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Living Independently: Establishing Credit1
Mary N. Harrison2Americans live in a credit-oriented society, therefore, it is important for most adults to establish credit in case it is needed or wanted. Most people find it necessary to use credit for major purchases, such as a car or home. Credit can also be used as a convenience, instead of carrying cash. As a general rule, however, it is best to pay for things when they are bought.
Establishing credit or documenting your credit worthiness before you need it is wise. People who always pay cash may find it hard to get credit, especially during an emergency or for a large amount. For example, suppose your car breaks down and you do not have the money available to get it fixed. Without credit, you have a problem! Other types of emergencies can also create a need for credit.
To help reduce the risk of extending credit, most merchants use the services of a credit bureau or credit reporting agency. There is a file on almost everyone throughout the nation who has used credit, which includes information such as:
Your credit report is the history of your credit use. Using a complex, standardized formula this information is used to determine your credit score score which predicts the likelihood that you can or will be able to pay any additional indebtedness. Since the information contained in these records is so important, there are Federal laws requiring it to be accurate, up-to-date, and available to people who legally have a use for it. These laws are designed to protect the consumer.
- Whom you work for, how long you've worked there, and the amount of your income
- Whom you owe and how much
- How punctual you are in making your payments
- Information about your personal life, such as whether you are married, divorced or have children to support
- Any legal action against you that may affect your ability to pay your bills
If you are denied credit because of information from a credit reporting agency, you must be provided the name and address of the agency. If you request it, you have the right to receive a copy of the information contained in your file so you can be sure it is accurate.
Several ways exist to establish credit. However, the first thing that you must do is apply for it. This is done by filling out an application. Read the application carefully. It states the terms of the credit for which you are applying. Terms and costs vary.
To get credit, you must have an income. No one will give you credit if you have no way to repay it. If you do not have a job and you get your money from someone else, for example, your parents or a husband or wife, that person will probably have to co-sign the contract with you. The co-signer is considered a partner in your debt obligation and will have to repay the debt if you do not.
The following information will be asked on your credit application:
If you have never used credit you do not have a credit record. When married couples use credit, both have a credit report in their names. Any good or bad credit is recorded in both names. If either or both have credit in their individual names only, they each have an individual credit report and a separate score based on their individual records. It is important to have a separate credit report and score if one of the couple has a poor credit history and the other has a good record. In that case the person with the good score could get credit in his/her name only.
- Where you work and how much you make.
- How long you have worked at your present job. Some companies will extend credit only to people who have worked at their job for six months or longer. Other companies do not require this.
- How much you owe and to whom. If you owe several different debts you may not make enough money to take on another bill.
- How many people you support.
Young people finishing school and taking a new job may find credit hard to get because they have not yet established a work record. This happens more often for students leaving or finishing high school than for college students.
People being released from prison also face special problems in obtaining credit. If they have been away from society for a relatively short time period, had a good credit record before going into prison, and have a job upon release, they can probably obtain credit. Others, however, will have to prove their credit worthiness, but it can be done. It will just take time.
If you are denied credit at one place, apply for it at another. Different retailers have different standards and requirements. However, do not apply for credit at several different places at the same time. When merchants check your records located at a credit reporting agency, they will learn about the other applications. They may think you are planning to use credit from all of these sources, which could overload your ability to pay. This misconception could result in you being denied credit at all of the places.
There are several different ways that you can try to establish credit in your own name. Consider the following options and select the one that best fits your needs
- Apply for credit with a merchant you know, possibly a small business where you know the owner. Charge small amounts and pay in full at the end of each month.
- Use a co-signer. This method is especially helpful for young people who are getting credit for the first time. To help young people qualify for bank credit cards, some banks offer special agreements where parents serve as co-signers for their children. The card and account is issued in the youth's name and he or she is responsible for it. If the youth pays each bill promptly for six months to a year, the parent's name is removed and the account is put in the youth's name only. However, if the youth does not pay or proves to be irresponsible, the parent or co-signer is required to pay the bills and the poor performance is recorded in the credit report of both people.
People with a poor credit rating may be required to have a co-signer before credit will be extended to them. Anyone who co-signs an agreement is legally responsible for the bill if it is not paid.
To be sure you have a good repayment record:
- Deposit a specific amount of money in an account at a bank or financial institution and use the account as collateral for a loan or credit card. This is called a secured credit card or loan. Make sure all payments are received on time and for the amount owed. This will establish a credit repayment record for you.
- Ask for only the amount of credit you are able to pay for. Keep the credit ceilings, or maximum you can charge low.
- Give accurate and complete information on your applications. Don't try to hide a debt. Leaving out information or making a false statement can get you into trouble.
- Pay the amount due promptly.
- If an unexpected emergency arises that makes it impossible for you to pay your bill, contact the creditor promptly and in person if possible. Explain the situation and work out an alternate schedule that is agreeable with your creditor. Do not try to hide, the creditor will think you are trying to avoid paying your debt.
Cautions
Having credit available reduces your resistance to buying. People buy more when they use credit. Be sure you can pay for something before you buy it.Do not plan to spend every penny that you make. Remember, you will have unexpected expenses, and possibly an emergency. It's very important to have savings available for unexpected expenses.
Before signing, read the credit contract carefully. If you do not understand it, wait and get someone you trust to read it with you. Be sure all blanks are filled in or marked through on both your copy and the creditor's copy. Never leave blank spaces to be filled in later. Get a copy of everything you sign, at the time that you sign it. Keep these copies in a safe place. Be sure to read the contract for details, such as what happens if a payment is late. Will you be charged a late fee or will the total amount become due?
Before filling out a credit application ask about the cost of using credit. This cost should be expressed as annual percentage rate (APR). If possible compare the APR charged by different merchants or lenders.
Keep copies of all charge receipts. Check your bills carefully when you first receive them. If an error is found, report it in writing and keep a copy of the letter.
Make payments promptly so that they will reach the creditor on or before the due date. Keep a record of your payments.
Remember: Credit availability is very important in the U.S. economy. Your credit report and score are a key to your financial future.
References
For more information on using credit, request the following publications from your County Extension Office:FCS 5001 Correcting Errors on Bills
FCS 5002 Consumer Credit Contracts
FCS 5003 Credit Card Regulations
FCS 5022 Consumer Cards
Footnotes
1. This document is Fact Sheet FCS 5034, a series of the Department of Family, Youth and Community Sciences, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Publication date: July 1999. First published: July 1988. Revised: January 2006. Please visit the EDIS Web site at http://edis ifas.ufl.edu2. Mary N. Harrison, professor, Consumer Education, Department of Family, Youth and Community Sciences, Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville FL 32611.
The Institute of Food and Agricultural Sciences (IFAS) is an Equal Opportunity Institution authorized to provide research, educational information and other services only to individuals and institutions that function with non-discrimination with respect to race, creed, color, religion, age, disability, sex, sexual orientation, marital status, national origin, political opinions or affiliations. For more information on obtaining other extension publications, contact your county Cooperative Extension service.
U.S. Department of Agriculture, Cooperative Extension Service, University of Florida, IFAS, Florida A. & M. University Cooperative Extension Program, and Boards of County Commissioners Cooperating. Larry Arrington, Dean.
Copyright Information
This document is copyrighted by the University of Florida, Institute of Food and Agricultural Sciences (UF/IFAS) for the people of the State of Florida. UF/IFAS retains all rights under all conventions, but permits free reproduction by all agents and offices of the Cooperative Extension Service and the people of the State of Florida. Permission is granted to others to use these materials in part or in full for educational purposes, provided that full credit is given to the UF/IFAS, citing the publication, its source, and date of publication.