As a young adult there will undoubtedly come a time when you will ask yourself the question, "Why didn't I learn about how to manage my credit during high school or college?" After all, you learned the formula to accurately calculate the area of a parallelogram with the given vertices (something you use every day in your career now, right!?). Regardless of what you did or did not learn during your school years, the unfortunately reality is that most graduates enter the real world with very little knowledge about the very important subject of credit.
Learning how to achieve and maintain great credit is a lifelong endeavor which requires hard work and consistency. However, the rewards of achieving stellar credit scores can be truly tremendous. While you cannot learn everything there is to know about your credit in a single article, here are 20 important credit facts which you need to know sooner rather than later as you embark upon (or continue) your journey into adulthood.
Fact #1: You have 3 credit reports.
A common credit myth which refuses to die is the false idea that you have only 1 credit report. However, you actually have 3 credit reports, 1 from each of the 3 credit reporting agencies - Equifax, TransUnion, and Experian.
Fact #2: You have hundreds of credit scores.
While you only have 3 credit reports, there are actually hundreds of different scoring models that can be used to calculate your credit scores depending upon who is checking them and for what purpose. Most lenders will use some version of the FICO credit score if you are applying for a loan or credit card. Although the idea that you have hundreds of scores may feel overwhelming the good news is that all of your credit scores are based upon the same information - the items appearing on your credit reports. Focus on maintaining clean credit reports and your scores should remain in good shape.
Fact #3: It is your job to check your own credit reports.
The Fair Credit Reporting Act (FCRA) gives you the right to expect accurate credit reports. Yet it is ultimately up to you to make sure that your credit reports remain error-free. No one else is going to monitor your credit on your behalf.
Fact #4: Checking your credit reports once is not enough.
Your credit reports are not static but are ever evolving and changing with new information. Therefore, checking your credit reports once is not going to be nearly sufficient. You can check your credit reports for free each year at AnnualCreditReport.com. You can also check your credit reports and scores more often (sometimes for a fee) through credit monitoring services online such as those found at GreatCredit101.com.
Fact #5: When credit errors occur, you have rights.
If you do discover errors on your credit reports the FCRA gives you the right to dispute those errors with the credit reporting agencies. You can submit a dispute on your own or with the help of a professional. CLICK HERE for a behind the scenes look at how the dispute process really works.
Fact #6: Credit cards are not the enemy.
Many people, especially Millennials, are anti-credit card. After all, you have likely seen your parents or another person you care about misuse credit cards and possibly fighting for years to overcome poor credit card spending habits. However, credit cards can be a very powerful tool which can help you to build excellent credit when they are used properly, not to mention they offer unparalleled fraud protections to help you protect your hard earned money. Treat credit cards as if they were debit cards (never charging more than you can afford to pay off in a given month) and you will be off to a great start in the credit card management department.
Fact #7: Credit card debt is not your friend.
While the plastic in your wallet may not be inherently evil, credit card debt is a predicament which you should strictly avoid. Not only can excessive credit card debt land you in a pile of financial troubles, revolving credit card debt from month to month is going to take a toll on your credit scores as well. If you wish to earn great credit then it is essential to develop the habit of paying off your credit card balances monthly.
Fact #8: Late payments are a big deal.
From a credit scoring perspective it is a mistake to shrug off the occasional late payment as if it were insignificant. Late payments are actually a pretty big deal. Since a massive 35% of your FICO credit scores are based upon the payment history on your credit reports it will be virtually impossible for you to ever earn the great credit scores you desire unless you permanently squash the late payment habit. On the flip side, if your credit reports show a history of on-time payments then you will be well on your way to credit score greatness.
Fact #9: Collection accounts can really hurt you.
If late payments can negatively impact your credit scores, collection accounts can cause a credit score train wreck. When a collection account finds its way onto your credit reports you are virtually guaranteed to see your credit scores start sliding in a downward direction.
Fact #10: Medical collections can prevent you from qualifying for a loan.
Even medical collections can harm your credit, often severely. It is true that many loan underwriters might not require you to pay off medical collections if your credit scores are high enough to qualify for a loan (leading some to incorrectly believe that medical collection do not matter). However, the presence of the medical collections on your credit reports is most likely going to damage your credit scores. As a result, while the balances of your smaller medical collection may not matter all that much when you apply for a loan their presence on your credit reports is very likely to be a problem.
Fact #11: Paying off collection accounts does not undo the damage.
When most consumers set out to start repairing their own credit they will often begin by trying to settle old collection accounts. Unfortunately, the bad news is that paying off collection accounts generally will not do much (if anything) to improve your credit scores when you are applying for a loan. Most lenders still use an older version of the FICO credit scoring model. These older FICO models care much more about the presence of collection accounts than the balances of those collection accounts. Therefore, a collection account with a $0 balance and a collection account with a $5,000 balance will have nearly the same negative impact upon your FICO credit scores.
Fact #12: Debt collectors have to follow the rules.
Even if you owe an outstanding debt, 3rd party debt collectors are still bound to follow the Fair Debt Collection Practices Act (FDCPA) in their collection attempts. Among other protections afforded to you this law prevents debt collectors from lying to you, harassing you, or revealing information about you to others when trying to collection a debt. Click here for more information about HOPE4USA's free collection letter review service.
Fact #13: Applying for too much credit can spell trouble for your credit scores.
You may find it unbelievable, but the mere action of applying for credit can potentially damage your credit scores. Credit scoring models are created by taking massive numbers of credit reports and comparing trends which lead to late payments and defaults. The stats clearly show that people who apply for credit more often are bigger credit risks for lenders to take on as new customers. As a result, if you want to achieve stellar credit scores you should make a habit of only applying for credit when you really need it.
Fact #14: Retail store credit cards can be dangerous to your credit scores.
Remember the tip above that says you should not apply for credit unless you really need something? Well, applying for a retail store card to save 15% off your order does not really qualify as a "need." Not only can the extra inquiry hurt your credit when you open a new retail store credit card, the new account itself can also lower your average age of accounts and potentially damage your credit scores even more. Finally, these types of cards are notorious for having low limits which makes it easy to run up a high debt to limit ratio - another dangerous prospect for your credit scores.
Fact #15: Co-signing can be the kiss of death for your credit.
At some point in your adult life you will probably be asked to co-sign for a friend or family member. However, whether you are co-signing for a loan, a credit card, or even an apartment you are risking your personal credit health by doing so. When you co-sign for a credit obligation you are equally responsible for the debt, just as if the account belonged to you and you alone. If the account is ever paid late it could cause serious damage to your credit scores.
Fact #16: Loved ones can add you as an authorized user to an existing credit card account.
For the sake of your loved ones, it is not a good idea to ask them to co-sign for you either. However, a loved one can help you to establish better credit for yourself without little to no risk to their own credit by adding you as an authorized user to an existing credit card account. Once the authorized user account shows up on your credit reports (assuming that the account has never been paid late and has a low or $0 balance) you might begin to see a positive impact upon your credit scores immediately.
Fact #17: Maintaining credit independence is important.
Even after you are married it is still important to keep your credit obligations separate from your spouse. The idea that you are required to co-sign for accounts with your husband or wife is completely false. In fact, unless both of your incomes are needed to qualify for a larger loan like a mortgage it is best to continue to maintain credit independence even after tying the knot.
Fact #18: Payment history is not the only thing that matters.
While your payment history certainly is the most important factor considered in your credit scores (35% of your FICO scores to be exact) there are other factors which impact your credit scores as well. The age of your credit accounts, the mix of accounts on your credit, your credit card balances, the number of accounts with balances appearing on your credit reports, and how often your credit reports have been pulled lately are just a few of the other factors considered in the calculation of your credit scores. CLICK HERE for more information about how your credit scores are calculated.
Fact #19: You have the right to work on credit problems by yourself.
Bad credit happens to good people all the time. Identity theft, credit reporting mistakes, job loss, illness, divorce, and other unfortunate circumstances can easily lead to credit problems. Your credit problems might have even come about because you made money management mistakes and perhaps bit off a little more than you could chew financially. However, whatever the reason for your credit problems you do have the right to try fix them on your own if you wish. There is no legal requirement for you to hire a professional to help you (just like you are not required to hire an attorney to represent you in court.) If a credit repair company makes you feel like you have to hire someone else to work on your credit you are probably dealing with a scam.
Fact #20: You have the right to hire professional help.
Just because you have the right to give DIY credit repair a try does not mean doing so is the best idea. Dealing with creditors, debt collectors, the credit reporting agencies, and building a credit recovery plan on your own can be an extremely difficult process to successfully navigate without professional guidance. Thankfully, you absolutely have the legal right to hire a credit expert to assist you in your credit restoration efforts if you are tired of trying to recover all on your own. CLICK HERE to schedule a no-obligation credit analysis with a HOPE4USA credit expert today.
Remember, the reason your credit matters so much is due to the fact that the condition of your credit reports and/or your credit scores is going to have an impact upon your life over and over again. In fact, whenever you purchase a vehicle, apply for a place to rent, take out a mortgage loan, apply for auto insurance, open a new utility account, and perhaps even when you apply for a job your credit will probably be reviewed by companies deciding whether or not they wish to do business with you or hire you. Bad credit can lead to some very bad problems.
Thankfully, if you have made credit mistakes in the past you can absolutely make a u-turn today and start heading back in the right direction. With the right plan, a little time, and a bit of hard work you can overcome credit problems and set out to earn great credit in the future. It may sound like a cheesy marketing line, but the truth is that there really is no such thing as a HOPEless credit situation.
Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.