Establishing credit is a great deal like establishing a reputation. Ben Franklin said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.” Establishing credit, whether a consumer is just beginning, or starting over, can be daunting. However, we have seen that with a little knowledge and a few simple steps a consumer’s credit may be established in short order.
The first step in the consumer’s journey is to check your credit report. The credit report is the reputation that a consumer has built over time by those “many good deeds”; timely payments on credit cards, car loans, mortgages and student loans; payment of rent or utility bills; responsible management of a checking account. These items are all a point of reference for a credit report. Credit reports are provided by Credit Bureaus.
The most common credit bureaus are Experian, TransUnion and Equifax. Consumers should check their credit history on a regular basis. Our firm recommends checking with each of the bureaus once each year for a total of three reviews annually. The check is free and is available from AnnualCreditReport.com.
A FICO score is also an important consideration in a consumer’s credit reputation. FICO obtains its data from the credit bureaus and then uses five key factors to determine a consumer’s credit score: 35 percent of the score comes from payment history, 30 percent from how much available credit is being utilized, 15 percent from the length of an individual’s credit history, 10 percent from new credit and 10 percent from the consumer’s credit mix. FICO scores range from 300 to 850: the higher the number the better the reputation.
Credit, like a good reputation, should not be abused. Use a credit card to purchase items that are part of day-to-day living expenses: gas, groceries and the occasional meal out. Home cooking is always the best!
However, a credit card should not be charged to the limit, and it should be paid in full each month. Timely payments also build a strong credit reputation. Payment history is 35 percent of the FICO score. A single late payment can create a big drop in a consumer’s credit score.
Reputation is proven by an individual’s responses to a variety of circumstances. This is also the case with a credit score. A variety of creditors builds a stronger credit score. A personal loan, an automobile loan and a student loan are all opportunities to build a strong credit score. And yes, we make these recommendations to our clients in helping their children establish a good credit reputation.