Credit is an unavoidable part of society, affecting every major buying decision in our lives. Your credit report determines whether or not you can secure reasonable interest rates on things such as a car loan, credit card or home mortgage. A good credit score can mean buying a bigger house at a lower price. It can even influence your ability to enter into an apartment lease agreement or get a job.

Having good credit allows you to borrow more money at better interest rates. This proves particularly influential when applying for large loans like a home mortgage or small business loan. Many potential employers also look at credit reports as a means of determining how responsible an applicant is. Bad credit can work against you in tremendous ways. Securing loans at reasonable interest rates can prove extremely challenging or impossible. Late payments and high balances on accounts are primary factors damaging credit, but even things like unpaid medical bills or having a number of new accounts all at once can affect your credit negatively.

Often, having no credit can be as detrimental as, or worse than, damaged credit. Without a credit history, lenders do not have an adequate indication of what kind of credit risk you may be and thus, may not wish to extend you credit or a loan. If they do extend credit, it is likely that your credit line will be minimal to start with.

Take the time to develop your credit history. Within one year, by creating and maintaining active accounts, you can demonstrate that you are a reasonable risk to a lender. Here are a few tips to establishing credit:

1. Open a checking and/or savings account at your credit union. A checking and/or savings account is crucial in proving to creditors that you can handle money. If possible, set up overdraft protection for your checking account and monitor all your accounts closely.
2. Borrow good credit. One of the best ways to get started establishing credit is to have a family member with strong credit add you as an authorized user on one of their active credit accounts. You do not even have to use the account and the activity will, nonetheless, be associated with your credit history.
3. Borrow against savings. As you venture into the world of credit you will encounter two basic forms of loans, secured and unsecured. A secured loan is backed by assets belonging to the borrower, which decreases the risk to the lender. Ask your credit union for a small loan secured by money you have deposited into a savings account or a CD (Certificate of Deposit) and make sure they report the transaction. You don’t have to spend the money, just borrow it and pay it back over several months. It will cost you a few dollars because the interest from your savings/CD will likely be less than the loan interest, but it is well worth the price.
4. Take out a small installment loan. You may need a co-signer (someone who becomes responsible if you don’t make the payment), but an installment loan is another good start. With this loan, you borrow all of the money at once and then pay it back over a set period of time at a set interest rate. These loans are often secured by the products you are purchasing (if you don’t pay the loan, the lender can repossess the property) or by the co-signer.
5. Begin with a single credit card. A credit card can help establish your credit history. Just be sure to use it sparingly and repay it in full on time. Start with a single credit card, as every inquiry into your credit history from potential card issuers can have a negative impact.
6. Pay attention to your payments. Two more ways to establish solid credit are to make timely payments and to pay more than the minimum amount required. A late payment can be very damaging to your credit. Better not to take out loans and credit cards if you can’t meet these two basic criteria.

FICO scores range from as low as 300 (worst) to as high as 850 (best).

650 or above - very good credit history. You will get credit more quickly, for higher amounts and at better rates.

625 – 650 - good credit history. Lenders will take a closer look at you for risks, which slows down the process and the loans you secure may be smaller with higher rates.

620 or lower - less favorable credit history. May prevent you from getting reasonable interest rates and sometimes from getting credit entirely.

What is Credit Scoring?

Your credit history information is collected to help creditors and lenders estimate the risk of loaning you money. Using a statistical program, they calculate your credit score to determine your risk. The most common scoring system is called FICO. What’s In Your FICO Score?

FICO scores are calculated from various data in your credit report, broken down into five categories. The percentages in the chart below, provided by myFICO.com, reflect how important each of the categories is in determining your score.

How Fico Scores are Calculated

• Payment History 35%
• Amounts Owed 30%
• Length of Credit History 15%
• Types of Credit Used 10%
• New Credit 10%

Seek credit counseling as soon as financial problems arise. To locate a low-cost or free credit counseling service near you, call 1-800-388- 2227 or visit nfcc.org. For one-on-one counseling, call 1-800- 680-DEBT, or visit myvesta.org.

If you feel that you are the victim of unfair interest rate charges, late fees, other penalties or deceptive marketing, and the credit card company fails to address your complaint, file a complaint with your state Attorney General’s office and the national Office of the Comptroller of the Currency:

• Visit: occ.treaS.gov/customer. htm
• Email: Customer.Assistance@occ.treas.gov
• Call: 1-800-613-6743 (Monday – Friday 9:00 am – 3:30 pm CST)
• Fax: 1-713-336-4301

Credit card offers are everywhere these days and it is important to choose a credit card wisely rather than accept the first offer solicited to you, because there will be many. Here are important considerations when choosing a credit card:

Annual Fee. The best annual fee is no annual fee. Read the fine print of the credit agreement, as some cards are dubious and may not initiate the annual fee until the second year of membership.

Annual Percentage Rate (APR) and Post-Introductory Rate. This is one of the easiest ways to compare costs among credit cards. However, beware of offers with an introductory rate of zero percent. Often, these low or no interest rate introductory APRs skyrocket into high APRs after a few months. APR will have less of an effect on someone that pays their balance in full every month versus someone who carries a balance.

Fixed vs. Variable Rates. Interest rates on credit cards can be fixed or variable. Generally, fixed are safer, especially in current times. Fixed rate cards have a fixed APR of the finance charge. A variable rate card takes the prime rate, which varies, plus an added percentage determined by the credit card issuer. For variable rate cards, Truth in Lending laws only require that a lender provide a minimum of 15 days notice before raising the rate.

Penalty APR. This is a much higher, punitive interest rate that the credit card issuer may apply to cardholders that have exceeded their credit limit, made one or more late payments or are in “bad standing.” Penalty APRs are on average, about 52% higher than regular APRs. Avoid them like the plague.

Rewards or Perks. Many credit cards now offer incentives like airline miles, cash back bonuses and discounted products and services for use of the card. Look for cards that offer rewards or perks that you will use and consider how many points you’ll realistically gain from the card. You still want to give primary consideration to card policies, fees and APR. Watch for fees built in to support rewards programs, as someone has to pay for them.

Grace Period. Generally 21 to 30 days, it will allow you to avoid finance charges if you pay your bill before the due date. Some cards do not offer a grace period, imposing finance charges the day you charge an item. A longer grace period will allow you to save money if you pay your balance monthly.

Fraud Protection. Some cards offer a specialized protection service for a monthly fee, while others provide free fraud and unauthorized spending protection, as well as travel insurance and other similar services. Fraud protection is important to have and you will want to know exactly how much coverage you have as well as the cost of such protection.

Sources: myfico.com; ftc.gov; yourcredit.com; cccsintl.org