Credit is one of the more important aspects of life today. Without credit, it's becoming increasingly difficult to perform tasks that used to be quite simple... things like renting a car, or reserving a hotel room. This guide looks at what a credit score is, what effects it, options for new credit lines regardless of your credit score, and the dangers of bankruptcy.
Most people will agree that credit is one of the most important things in life. If you don’t have credit, then it seems almost impossible to get credit… and if you have bad credit, then everything that you want to buy is an uphill struggle to get payments for. Of course, if you have good credit then you’re swamped with offers for new credit cards and credit lines… everyone wants you to use their product.
In this day and age, it’s becoming increasingly harder to get by without some form of credit card. Online services may require credit cards for payment or address verification, car rental companies often want a credit card number to place a deposit on, and hotel reservations usually have to be pre-approved via credit card. If you’ve thought about getting a credit card but weren’t sure which one was for you, or if you’ve thought that no one would issue credit to you because of credit problems in the past, you’re in luck. There are credit options available to just about everyone, regardless of your credit rating.
Exactly What Is a Credit Rating, Anyway?
Your credit rating is a number that’s assigned to you by the various credit reporting agencies, based upon past and current lines of credit and the reports that they received from your creditors. Someone who always makes all of their payments on time, who has had established lines of credit for a long time, and who keeps the balance on their line of credit low will have a much higher credit score than someone who’s missed payments, defaulted on credit lines, or who keeps their lines of credit maxed out pretty much every month. Pretty much any new line of credit that you attempt to take out will first require a check of your credit score (often from two or more reporting agencies, as the score can differ from agency to agency), and from that score they’ll determine whether you’re more likely to pay on time or to miss payments.
Of course, if you have little or no established credit then you might get the raw end of the deal. If you don’t have a credit report on file with the agencies, or if your report is pretty much empty except for 1 or 2 items, then you might be withheld credit simply because the company doesn’t really know how much of a risk you are and doesn’t want to take the risk of losing money if you do end up being a big risk. Of course, other factors may come into play as well if you don’t have any real credit to speak of… college students are often given multiple credit offers within their first 2 years of school, since even though they might be a large credit risk there’s also a good chance that their parents will bail them out if they get in over their head.
Can a Credit Rating be Changed?
Obviously, the people who have good credit got it somehow. The same goes for the people with bad credit, and those in between. Just about every payment that’s made or missed to credit cards, bank loans, and even distance-learning courses has the potential to make or break your credit. Good credit can very quickly turn bad if you start missing payments from one or several sources… and once your credit score has dropped, it can be difficult to bring it back up again.
That’s not saying, of course, that it’s impossible. Your credit report is very adaptable, and several different items are taken into account when calculating your score. You can check it yourself, either by running a credit check or by contacting one of the credit reporting agencies and requesting a copy of your most recent report… a law passed in 2004 allows you to check it for free once a year. You can also request a free report from one of several online outlets, but beware: in signing up for free access to your report, you’re often enrolled in a credit monitoring service (with a free trial) which can be very difficult to unsubscribe from before they charge you for the monitoring.
If you do have a low credit score, there are several things that you can do to improve it. First of all, work on paying off any outstanding debts that you might have… even if your score was dropped by bad payment habits in the past, once the debt is paid off it won’t continue to drag your score down. Make regular, on time payments on any open lines of credit that you might have, and if you can afford it try to open up a new line of credit with a small credit limit. Though it will take time, having a lot of positive reports coming in on your file now will start to repair the damage done then. Negative marks on your credit report can stay in place for up to seven years… if you’re trying to reestablish your credit by getting positive reports coming in, it still may take several years before a major increase in your score occurs.
What About Bankruptcy?
Bankruptcy is meant to be a last resort for individuals and businesses. Depending upon your tax status and the severity of your debts, there are several different bankruptcy options available… some that are meant to help businesses to restructure, some that are designed to ease the pressure of debt on individuals, and even some that pretty much suspend all of the debt and make you pay it back through the court system. Unless it’s a truly desperate situation, however, bankruptcy shouldn’t even be considered; not only does it drag your debts through the legal system, but most creditors won’t (or in some cases, can’t) touch you until your bankruptcy has been discharged by the court (and many still won’t deal with you for at least 2-3 years afterward.) Additionally, legislation has been passed on several occasions to make bankruptcies more difficult to execute and to make the penalties of bankruptcy more severe in order to prevent people from seeing it as simply an “easy out” from their debts.
So What Options Are Available for Credit?
Good Credit
If you have good credit, then you’re very fortunate. Take care in choosing new lines of credit, because you don’t want anything to mess up your score. Shop around for credit cards, weighing the options and benefits among them; compare interest rates, additional fees, and any perks that the cards might have. In most cases, you should avoid any cards that charge processing fees or monthly and annual fees; with your credit rating, you can almost certainly find a card out there that offers as good or better terms without the fees. Check with your local banks, as they may be able to offer you a better rate than a national competitor. If you’re in the market for a loan or other credit line, shop around at different banks to make sure that you get the lowest rates and the best terms. Doing business with a bank where you have a checking account and a savings account can also have advantages; many banks offer lower rates and more options to customers that they already have dealings with. Don’t let loyalty to one institution cause you to miss out on better terms across town, however.
Fair Credit
If you have what they call “fair” credit, meaning that it’s not the best but it’s not really that bad either, then you should still have a variety of credit options available to you. You might get turned down for some of the more high-class credit cards and loan officers might look over your paperwork a little harder, but you’re not in that bad of a spot. The best thing that you can do is to try to find some really good interest rates and submit your application. You might not get the card or credit line, but there’s still a pretty good chance that you will. The interest rate might be adjusted a little bit, meaning that you’ll have to pay a little more than the initial rate that you applied for, but it still shouldn’t be too bad. Make regular payments and try to always pay more than the minimum amount… this will help to keep your balance low, which will help you to improve your credit score. If your score improves to the point where you can get a better rate elsewhere, then take it. Transfer your balance over to the new credit line or card, and then either keep your old line open for emergencies or request that it be closed down. (A credit line that’s closed at the customer’s request looks a lot better on a credit report than one that’s closed by the creditor.)
Poor or Bad Credit
Of course, if you have poor or bad credit then your options may be a bit more limited. You might want to consider opening a checking account and getting a check card or debit card (which draws funds from your checking account instead of being a credit line.) Depending upon your credit rating, though, you might find yourself having trouble even opening a checking account… if that’s the case, you might want to consider getting a prepaid credit card. These cards allow you to “charge” them, or put money onto them, and then can be used wherever the card could normally be used. They come in a variety of different styles and can either be single-charge or rechargeable; the rechargeable cards would probably be your best bet. You also might use an internet credit card search to find other cards that you can apply for. Usually these cards will charge high interest rates and monthly fees, as well as having most of the credit of the card charged full of processing fees when it’s issued… you have to pay the fees down before you can use the card for much. This ensures the company that you’re going to make payments before you start charging everything, and is one way that many of the cards are able to be issued to people with bad credit. You also might look into getting a secured card, which either requires a deposit or an account be opened with the issuing bank; it still costs money, but it’s not money paid toward fees. The deposit simply makes sure that the bank has the money on hand for any charges you might make, just in case you don’t pay it off.
Keeping Your Credit in Check
Whether you have good or bad credit, you should always keep in mind that it can be better. Pay balances on time, pay more than the minimum, and try to keep your balances low so that your credit rating will keep increasing. If you don’t think that you’ll be able to afford to do so, you might want to reconsider getting a credit card or credit line until you can… after all, credit isn’t free money, it’s just a loan that you’ve got to pay with interest. The lower your balance is, the less interest you’ll pay. The less interest you pay, the more money you’ll have for other things… and that’s always a good thing.