Manage Your Credit

Credit is complicated. To put it simply, credit is the ability to borrow money based on promise of a future repayment. It also means a person's reputation for paying bills. There are many ways to manage your credit. You should use credit wisely, by choosing the best credit card deals and making timely payments in full. You should also strive to pay down your debt quickly and improve your credit score. Lastly, you should monitor your credit reports and correct any errors, which may improve your credit score as well.

Steps

Using Credit Wisely

1. Create a monthly budget. Before you even try to start developing credit, you need to have a budget in mind. If you don't, your credit could quickly get out of hand. So make a list of your monthly income and all your monthly expenses, and be sure that they even out. Better yet, end each month with an income surplus.
2. Find the best credit card offers. Do sufficient research before you sign up for a credit card. Remember to ask for a list of terms and conditions before signing up. In particular, look at the following:
   • The Annual Percentage Rate. This is the interest rate you will pay annually on your balances. With most credit cards, you can avoid paying interest if you pay your balance in full each month.
   • Penalty APR. If you’re late with payments, a credit card company will typically increase your APR. You should find out the rate.
   • APR for balance transfers. You can transfer debts from one credit card to another. Check whether the credit card offers a promotion 0% APR.
   • Fees. Credit cards assess many fees for cash advances, balance transfers, and late payments.
3. Know when to seek a personal loan instead. Often, personal loans are a better option than credit cards. With a personal loan, you generally will pay a lower interest rate. You also can make equal payments on a personal loan over time. With a credit card, you pay a lot upfront, which slowly decreases each month until the balance is paid off. You should choose a personal loan over a credit card for longer-term financing that you can’t pay off immediately.
   • However, you should only get a “secured” loan in a few circumstances. When you secure a loan, you pledge other property as collateral. This means that your lender can seize the property if you default.
   • Car loans are typically secured by the car itself, and home mortgages are secured by the home. These are the only two secured loans most people ever need.
4. Avoid payday loans. Payday loans are short-term loans given without a credit check. Unfortunately, payday loans charge sky high interest rates, often around 400% or more. Many payday lenders also require access to your bank account so they can withdraw the money if you don’t repay on time. You should avoid payday loans at all costs. Instead, consider the following alternatives:
   • Personal loans. You can often get these loans at a reasonable interest rate.
   • Loans from friends or family. You might be embarrassed to tell people you know that you need money, but the embarrassment is preferable to a payday loan.
   • Pay advance from your boss. Your employer might be willing to advance you a small sum of money.
5. Be wary of cash advances. You might take money from an ATM when you need cash. Look elsewhere instead. Although not as bad as payday loans, cash advances charge very high interest rates which can put you deeper into debt.
   • For example, you accrue interest immediately with a cash advance. By contrast, your credit card company usually gives you a grace period on purchase. Not so with cash advances.
6. Pay more than the minimum. By paying only the minimum, it could take years to pay off a credit card balance. You should pay more than the minimum each month to reduce the amount of interest you pay.
   • Your credit card statement should tell you how long it will take to pay off your debt if you only pay the minimum. It should also calculate how much of your repayment will be interest.
   • Generally, if you pay double the minimum, you can cut your payments in half and lower the amount that goes to interest.

Reducing Your Debt

1. Sell your possessions. Probably the easiest way to reduce debt is to sell whatever you bought with your credit card. Ask yourself if you really need the possession. If not, sell them in a Hold a Great Yard Sale or on eBay. Contribute the proceeds to your credit card balance.
2. Work a part-time job. Seek out part-time work in the evenings or on weekends. Then contribute all extra income to your debts. Before you know it, you might have paid off a huge credit card balance.
   • For example, imagine you work 15 hours a week for $10 an hour. Each week, that’s an additional $150 before taxes. Over the course of a year, you’ll have an additional $7,500. You can pay off a lot of debts working an additional 15 hours a week.
3. Consolidate debts. With debt consolidation, you pay off smaller debts by taking out a large loan which has more favorable terms, such as a lower interest rate. Debt consolidation usually frees up money that you can direct toward the your principal.
   • Generally, people consolidate debts with a personal loan. For example, you might have three credit cards with balances of $3,000, $2,500, and $2,000. You can get a personal loan for $7,500 and pay off your smaller debts.
   • You can also Reduce Debt Using a Balance Transfer to a credit card with a promotional APR. Generally, you’ll get the rate for six to eighteen months.
   • Make sure the loan you get has a lower interest rate than the debts you want to pay off. If it doesn’t, you won’t save money.
4. Set up a debt management plan. A credit counselor can help you set up a repayment plan, which may take several years to pay off. The counselor can also contact your creditors. Although they can’t get the amount you owe reduced, they can often get the creditor to waive late penalties and fees or lower the interest rate.
   • You can find a credit counselor by calling the National Foundation for Credit Counseling at 800-388-2227, or you can get started online at their website.
   • Debt management plans only work with unsecured debt, such as credit card debt, personal loans, or medical debt.
5. Consider debt settlement carefully. Debt settlement is distinct from debt management, and it is typically a worse option. With debt settlement, you stop making payments on your debts. Instead, you save up enough money to make a lump sum offer to your creditors. Often the lump sum is for 50% or less of the amount you owe. If your creditors accept the offer, they write off the remainder of your debt.
   • Because you stop making payments, your credit score tanks. Also, there’s no guarantee that your lender will agree to accept a lump sum.
   • Instead, your creditor might sue you. If they get a court judgment, they can seize assets, such as your car or home.
   • There are many debt settlement companies who can help you if you don’t like to negotiate on your own. Do thorough research, since there are many scammers out there. Make sure to get a written contract explaining price and terms, and avoid any agency that charges up-front fees.
6. Choose bankruptcy as only a last resort. Bankruptcy is an easy way to get rid of unsecured debts like credit card debt. With a Chapter 7 bankruptcy, all unsecured debts will be wiped out, allowing you to start afresh. However, a Chapter 7 bankruptcy will stay on your credit report for 10 years and make it difficult to get loans.
   • Not all bankruptcies are the same. With a Chapter 13, you can save your home and other possessions, which you might lose in a Chapter 7. Discuss your options with a Find a Bankruptcy Lawyer.

Improving Your Credit Score

1. Make timely payments. Your payment history makes up 35% of your FICO score. Late payments also incur late fees and penalties, which can snowball. If you make a $100 purchase but are late with a payment, you might incur a $25 late-payment fee and have your APR increased.
   • Set up a payment reminder. Some banks will send you an email or a text message when your payment is due.
2. Keep your balances low. You generally want to keep your balance on each card to 30-35%. This is called your “utilization,” and it makes up about 30% of your credit score.
   • For example, if you have a card with a $10,000 limit, you shouldn’t carry more than $3,500 on the card.
   • You might need to spread your balances around different cards by using a balance transfer. Alternately, you could rotate which cards you use so that no single card racks up too much in charges.
3. Avoid closing accounts. Your length of credit history is also important and makes up roughly 15% of your credit score. If you no longer use an account, consider keeping it open. Closing your accounts can negatively affect your credit score.
4. Divide your accounts when you divorce. Make sure to close all joint accounts or to remove one person’s name from the accounts so they are no longer jointly owned. You will also need to ask the judge to divide your debts.
   • Divorcees also need to establish their own credit history. However, you shouldn’t apply for cards and loans all at once. Instead, space out each credit request by at least six months.
5. Apply for credit intelligently. Each time you apply for credit, the lender will pull your credit score. This “hard pull” will reduce your credit score slightly for about a year. For that reason, you shouldn’t liberally apply for credit.
   • Instead, comparison shop and find the right loan or credit card for you. Then make one application, which will result in one inquiry. Applying for a lot of new credit suggests you are having financial problems.
   • If you’re shopping for a car loan or a mortgage, then it’s okay to have several inquiries. In fact, all inquiries made within a 30-45 day window will count as one inquiry.
6. Monitor your credit score. You can get your credit score in one of several ways. For example, you can buy it from myfico.com. However, there are other free options:
   • Contact a credit counselor or a housing counselor approved by the federal Department of Housing and Urban Development (HUD).
   • Look at your credit card statement. Sometimes, your score is reported there.
   • Visit a website that provides credit scores for free. Choose a reputable company, like Credit Karma.

Correcting Your Credit History

1. Obtain a free credit report. Each year, you can get a free copy of your credit report from each of the three national credit reporting agencies (CRAs)—Equifax, Experian, and TransUnion. You don’t have to order them individually. Instead, you can order all three at once:
   • Call 1-877-322-8228. Provide your name, address, Social Security Number, and date of birth. Your report will be mailed to you.
   • Visit annualcreditreport.com and supply the requested information. You can gain instant access to your credit report.
   • Fill out the Federal Trade Commission’s (FTC) Annual Credit Report Request form, available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Mail it to the address listed on the form.
2. Look for common errors on credit reports. Go through each item listed on your reports and highlight anything that is wrong. Some of the more common errors include the following:
   • errors made regarding your name, address, or contact information
   • accounts that don’t belong to you
   • accounts created by someone who stole your identity
   • current accounts listed as late or delinquent
   • incorrect dates
   • accounts that appear more than once with different creditors listed
   • old information that should have fallen off, such as a bankruptcy that occurred more than 10 years ago
   • erroneous account balance
   • erroneous credit limit
3. Find supporting documentation. When you contact the CRA, share any proof you have that the information is wrong. Don’t worry if you don’t have anything. However, go through your papers and try to find any supporting documents that you can.
   • For example, you might have been the victim of identity theft. You should have a copy of the police report to share.
   • If an account is improperly listed as in default, find old statements that show you have made timely payments.
4. Ask that the errors be fixed. You should contact the CRA which has the negative information. If more than one has the same incorrect information, you only need to contact one.
   • You can report online. Go to each CRAs website and look for a link to “Credit Report Disputes” or something similar.
   • You should also send a letter certified mail, return receipt requested. Hold onto the receipt, as it will serve as proof that the letter was received. The FTC has a sample letter you can use to request that the information be corrected.
5. Wait for a response. After you contact a CRA, it will investigate by contacting the entity that submitted the incorrect information (such as a bank). The reporting entity must confirm that the information is accurate. If they can’t, then it will be removed. Generally, you will hear back within 30 days.
   • You should receive a written letter explaining the results of the investigation. You’ll also receive a free credit report if a change was made.
   • You should also receive the name, address, and phone number of the entity that provided the inaccurate information.
   • You can request that the CRA send a free report to anyone who has received it within the past six months.
6. Dispute the information with the provider. If the CRA won’t make the change, you should then object directly to the entity that provided the information. The FTC has a sample letter you can use for this as well.
   • If you are still unhappy, then ask to file a statement of dispute. This is a short statement (usually 100 words) that provides context. It will be included whenever someone requests a copy of your credit report.
   • It’s best to include a statement if you were the victim of identity theft but the provider is insisting you really opened the account. You might also want to provide a statement if health issues caused financial difficulty.

Tips

• Immediately notify your bank if your credit card has been lost or stolen. That way you won't be held liable for any unauthorized charges.

Related Articles

• Work out Credit Card Charges
• Use Credit Wisely
• Build Good Credit
• Establish Credit History
• Maintain Your Credit Rating

Sources and Citations

See also

• Hire a Financial Advisor
• Discuss Finances Together in a Marriage
• Select a Property Tax Attorney
• Prepare an Emergency Fund
• Use a Robo Advisor
• Determine Adjusted Gross Income (AGI)
• Follow the Debt Snowflake Method
• Avoid the Most Common Reasons for Credit Denial
• Save Money
• Build Good Credit

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