of any correspondence you send or notes on any phone conversations. Check out the Federal Trade Commission's sample dispute letter.
• Know what to expect.
  Within 30 days, the credit-reporting agency will investigate the disputed information. If it is found to be inaccurate, the creditor involved must notify all nationwide credit-reporting agencies so your file can be corrected.
• Get the results in writing.
  If your dispute results in a change to your credit report, the credit bureau will give you the written results and a free copy of your report.
• If you can't get information removed, consider explaining.
  You have a legal right to attach a letter of explanation to your credit file. Send this explanation to the three major credit bureaus, as well as to any business that was involved. The business is obligated to include your letter in any future input to the credit bureaus.
• Businesses that guarantee to remove negative information from your credit file cannot provide such a remedy. According to the Federal Trade Commission, these so-called credit-repair companies charge anywhere from $50 to more than $1,000 and do little to nothing to improve your credit report. You can learn more about these scams on the Federal Trade Commission's website here.