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Financial Education for Everyone

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January 9, 2009

As anyone who's applied for a new loan lately knows, if you don't have a gold-plated credit history, you may have a tough time borrowing. And even many 24-karat consumers are being turned down. Lenders have responded to their own difficulty accessing credit – as well as increasing customer defaults – by tightening lending standards.

Now more than ever you need to closely monitor your credit scores and avoid behaviors that might trigger higher interest rates, cancelled accounts or reduced credit limits, any of which can lower scores.

A few precautions:

Check credit reports and scores. The three major credit bureaus (Equifax, Experian and TransUnion) track your credit history and compile credit reports showing a snapshot of your credit behavior. They also use the information to create three-digit credit scores that help lenders (and potential landlords and employers) determine if you're a good credit risk.

It's vital to know what information appears in your credit reports since errors, omissions and fraudulent activities could seriously impact your score. In a recent Visa Inc. cardholder survey, nearly half said they check their score once a year or more and 18 percent every few years. But alarmingly, 30 percent have never checked their credit score. That's the financial equivalent of driving with your eyes shut.

You can order one free credit report per year from each bureau at www.annualcreditreport.com. You can also purchase copies of your credit scores for about $15 each at www.myfico.com.

You can also estimate your score using the free FICO Score Estimator at What's My Score, a financial literacy program run by Visa (www.whatsmyscore.org/estimator.) The site also features tips on repairing damaged or unestablished credit scores.

Know what credit scores measure. The Visa survey also uncovered some misconceptions about factors impacting your credit score: Although the vast majority correctly identified bill payment history, current level of debt and interest rates on current debt as measurable factors, around a quarter incorrectly believed that race, gender and national origin also play a role.

Basically, five factors determine your credit score: payment history, amount owed, length of credit history, newly opened credit accounts, and types of credit used. Scores take into consideration both positive and negative information in each category, but may weigh the factors differently depending on your individual circumstances.

Read your mail. Account terms, including interest rates, credit limits and payment deadlines, are subject to change, pending notification. So always read any correspondence from lenders or retailers where you have accounts, even if it looks like junk mail. To be safe, you can check your monthly statements or call each lender to verify terms.

A few additional tips:

  • Pay bills on time.
  • Pay at least the minimum amount due on credit cards and other loans.
  • If you can't make a payment, contact the lender before you're past due to work out a compromise.
  • Don't use more than 30 percent of any one card's available credit, or 30 percent of your overall available credit from all cards.
  • Be cautious about opening or closing accounts. Some experts recommend occasionally charging small amounts to older, unused accounts so they'll remain open, thereby not reducing your total available credit.
  • Unpaid medical bills can get lost in the shuffle, so track all bills and check your insurance statements carefully for errors or underpayments.

It's essential to know where your credit stands today so you can correct any mishaps before they impact your ability to borrow at favorable terms tomorrow.


This article is intended to provide general information and should not be considered health, legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.