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Credit — What You Need to Know

Credit plays an important role in our lives. Without it, life gets complicated. You might even miss money-saving opportunities. For example, few can afford to buy a home or car with cash; most take out a loan to do that. Some employers run credit checks on potential employees as a way to screen them, especially if they are handling cash or working with sensitive customer information.

What Is Credit and Why Do I Need It?

Credit is buying today and paying later, by a specified date. Lending institutions and credit card companies will consider you credit worthy if you can demonstrate a history of routinely paying back borrowed money on the date it is due; less so, if you occasionally pay back borrowed money on the date it is due. The cost to use credit is in the form of an interest rate charged against the amount of borrowed money you owe the creditor.

How you use credit reflects how you manage your money. You will qualify for the best rates on loans and credit cards when you are considered credit worthy, or considered most likely to pay back borrowed money on time, every month. The opposite is true if you are considered less credit worthy, or less likely to pay back borrowed money on time, every month.

Why Do I Need Credit?

People usually use their good credit to:

• Buy large, expensive items, such as a car or appliance
• Finance an education
• Buy a house
• Purchase items online 

Having credit is important for several other reasons. Employers, landlords, utilities, and insurance companies may want to look at your credit as well. Here is why:

Employers sometimes view job applicants’ credit reports as a screening tool to:

• Confirm a person’s identity
• Determine a person’s future job performance; employers may consider a person responsible with money likely to also be responsible while on the job
• Determine if a person’s debt payments would require too much take-home pay and cause financial hardship
• Take precaution when jobs require employees to use cash or confidential information 

Landlords and utility companies need to know if you will pay your bills on time. Your credit report shows whether or not you routinely pay your bills on time.

Insurance companies may view your credit to help predict if you will file a claim. Sounds odd? Car insurance companies find that people who manage their money well tend to get in fewer accidents and take better care of their health and home. Insurance companies view your credit information to decide if they will insure you and if you will be able to pay your monthly premium.

Get and Read Your Credit Report Every Year

Your credit report is a snapshot on how you manage your money—how timely you pay your bills and the amount of your debt, if any.

What Kind of Information Is on my Credit Report?

• Identifying Information: your name, address, date of birth, and social security number.

• Credit Information: all the financial institutions that have approved you for credit, and for how much; and whether you have paid back borrowed money on time, every month.

• Public Record Information: charge-offs, foreclosures, and bankruptcies.

• Inquiries: a list of financial institutions that have requested your credit report to determine whether or not to approve you for credit.

Like regularly checking the oil in your car as part of maintaining it, you need to regularly check your credit as a way to maintain it. Reading your credit report should become an annual “to-do.” Here are three good reasons to do that:

• Look for errors, such as late payments or a collection notice, that could negatively affect your credit.
• Look for credit activity you didn’t authorize, which could be a sign of identity theft.
• Stay informed on the type of information that creditors can view about you.

How to Correct Credit Report Errors

If errors appear on your credit report, you have the right to have them corrected at no charge to you. The credit report itself will provide information on how to correct errors. Instructions on how to do that may be listed under “How to file a dispute” located at the end of your credit report. You will have to provide evidence, such as a copy of a canceled check as proof of payment, that supports your request to fix an error.

If a credit-reporting agency refuses to correct information you believe is in error, initiate another “dispute.” If the credit card company still does not correct the error, you have the right to insert a written explanation of the error into your credit report. You may want to contact your state’s attorney general’s office or the National Foundation for Credit Counseling (NFCC)  for assistance. If you believe your identity has been compromised, in that you notice credit activity on your credit report that you know you didn’t authorize, see the section on reporting identity theft.

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