Credit Series:

Establishing Credit

Dr. Jo Turner, CFP

Professor, Family and Consumer Economics

Do you ever need to buy now and pay later? To do this you must have a good credit rating.  If you have a good one, keep it. This credit series will help you learn to do that.

There is a lot more to getting and keeping credit than you might think.  It begins when you apply for credit.   

Credit Application 

When you apply for credit, you fill out a form.  The facts you are asked to give on this form are very general.  The lender wants to know such things as:

• Your name
• Name of your employer
• Your salary
• Years worked for present employer
• Home address and how long you have lived there
• If you own or rent your residence
• Debts
• Credit references
• Bank references

To decide if you will get credit, the lender looks for three things, often known as three C's of credit:

• Character -- Are you known to be honest, reliable and responsible?
• Capital -- What to you own that has value?
• Capacity -- What is your income now, and what will it be in the future?

Credit Investigation

The lender will use the facts on your credit application to check up on you.  One of the main things will be a list of your debts.  Each of your creditors will be asked questions about your credit.  They will be asked about:

• The kind of credit account you have
• The amount of money you owe
• The amount you charge monthly
• The amount of your payments
• How quickly you make payments
• Credit sources you listed when you applied for credit with them

Your bank may be called and asked if you have an account there and of course, credit departments where you have credit will be called.  These facts will give a good picture of the kind of credit customer you are.  You no doubt can see the need to keep your credit accounts in good shape.

As you can tell, a lot can be learned from such a check-up.  In fact, there is almost no way to hide anything bad.  A creditor can check up on you without outside help.  But most will use a credit bureau.

Credit Bureau

Credit bureaus collect, store, and sell information on people who use credit.  Credit bureaus have two major job functions: (1) to gather facts about a person and (2) to say if your statements on a credit application are true.  You may wonder where credit bureaus get their facts.  Some are from courthouse records and the records of other credit bureaus. If you have used credit in the past few years, there is a good chance that you are on file at the local credit bureau.

The services of a credit bureau are used by those who give credit and by employers. No one can get your credit record except members of the credit bureau.  Members pay dues each year, and they may also have to pay a fee for each credit check they make.  There are about 3,000 credit bureaus in the United States.  Most of them belong to Associated Credit Bureaus, Inc.  This association helps credit bureaus in different towns work together.

Your Credit Record

Your credit record is a history of your use of credit. Your credit record is kept in a file by the local credit bureau.  It includes all the information you have given about yourself to stores, banks and other places where you have applied for credit.  It also includes facts your creditors have given to the credit bureau about you.  The creditors give such facts as:

• How often you use credit
• What you use credit for
• How quickly you pay your bills

Credit records also contain facts from courthouse files such as divorce, bankruptcy records, and judgments for not paying debts.  Information in your credit record has a "file life" assigned to it.  Computer programs make it easy to delete old information.  When facts become 7 years old they are automatically deleted from your file except for bankruptcy.  Bankruptcy has a file life of 10 years.

Your Credit Rating -- Guard it with care

A good credit record is something everyone should have, even just for an emergency.  Many people have money problems that are beyond their control.  A long illness or a job loss can dry up your bank accounts.  But you can and should protect your credit rating even then.

When you can't pay your bills on time, contact your creditors before your accounts are declared overdue.  You and the creditor may be able to work out an agreement that will suit you both.  Creditors do not wish to punish you.  They only want to know that their money will be repaid.

In the twenty-first century, credit is more important than ever before.  You need to know how to get the privilege of using credit.  But more important, you must know how to keep that privilege. In the long run, it is your choice whether you will get to keep using credit.  You do this by the way you live up to your credit obligations. Your credit rating depends upon you.