How to establish credit; manage credit and bad ratings

Credit isn’t just convenient. It lets you take advantage of price breaks and make major purchases without waiting (and, in inflationary times, before the price goes up). Those who extend credit, however, exact interest for the use of their money. Compare lenders’ interest rates before making any commitment for a mortgage, installment purchase, or even a credit card.

Credit is granted on a lender’s confidence that the borrower will repay. Therefore, the lender usually checks your credit history with one or more of the credit bureaus that collect data about a person’s bill-paying practices and debts. These bureaus don’t rate you; they simply report what they learn from subscribing stores, banks, and credit-card issuers. They have limited responsibility for accuracy.

Most credit bureaus give a “current” or POS (positive) rating to people who pay bills within 30 days. Those who take 90 days or more will be rated “delinquent” or NEG (negative). Between those extremes there lies a gray area, called NON (nonevaluated) because individual creditors apply their own standards. Unused credit lines are considered debt because you could use them at any time. Establishing credit To establish credit you must borrow something and repay it. For those with no credit history, the best way is to set up a savings account, then take out a passbook loan with the savings acting as collateral.

Credit card companies will often let young borrowers start with an account cosigned by their parents. A cosigner may be the answer too for older people who have always paid with cash. The Equal Credit Opportunity Act sets up a special “user” category that could help women with accounts in their husbands’ names to build a credit record. Ask for an ECOA/TYPE account or loan.

Managing credit
Credit counselors think most people can afford 10 percent to 15 percent of their take-home pay, excluding mortgages, in installment debt. Over 15 percent means it’s time to cut back; over 20 percent means trouble ahead. Similarly, most banks look for a debt to-income ratio of 10 percent to 20 percent, home mortgages excluded.

Generally, avoid credit transactions under $25. Try to make credit-card purchases just after the monthly closing date, and you’ll have about 6 weeks to make the next payment. Pay promptly to avoid interest charges. Avoiding a bad credit rating If you have a backlog of debt, pay bills before the grace period ends to avoid triggering a “late” charge on the computer. Next best: pay the minimum amount by the due date. Failing that, send what you can, with a note promising more payments soon.
Federal law now requires a creditor to explain why it rejects you for a loan or a credit card. If a credit bureau was responsible, the creditor must tell you which one. That bureau must let you examine your file without fee within 30 days. For a small fee anyone can see his or her file at any time.

Get the addresses of local bureaus from your bank or department store or check the classified directory under “Credit Reporting Agencies.” Call for an appointment or ask if a copy of your file can be mailed to you. The Fair Credit Reporting Act requires all credit bureaus to reinvestigate disputed facts and to delete any that are inaccurate or unsubstantiated-or at least to include your explanation.

Lost cards
Federal law limits a cardholder’s liability to the first $50 of purchases on a lost or stolen card; most companies don’t charge that. But you must notify the issuer immediately. Some companies won’t replace a card lost twice. Special insurance is costly and generally unnecessary. Some homeowners’ insurance covers losses. Credit complaints If you think your bill is in error, write the creditor within 60 days, giving your name, address, account number, the dollar amount, and an explanation of what you think is wrong. The creditor must acknowledge your letter within 30 days.

Once you have notified a creditor of a supposed error, he cannot act to collect the disputed amount or report it as delinquent. If the dispute is not resolved within 90 days, the creditor can notify the credit bureau and other creditors. He must again notify them when the problem is resolved.