Credit Reports: Annual Check-Up Time!

What do you call an annual health check-up for your credit? A credit report! If you have ever used a credit card in your name or borrowed a loan from a financial institution, you have credit history. Your credit history shows whether you can be trusted with borrowing money and paying it back.

Your credit history gets filed at three bureaus: Equifax, Experian, and TransUnion. Whenever you apply for a new loan or credit card, the company that is offering the loan or credit card will check your credit with one, two, or all three bureaus. That is why you need to make sure your credit history is accurate. How do you check your credit history? Through a credit report!

Every twelve months, you are entitled to request your credit report at no charge from each bureau. Notice I said each bureau. You can request all three bureaus at the same time or you can view each report at different times in the year. If you are about to get a new loan, such as a mortgage, you may want to check all three before you apply. But if you are just doing a routine check-up, you could request one bureau first, the next one in four months, and the last one in another four months. It’s almost like getting three reports each year!

What are some of the things to check on your credit report?

  • Payment History. Does the report show that you made payments late, even though you were on-time? Paying on-time will tell future lenders if you are dependable when paying back borrowed money.
  • Available Credit. How high is your credit limit, and are the amounts of current balances listed properly? Contrary to popular belief, having too much credit, even if not being used, is a bad thing because it makes borrowing any more money a risk factor. From the lender’s perspective, there might come a day when you max out all your credit cards and then can’t pay them back.
  • Accounts. Are all the accounts listed correctly? Have you closed unnecessary accounts that you no longer use? Nowadays with identity theft and stolen credit cards, it’s of utmost importance to review your credit report carefully. If anything appears incorrect, contact the credit reporting bureaus.

Credit reports sometimes get confused with credit scores. A credit score is generated from your credit history, but acts more like a quick rating. A credit report goes into greater detail about your credit activity. Compare it to a friend asking what score you got on a test versus going over the actual test questions and mark-ups. Although the credit score is not typically noted on your credit report, some credit card companies are now offering free access to credit score monitoring as an added benefit for cardholders.

Why the need for three credit bureaus instead of one? There are times when your information doesn’t get captured by one of the credit bureaus. Each bureau also weighs certain types of credit differently, so your credit score could alter slightly from one bureau to the next. Regardless, it’s a good way to check one against the other, instead of getting all of your information from one source.

Just as you visit the doctor for an annual check-up, do your finances a favor by getting a copy of your credit report. It’s free!

Homework: Request and review your credit report by visiting www.annualcreditreport.com. How would you rate your own creditworthiness?

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Credit Card FAQs

Whether you already have a credit card or are thinking about getting one, it’s time to get acquainted. Here’s what you should know.

What is a credit card?

A credit card allows you to borrow money to make purchases and then pay back later. How much you can borrow is based on your credit, or your trustworthiness to pay back the money. There is also a time limit to pay back the money before interest starts to multiply on the original amount borrowed.

Why use credit cards?

Credit cards carry several advantages:

  • Use credit cards in place of cash, which can be bulky in your wallet.
  • Build and maintain credit history. Mortgages and other loans will often check how well you handled past payments. Did you pay on-time?
  • Earn perks like travel miles or shopping points, and sometimes even cash back, with certain credit cards.

What are some key costs of using a credit card?

  • Finance Charges – Do you carry a balance on the credit card after it is due? Then you owe interest on the borrowed money, otherwise known as finance charges. These get calculated as an annual percentage rate, or APR. If you pay in full each month, you have no finance charges.
  • Late Fee – Don’t pay your credit card on-time? There’s a fee for that.
  • Balance Transfer Fee – Trying to move other debt to your credit card, so that you can capture a lower interest rate? Doing so incurs a balance transfer fee, usually a percentage of the amount to be transferred.
  • Annual Fee – Some credit cards carry such good perks or low finance charges that it costs you money to use them. Using these types of credit cards is wise only if the perks outweigh the annual fees.

As you can see, most of these costs don’t apply if you pay your credit card in full each month. Thus, it is actually possible for the cost of using credit cards to be zero!

How does credit card debt happen, and how do I avoid it?

As long as you pay off your credit card in full every time and on-time, you won’t fall into debt. In fact, it should be the only way to use credit cards. Unfortunately, credit card companies give the option to pay a minimum amount, typically 1%-2% of the total credit card balance. Paying the minimum causes the remaining balance to rack up interest, adding to the cost of what was originally borrowed.

To illustrate the real cost of carrying a balance on a credit card, let’s use this example. Say you buy a bike for $100 on a credit card with 18% APR (annual percentage rate). $100 x 18% = $18. You actually pay $18 more dollars on that bike if you let that debt sit for a year. If the credit card company calculates on a monthly or daily basis, and most do, that bike will cost even more. Much like compound interest on investments, debt multiplies itself over time. Avoid debt altogether by buying only what you can afford and paying off the balance in full each month.

Parents can introduce credit cards using a 3-step approach. 1) Start with gift cards. What’s great about gift cards is that you can only spend what you have and nothing more, but you are required to spend in only one place. Nowadays there is the option to get gift cards to use wherever credit cards are accepted. 2) Get a debit card to allow for spending anywhere, keeping within the limits of what is available. A debit card requires an attached bank account to pull funds from, so you will need to set one up if you want children to access their own money. 3) Graduate to the credit card! Only keep the credit card if every statement is paid in full.

Credit cards: Good or Bad?

Only you can decide whether credit cards are good or bad for you. If you can commit to paying off your credit card in full each month, there really is no disadvantage to keeping or getting one. Choose what’s right for you!

Tune in next week to learn about the 401(k) plan. Is it a type of investment? Is it a savings account? Subscribe below to automatically receive weekly lessons in your inbox!

Homework: Know what credit cards are charging you. Become familiar with the costs before getting a credit card, and choose the right one. If you already have a credit card, is it the best one for you?

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