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Managing Your Credit: The Good, the Bad, and the Ugly (Financial Friday #3)


Landon's back for a third installment of his Financial Friday series!

After tackling student loans and student loan debt earlier this month, he's sharing his knowledge about credit this week. Do you know your credit score? Do you have good credit? Here's a non-banker's guide to everything credit-related.

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Hi, blog readers. It's Natalie's husband, Landon, again. As a banker, I deal with people's credit every single day, and it's awful when I have to decline a house or car loan for an otherwise nice and awesome person because of his or her credit. (Unfortunately, in banking, being nice and/or awesome doesn't get your the home of your dreams.) I'm going to walk you step-by-step through basic credit, so you won't be that person.

What is a credit score?
It is a way for a business or a lender to see how responsible you are financially when it comes to paying your bills. Basically, if you pay your bills--on time and every single month--you'll have, at least, passable credit. Average to good credit will get you better rates on loans, companies will waive security deposit requirements, and you won't get denied for some jobs.

What comprises a credit score?
The primary things that make up your credit score are your ability to pay, your punctuality in paying, and the types of credit you have, and the volume of credit you have.

The most important factors are the first two: actually paying your bills and paying them on time. The things that will hurt your credit score the most are being late on your bills more than thirty days, as well as having accounts in default (which means they aren't being paid at all).

What are the types of credit?
There are two main types:
1) term loans. This is like a car loan; you pay on a certain schedule (x number of dollars per month) with an end date. This type of loan usually has a fixed interest rate for the entire schedule.
2) revolving lines. This is like a credit card. You have a credit limit--you can charge up to that limit, and anytime you pay the line down, you can charge up to the limit again.

How is my credit score calculated?
The credit bureaus keep the exact calculations secret, but we do know that the four factors (see above) are crucial to the final determination of score.

A good score is anything above 680. 740 or above will get you approve for just about anything you need. The max is 850, but it is rare to see anything about 800.

Anything below 660, and especially below 640, will get you declined for most loans. However, when your score is between 640 and 660, it is easy to recover by doing a few small things, like paying down credit card balances.

How can I have good credit?
Pay your loans, and pay them on time. No exceptions.

Have at least one term loan and one revolving line of credit open at all times. (The older the revolving lines are, the better.)

Also, one more thing on those credit cards: you shouldn't ever utilize more than 30% of the available limit if you really want a good score. So, if you have a $1000 credit limit, you shouldn't ever owe more than $300 in one billing cycle.

I don't have any credit. What can I do?
The best place to start is with a secured credit card. Most banks offer these, and they operate just like an regular credit card. The only difference is that a secured card is backed by your savings account; you must keep an amount equal to the minimum balance in that account.

You can also put your utility bills in your name. Consider being the primary account holder for your water and power bills.

I have bad credit. Help!
The first thing you need to do is pull your credit bureau report. By law, anyone can pull a report from each bureau (Equifax, Experion, and TransUnion) one time each year for free.

Once you have your report, you need to see what's late. Either pay them off as quickly as possible, or--if you think there's been a mistake or fraud--you can dispute the charges.

Establish new lines that you know you'll be able to pay off, and then pay them every single month on time.

The best friend that you have in repairing your credit is time. Your local banker will be happy to discuss your credit and steps you can take to improve it.

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Check back next week to learn about mortgages and what you can do to get your dream house!