Editorial Policy

6 credit tips you may not have learned in school

Erica Sandberg

June 26, 2015

QHi Erica,

I think my question is more of a rant against the system. How can people be expected to have good scores when they don’t know how and have never been taught in school? Not even in college — and I was a nursing major. Personally, I did some things with my credit that I now know is wrong, like applying for many cards at one time. But it’s not like it’s written anywhere not to do that! Why should we all be punished for a system that’s unclear? –Zoe

ADear Zoe,

Regrettably, consumer finance is not a strong focus in many American schools and universities today. I certainly think it should be, especially at the high school level. At the very least, teaching the basics of household budgeting and the credit and banking system is a good idea. There are some wonderful organizations that are advocating for this type of financial literacy to be integrated into primary and secondary level curriculum, such as the JumpStart Coalition. If you’ve got the time, use your passion to get involved.

Meanwhile, it is the responsibility of every adult to discover the best way to manage their own money and to learn how to use credit tools effectively. Along the way, mistakes will be made, but that’s not necessarily a bad thing, and it’s certainly not punishment. Ask Erica

In fact, errors can be invaluable learning opportunities. Spend too much in a month and you’ll come home to an empty refrigerator. Use a credit card to supplement your paychecks to feed your growling stomach, and in a few weeks, you’ll receive a bill that might be difficult to repay. At that stage you can connect the dots: “If I blow all my cash in the beginning of the month, I will run short. If I charge what I can’t afford, the relief will be temporary, and I’ll be in a bigger mess later.” Eventually you’ll change, making fewer uncomfortable and expensive mistakes.

To stay out of credit trouble, this is what you need to know:

  1. Learn to budget. Before you do anything, you need to know how to make you are bringing in more than you spend. How do you do this? Develop a workable budget and begin saving for the unexpected. Without these two skills, you will be constantly scrambling.
  2. Credit reports record your borrowing activity. There are three major consumer credit reporting agencies in the U.S. — TransUnion, Equifax and Experian. Lenders and other companies send them information about you, from your application history, your open and closed credit accounts, the amount you currently owe and your payment pattern. The agencies put all that data into reports that businesses can access to see what kind of borrower you are. I’m going to tell you how to access those reports in a minute.
  3. Credit scores rate your activity. There are many credit scores, but all take the financial data from your credit report and plug it into an algorithm to produce a number that lenders can use to make quick, objective decisions. The FICO scoring model is the most common, and it ranges from 300 to 850, with 850 as the best. To create a great score, just develop a long history of using credit, pay on time and keep debt low, because the combination comprises 80 percent of the score. Using a variety of credit instruments and keeping credit applications to a minimum are also factors, but together are only 20 percent of the score.
  4. It’s up to you to monitor your reports, scores and statements. At least once a year, get your credit reports for free from AnnualCreditReport.com and check them for accuracy. Ideally, pull one report every four months, alternating throughout the year. Dispute any errors. Knowing what your scores are is important too, particularly before applying for new credit. You can buy them from MyFICO.com for about $20 per report. Always read your billing statements carefully. You’ll want to catch any errors fast, so you can clear them up before they appear on your credit reports and are factored into your scores.
  5. Credit cards are payment tools for what you can afford. Only charge when you have the money to pay the bill on time and in full. It really is that simple. If you don’t, finance fees will be applied, which can be very expensive as interest compounds. That means that interest is charged on debts already increased by the fees. The higher the rate (called the APR, or annual percent rate) the more costly it becomes.
  6. Loans are for what you can’t afford (but can afford the payments). Few people have enough funds in the bank to pay for the entire cost of a college education, house or vehicle. That’s where a loan comes in. You borrow a fixed amount with interest built in. The monthly payments should be well within your budgetary parameters.

As you can see, these are not complicated subjects. Almost everyone can master them!

Got a question for Erica? Send her an email.