- 1. How do I build a strong credit rating?
Pay your bills on time, especially mortgage or rent
payments. Apart from extreme circumstances like bankruptcy
or tax liens, nothing has the impact of late payments. Anything more
than 30 days late will hurt you. Never let a payment of any kind --
even phone or utility bills -- get 90 days past due.
Limit your debt. If you absolutely must carry a
balance on any accounts, keep that balance as low as possible.
Bumping up against your credit limit on one or more cards is a
signal to many lenders that you're not a good debt manager.
Be careful not to apply for too much credit in a short
amount of time. Multiple requests for your credit history
(not including requests by you to check your file) will reduce your
credit score. If you are hunting around for good loan rates, assume
that every time you give your Social Security number to a lender or
credit card company, they will order a credit history.
Check your credit history for errors. This is
especially important if you will soon be requesting a time-dependent
loan, like a mortgage. All three national credit reporting agencies
-- Equifax (1-800-685-1111), Experian (1-888-567-8688), and
Transunion (1-800 888-4213) -- have consumer ordering information on
their websites. You can also order reports from Truecredit.com
(1-800-493-2392).
- 2. That all sounds great, but I've already made some
mistakes. How do I clear up a negative credit history?
The bad news is that past credit problems like late bill payments
or accounts referred to collection will stay on your credit report.
The good news, however, is that they affect your credit rating less
as time passes. You can lessen the sting of your less-than-angelic
history by habitually paying current bills on time. Your report
changes gradually as new information is added to your bank and
credit bureau files, and credit issuers give more weight to your
recent bill-paying history. A clean record for the last year or two
can make a real difference.
- 3. Should I borrow from my 401(k), or a similar
retirement plan, to pay back loans?
In general, this is a bad idea. Think about it this way: Your
current situation may seem like a nightmare, but imagine facing the
same set of circumstances in old age, without sufficient retirement
savings. Sound fun?
Sure, you'll make your loan payments back into your own
retirement savings (and, make no mistake, this is a good thing!),
but while the money is out of the plan, it stops working for you,
delaying compound gains. Also, if you change jobs, you might have to
pay off the loan in a hurry, or face a permanent dent in your
tax-sheltered retirement savings plus some penalties for good
measure.
Finally, if your budget can accommodate these loan payments back
into your plan, why mess with your nest egg in the first place? If
at all possible, dig deeper for another option. Pre-tax savings
plans are just such a powerful tool, and saving for retirement is so
much easier if you start early and leave the money alone.
- 4. Do I really have to have a credit card? I've had
trouble controlling my spending in the past, and so prefer not to
carry one.
If you've been burned by credit card debt and are reluctant to
carry a card again, consider setting up automatic monthly charges to
your card's account for regular, recurring bills such as newspaper
subscriptions or your phone. Then lock the card away where it's not
a temptation. That way you can start building a credit history.
Although they have their dangers, credit cards are still the
easiest way to establish a credit history. It can be difficult to
get a loan anywhere else -- including a mortgage -- without having
documented credit history. You don't have to use your cards much to
improve your credit rating, or incur interest charges by carrying a
balance. Banks and other lending institutions, especially those that
don't know you as a long-time customer, just want some evidence that
you can handle credit responsibly. The sooner you get started the
better, especially if you are currently renting but plan to buy a
house someday.
- 5. Is it better to carry a gold card? Does it look better
on my credit history?
While platinum and gold cards often offer special perks such as
frequent flyer miles for dollars spent, additional travel insurance,
and automatic rental auto insurance, these perks may not be worth
the annual fees -- often in the range of $85-$150 -- you'll have to
cough up to carry the card. If you're thinking about signing up for
one of these cards, realistically consider if the rewards correspond
to your lifestyle, and if they outweigh the cost of what is probably
a substantial annual fee.
Be wary of platinum or gold card offers that promise to improve
your credit rating or gain you approval for major credit cards you
wouldn't otherwise get. Often the only additional card you might get
is a secured credit card that requires a substantial security
deposit with a bank. In addition, many of these credit-card
purveyors do not report to credit bureaus as they promise, and their
cards seldom help secure lines of credit with other creditors.
Such 'gold' and 'platinum' credit-card offers usually are
promoted through television or newspaper advertisements, direct
mail, or telephone solicitations using automatic dialing machines
and recorded messages. Show them you're the wiser by not responding
to such ads, or consider taking the necessary steps to opt out by
calling 1-888-5-OPTOUT.
- 6. Should I declare bankruptcy?
Although it may be tempting to declare bankruptcy if you are
feeling overwhelmed by financial obligations you just can't meet,
bankruptcy should only be considered as a last resort. Contrary to
what you may have heard, bankruptcy does not wipe clean your credit
history, nor does it provide a fresh start.
Consider that:
- Bankruptcy stays on your credit report for up to ten years.
- If you declare bankruptcy, you will have difficulty getting future credit such as a mortgage loan.
- After bankruptcy, any credit you do get will probably cost you more in terms of interest rates and fees charged.
- Alimony, child support, and most taxes survive bankruptcy and will still be owed.
Before you consider bankruptcy, try to work out a payment plan with
your creditors, or set up a debt-repayment program by contacting an
NFCC-member financial help center at 1-800-388-2227.
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