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Building and Managing Your Credit

Last month we talked about how to borrow wisely. There’s a step that comes before borrowing, and that’s building your credit so that companies will loan to you.

Your credit worthiness is based on your credit score. How do you figure out what your current credit score is, and why should you care?

What your credit score is based on:
Your credit score is a number that comes from an analysis of your credit reports from several agencies. The major credit reporting bureaus are Experian, TransUnion, and Equifax. Each of these agencies tracks your credit and payment history, from outstanding loans (including credit cards), your payment record, your late payment record, the amount of debt you have relative to your income, your job stability and other factors. They tabulate all that information and provide it in a credit report to you, or to those want to examine your credit worthiness.

You are entitled to a yearly free copy of your credit report from each of the three main credit reporting agencies. These can be obtained at at no charge, once every 12 months.

Your credit score is calculated usually by another agency; they look at your complete information (provided by the bureaus) and determine your credit risk and worthiness. The FICO score is the most common, and it may be used in conjunction with other information or scores. This one final number is the distillation of your entire financial situation.

The FICO score number ranges from 300 (bad credit) to 850 (fabulous credit). Most credit-worthy people have a score in the 700s. The lowest score that is still credit-worthy is 640, but that has been trending up to sometimes as high as 740 for some companies and in some situations.

You may get a copy of your credit score, but there is a small charge for it, usually around $10. You can get this as an add-on to your credit report request, also at

Why should you care what your credit score is?
Obviously, if you ever want to purchase something on credit or take a loan, your credit score will determine whether you can get a company to approve your loan. This is true for buying a home and taking out a mortgage, getting a credit card, and buying a car. Realize, though, that your credit score and credit reports will also affect the interest rate you receive from your lender, the amount your insurance costs you, your ability to rent a place to live, and even to get a job. Yes, they all look at your credit reports.

You will want to review your credit reports to make sure all the information included is correct. Your credit report includes: Companies that have extended credit to you; the amounts of your loans and credit limits; your payment history; who has requested a copy of your credit report; your employment history and your addresses. Make sure all items are correct. Things to look out for: Did a credit card company make a mistake about when you made your payments? Is your address correct? Are the credit accounts listed ones you took out? Has someone requested your credit report that you don’t recognize?

Examining your credit reports is key to preventing identity theft—and identity theft is a very painful and quick way to send your credit score plummeting.

How to build your credit score:
If your credit score is on the low end, don’t despair. A credit score is a living thing, always changing depending on your actions, and those actions can cause your credit score to steadily improve. Some suggestions:

  • Get a credit card: Even if you can’t qualify for a regular credit card, take out a secured credit card (you deposit an amount of money to be used for your credit line), and choose one that reports to all three credit bureaus.
  • Take out a small personal loan: Your credit score goes up if you show you can handle different kinds of credit, from a credit card to actual loans. You may already have a student loan or a car loan; but if not, get a small personal loan (from a company that reports to the three credit bureaus) and pay it off reliably.
  • Pay your bills on time: They all get reported to the credit bureaus. Try setting up automatic payments if you have trouble remembering.
  • Pay down your loans, especially your credit cards: Make your payments regularly, and get your loan balance below 10-30% of your credit limit. Try to have an account or two where you owe nothing.
  • Know your credit limits and keep your credit cards active: Make sure you are familiar with your credit card and loan terms, and that your credit card’s credit limit is reported accurately in your credit report. Use your credit cards once in a while (and paying them off that month) so that all your credit (and good credit behavior) continues to get reported to the credit bureaus.
  • Manage your late payments or debts that went to collection: If you’re normally a good customer, ask the company to erase that one late payment record. See if you can “re-age” your account by making steady payments for a determined period of time. Dispute items marked as “collection” if that’s not what happened.

What not to do:

  • Make late payments, or skip payments.
  • Ask a creditor to lower your credit limit.
  • Transfer balances between creditors.
  • Apply for more credit if you don’t need it.

Remember that repairing and improving your credit score, and your ability to get a loan, will take time. The exact amount of time depends on what your specific financial situation has been—if you’ve had delinquencies or bankruptcy, it will take longer.

But be patient and keep at it—a good credit score is achievable for everyone!

Questions? Just stop by any PayDayHawaii location for more information on any of these topics.

You can also now follow us on Twitter at @PayDayHawaii.

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