Everyone knows the importance of a good credit rating. A good credit rating allows consumers to have credit cards, purchase large items over a period of time, diminishes security deposits, and can even reduce the cost of auto insurance.
But what is a credit rating and how can a frugal consumer maintain one?
Not everyone has an official credit rating. If you have not purchased anything requiring monthly payments, if you are a young adult with your first job, if you have always paid cash for everything, you may not have a credit rating. This isn’t necessarily a bad thing; it just means that the rating companies don’t have enough data to rate your credit.
Credit ratings are established when notes about your consistency in making payments on time purchases is sent to rating agencies. There are three big ones: Equifax, Experian and Transunion. They are not, however, the only reporting agencies.
It is a good idea to know your credit rating and to check it once a year. Because of the importance of having a good credit rating, the federal government in the United States determined that everyone should have the opportunity to receive a free report once a year. The official website for checking your credit is www.anualcreditreport.com. Alternatively, you can write to each of the big three and receive an individual report from each of them. Do not subscribe to one of the reporting services that checks your rating monthly. Each time your credit is checked, your rating goes down slightly. Furthermore, those services charge a monthly fee, adding another bill to your list of things that are paid out each month. This also diminishes your rating.
The best way to maintain a good credit rating is to pay your bills on time, and to return your public library books. Keeping up with your obligations as a consumer maintains your good standing in the world. Believe it or not, libraries report patrons who keep loaned material past its due date, and/or do not pay their library fines.
Your personal credit score is based on a combination of factors: How many and what kinds of payments do you make monthly? How much of your income is left after you pay your monthly bills? If you are one of the many people who are left wondering how to buy groceries after paying the bills, chances are you will not have a good credit rating, even if you are conscientious about your obligations.
If you have no credit rating at all, an easy way to establish credit is to apply for a small store credit card, charge one or two small items you would have purchased anyway, and pay them off in two or three months. Be very sure you make at least the minimum payment each month.
If you have had too much credit, have had student loans that have gone into default, or have otherwise had a situation where you were unable to meet your obligations, it may take some time and some work to re-establish your credit. Here are the basic steps for doing this:
1. Obtain a job or jobs that bring in more money than your basic needs. This is essential. It is not possible to repair credit without resources.
2. Get your free credit report. Go through it for errors or forgotten bills. This is a great tool when through adverse life changes records have been lost. It is also a way of checking to see if you have been a victim of identity theft.
3. Even if you cannot pay off right away, contact all of your creditors. Let them in on your plan for recovery.
4. Set up a reasonable plan of repayment, and stick to it. Leave yourself some resources for emergencies and unexpected expenses. They are going to happen.
5. Stay away from Credit Repair agencies. Many of them are scams, and will only add to your debt load. Do use the tools listed at http://www.federalreserve.gov/Pubs/creditscore/default.htm . If you are not a citizen of the United States, consult your own countries resources in this regard.
6. Celebrate each payoff with something inexpensive-like marking a red line through that creditor or adding that sum to the payments being made to another creditor. Do NOT spend money or add to your credit burden. If you are pretty much debt free, start a savings account.
7. When you have cleared off all the old debts, when you have a year’s income in the bank, when your monthly income from your primary source exceeds your monthly bills and grocery requirements by a decent margin, you may then quit the secondary job or relax and celebrate a little by eating out or taking a small vacation. Just remember: It was a long, hard road getting out of debt and improving that credit score. You don’t want to have to travel that way twice!