I recently read this article about Tom Pavelka, an Ohio resident with a near-perfect credit score (848/850). Although Mr. Pavelka and his wife have a very comfortable household income, some of Mr. Pavelka's credit tips are worth reading because they apply to consumers of all incomes.
Included within the article were links to two other articles -- one is about credit repair and the other is about ten "secrets" about credit. I will address all three articles after the jump.
Let's start with a look at Mr. Pavelka's credit tips. Many of his tips seem to be related to WHAT to buy, not how to use credit. While some of these bits of advice are valid, they're outside the scope of this post.
In my opinon, the three best pieces of advice Mr. Pavelka provides are:
1. Never charge something without having something to show for it.
2. Never spend money without knowing when you can repay it.
3. Pay your bills on time.
These three rules will help anyone use credit responsibly. The first rule is a no-brainer -- using credit to buy consumable items leaves you with nothing to show for your expenditure. However, using credit to buy household items or clothing guarantees that you are getting lasting use out of an item on which you may be paying interest.
It is also very important to pay bills on time. A large part of credit reporting is based on whether you make timely bill payments.
This leads me to my next topic -- five ways to improve your credit.
This article does a great job of explaining the basics of the five ways to improve your credit, so I will do my best to simply summarize the rule and add something new.
1. Organize your bills and your budget so that you pay everything on time or early.
This rule ties back into Mr. Pavelka's third rule -- a large part of your credit score will be determined by your ability to make timely payments on your existing debts and recurring bills. If you build your budget around paying bills on time, you will be developing a good habit that should also help build your credit score.
2. If you negotiate down a debt, get a written promise
Negotiating a debt down can help you repay some debts that you'd otherwise be forced to default on. However, you need to make sure that your creditor agrees to report the debt as "paying as agreed." If you pay the debt off for a lesser amount than what is owed, make sure to get a written waiver of the remaining amount due. It is not unusual for companies to sell "settled" debt to third-party debt purchasers who will continue to pursue you for debts that you've already paid off.
3. Closing accounts can hurt your credit score.
Don't simply close old credit card accounts because you have paid off the balance. Maintaining a small monthly balance and making payments in full each month will demonstrate your responsible use of credit. Even though the average person has seven credit card accounts, there is no reason to have this many. You can do just fine with two credit cards if they are used responsibly.
4. If you can't otherwise get credit, try a secured card.
I don't normally recommend secured credit cards. However, if you have no credit or very poor credit, a secured card can be a reliable way to build a credit history. Secured cards generally require that you pay a deposit which is equivalent to your credit limit. Pay close attention to annual fees, which can eat up a large chunk of your available credit.
5. Check your credit and dispute any errors.
Nobody will dispute the errors on your credit report but you. If a creditor is reporting a debt that is over seven years old, then you need to challenge that trade line. If debt that was paid off is still being reported as unpaid, then you need to challenge that trade line.
If there are accounts on your credit report that you know you did not open, then you need to challenge those trade lines and possibly file a fraud alert -- checking your credit is one way to spot identity theft.
Finally, let's take a look at this article, which claims to provide ten secrets that your credit bureau won't tell you. I think the entire thing is worth reading. However, here are a few tidbits that I found to be the most compelling.
1. You have more than one credit score.
Each bureau has its own score. Your TransUnion number is probably different than the ones given to you by Equifax and Experian. Also, the FICO score is only one type of score. There are multiple types of credit scores with multiple types of grading systems.
2. There are more than three credit bureaus.
ChexSystems, to name one, is a credit bureau just like TransUnion. It is governed by the Fair Credit Reporting Act. What does ChexSystems do? It reports on a consumer's use of his or her checking accounts. You can find a complete list of credit reporting bureaus here.
3. Even though local laws are changing, bad credit can keep you from getting jobs.
There's not much to say about this one. Bad credit can demonstrate irresponsiblity or an inability to plan ahead. Since your credit report does not provide information about the life circumstances that led to a bad score, overcoming these presumptions can be rather difficult.