Knowledge Hoop

Credit is a significant factor in building wealth.  The truth of the matter is people without credit or with poor credit pay more for basic services (e.g., home mortgages, auto loans and insurance.)  Additionally, it’s important to know that no credit is the equivalent of poor credit.  That being said, whether you use it or not, if you want to build wealth, you need credit.  To ensure we’re on the same page, I’d like to introduce three key terms:  credit, credit reports, and credit scores.

Credit is the ability to buy now with a promise to pay later.  According to the Federal Trade Commission (FTC), if you’ve ever applied for a loan, credit card, insurance, or job, you have a credit report.  Your credit report is similar to a report card; it conveys a story to creditors.  It shows whether you’ve been a conscientious consumer, if you honor your credit agreements, and whether or not you’re carrying too much debt.  In today’s economy, credit is more important now than ever before.  Not only will it prevent you from being able to purchase or rent the home you desire, it can also prevent you from obtaining the job you want.  If you’ve never reviewed your credit report, there’s no time like the present.  Each year, consumers qualify for a free credit report from the three major credit bureaus.  To request your free credit reports, please visit www.annualcreditreport.com .

If you have a credit report, you have a credit score.  In an effort to ensure objectivity, many creditors use credit scores to assess an applicant’s credit worthiness.  A credit score is a numeric value that ranks an individual according to their credit history at a given point in time.  Credit scores typically range from 400 to 850 – the higher, the better.  Although obtaining your credit score from the three credit bureaus is not free, it’s worth the investment.  You can obtain your credit score from Experian, one of the three major credit bureaus, by visiting www.freecreditscore.com .  Because the information in your credit report may vary, you should obtain your credit score from all three major credit bureaus.

If you’re credit challenged, the following steps will help you improve your credit score:

1.  Pay Your Bills on Time.  Creditors do not report your account as late to the credit bureaus until your account is 31 days past due.  Because we now have the ability to pay our bills online, many creditors have eliminated the grace period for late fees.  For example, if your credit card bill is due on June 1, most creditors will assess a late fee if your payment does not post to your account by that day.  Although you may incur a late fee, your account will not be reported as late to the credit bureau until it’s 31 days past due.
2. Keep credit card balances below 50% of your approved credit limit.  Your credit score factors in how much credit you use.  In essence, just because you have it doesn’t mean you have to use it.  If you can’t pay off your balance at the end of the month, keep your balances low.
3. Pay outstanding judgments.  If you have debts that are not in good standing, it’s important to make arrangements and pay them.  As you develop a plan to pay outstanding debts, you should focus on the most recently reported first.  You should also take an opportunity to request settlements.  Most creditors will accept settlements on bad debts.  As you work with a creditor on a potential settlement, try to settle the account for 50-60% of the outstanding balance, and make sure you obtain the terms of the settlement agreement in writing and honor them.

Restoring credit takes time, but it’s worth it.  Proverbs 22:1 states, “A good name is more desirable than great riches; to be esteemed is better than silver and gold.”  If you desire to build wealth for future generations, it begins with striving to maintain your credit worthiness.  For more information on how to restore your credit, please consider the book, Rags to Riches.