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Front Page » December 17, 2009 » Business Journal » Credit gone bad?
Published 1,739 days ago

Credit gone bad?


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As the economy begins to rebound, so, too, are many of the individuals who were negatively affected by its decline. Be it because of layoffs or investments that steeply declined in value, many people across the country took significant financial hits in 2009.

It's easy to fall into the trap that got many people in trouble in the first place: easy credit that allows a borrower to take so much cash from a lender that they have a hard time paying it back, it at all.

As the calendar gets set to turn into a new year, lots of people are seeking ways to better manage their financial affairs in the hopes they'll be more prepared should another recession rear its ugly head in the future. One of the best ways to prepare is to manage credit properly, which can be done in a number of ways.

Know why your rating is going up or down. Many people are aware they have a credit score, they just aren't aware what that score is or how it's determined. Credit bureaus such as Experian and Equifax can provide individuals with their credit score, but that's only half the process. The other half is why that score is what it is. The two most influential factors in a credit score are an individual's payment history and how much of their available credit that individual uses.

Paying on time is arguably the most important part of achieving and maintaining a good credit score. A single missed payment can have a longterm negative impact on an individual's credit score. Individuals can set up automatic payments so they never forget to pay a bill. Even a momentary bout of forgetfulness will not matter when missing a payment. All that will show up on the credit report is a missed payment, not the reasons for it, no matter how valid or innocent those reasons are.

How much of an individual's available credit is being used also has a strong impact on that person's credit score. In general, it's best to keep credit use to less than 30 percent of available credit, and many financial advisors actually suggest keeping it closer to 10 percent. An individual should never "max out" a credit card unless that individual is certain he or she can pay the balance in full by the time the next bill is due. Establishing a 10 percent threshold can allow individuals to avoid the massive credit debts many before them have suffered through.

Consider a secured credit card. Secured credit cars require careful and meticulous research on the borrower's part, but can be an effective means of restoring a credit rating for those with a bad or even minimal credit history. A secured credit card requires the borrower to deposit money with a lender, and the credit limit is typically the amount of money deposited. Be careful, however, as certain secured lenders have hidden fees and interest rates that can be quite large. Those who are already a member or eligible for membership in a credit union should look into a secured credit card from their union, as credit unions are typically trustworthy sources for secured cards.

Think outside the card. A credit rating isn't entirely based on how an individual handles his or her credit card payments. Installment loans, if paid on time, can be a boon to an individual's credit rating. Installment loans can include auto loans, personal loans or even mortgages. Those with relatively short credit histories might find it difficult to secure an installment loan, especially one with a good interest rate. However, individuals who have had credit for a year or so and have made their payments on time while carrying a responsible balance might want to consider applying for an installment loan in the future. Demonstrating an ability to make loan payments on a monthly basis can only provide a significant boost to a credit rating, helping individuals secure bigger loans, such as a mortgage, down the road.

Ask for help. While it might seem as though a co-signer would not be ideal for someone hoping to boost their credit rating, it actually will, so long as the individual makes the payments on time and pays off the loan responsibly. Parents often co-sign loans for their children, allowing children to use their high credit rating as a stepping stone to establish their own credit history. However, borrowers must realize that missing a payment on a loan that has a co-signer negatively impacts the co-signer's credit score as well as their own. That reality emphasizes the importance of paying on time and, for the co-signer, making a wise decision as for whom it is they're willing to co-sign a loan for.

Open a bank account. Lenders want to see stability before handing out credit. That's especially true in the current economy, when lenders who made irresponsible loans to unqualified borrowers either ended up out of business or in need of a bailout. Individuals hoping to restore a credit rating or build a credit history should open a checking and savings account as a means of illustrating to lenders that they are stable and worthy of the trust and responsibility that comes with credit.

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December 17, 2009
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