BUILDING CREDIT
Establishing credit is useful for everything from buying a home or car to satisfying a potential employer. A secured credit card, geared to first-time users, usually requires a cash deposit equal to the credit limit. Becoming an authorized user on a family member’s credit card or having a loan co-signer also helps establish credit. Other ways to establish credit include student credit cards and credit builder loans that require consumers to repay the loan before receiving the funds.

Renters who pay rent and utilities on time are building good credit when the landlord and utility companies report this activity to the credit bureaus.

Those attempting to build credit should use a credit card instead of a debit card. Debit card use does not build credit as it is considered the same as using cash. Using a credit card is like having a short-term loan, and by paying the bill monthly, you establish a record of good credit.

REDUCING DEBT
Know what you owe. Does your current income cover your expenses? Look for ways to free up cash to pay towards the outstanding debt. This may include reducing or eliminating non-essentials like eating out, cable, and vacations. You may also need to take on a part time job or ask for a raise.

Tackle credit card debt with a method that works best for you. The “avalanche” payoff method targets debts with the highest interest rates first, while the “snowball” method prioritizes your smallest debt first no matter the interest rate.
You should track your progress each month, regardless of the method you choose.

Establish an emergency fund and create a spending plan. There are many online apps that are available such as Quicken, Mint, YNAB, or you can use a simple ledger system for each month’s income and expenses.

Seek assistance from a daily money manager (DMM), credit counselor, or financial coach if you are unable to reduce debt on your own. If debt is too large and there is not a way to pay off the debt with the income you have, bankruptcy
may provide the debt relief needed to start over.

DEBT MANAGEMENT
Lenders often look at the debt-to-income ratio, monthly debt payments divided by gross monthly income. For example, if gross income is $6,000 and you pay $1800 a month for your mortgage, $200 a month for your car loan, and $400 a
month for other debts, your debt-to-income ratio is 40%. Lenders usually look for a debt-to-income ratio of 43% or less.

If you have severe debt, you may be eligible to enroll in a Debt Management Plan (DMP). A DMP is a systematic way to pay down your outstanding debt through monthly payments to your credit counseling agency, who then distributes
funds to your creditors.

CREDIT REPORTS
Credit reports contain personal and financial information that help lenders decide whether to extend credit or make a loan and often affect the interest rate charged. Prospective employers and insurers may also review the information contained in a credit report. The information in a report includes your name, address, employers and legalities such as if you have been sued, arrested or have filed for bankruptcy. It includes current debt and history of how you have handled debt.

Each of the three major credit reporting agencies, Equifax, Experian, and TransUnion, will provide one free credit report annually through AnnualCreditReport.com. The credit reporting agency or the information provider should be notified of any credit report errors. For assistance disputing errors or with any problems with a credit reporting agency, contact the Consumer Financial Protection Bureau.

CREDIT SCORES
A credit score is a number that generally ranges from 300 to 850 and indicates your credit risk at a point in time. The higher your score, the better you will look to a prospective employer and the easier it will be for you to obtain a loan and
get lower interest rates. Most banks and credit grantors use a FICO score based on information from the three credit reporting agencies. Components include payment history, debt burden, length of credit history, type of credit used, and
recent searches for credit. You may be able to get a free credit score from your credit card company or bank, or you can pay a fee to the three credit reporting agencies. For help in improving your credit score, consider speaking to a daily
money manager (DMM).

FRAUD ALERTS
Fraud alerts on your credit report alert potential lenders and creditors that there may be suspicious activity or identity theft. It informs credit reporting bureaus that a consumer’s identity may have been stolen and requests for new credit
in that consumer’s name may not be legitimate. If you suspect fraudulent activity and place a fraud alert on your report with one of the three major credit reporting agencies, that agency will notify the other two.

CREDIT FREEZE
A credit freeze, also known as security freeze, is an effective way for consumers to protect themselves from identity theft by blocking access to their credit reports. Although existing creditors and some government agencies will still have
access to ‘frozen’ credit reports, identity thieves will find it difficult to open new accounts in a consumer’s name, even if they have obtained their personal information. Freezes must be placed with each of the three nationwide credit reporting companies. Each credit reporting company will provide a unique PIN to allow consumers to ‘thaw’ their credit report to make it available to a creditor, employer, or someone else the consumer approves. The cost to freeze or thaw credit reports varies by state, but there is legislation pending that would allow individuals to obtain free credit freezes.

MANAGING CREDIT COSTS
Credit allows one to buy items not affordable in a lump sum and can facilitate an even cash flow if income varies throughout a month; however, credit comes with a cost. For fixed loans, it’s important to shop not only for the best interest rate but also for any costs associated with originating the loan and/or prepayment penalties.

Revolving credit or credit cards may be the most pervasively used form of credit, and the one with which people can incur the most cost. This is especially true if they are using several cards at once, and if they are not paying the outstanding balances in full each month. Additionally, if payments are made late, they can result in late fees and increased interest rates. If only minimum credit card payments are made each month, the amount of interest paid over time can be astronomical. This information is on creditors’ websites and credit card statements. Debt calculators are also available online.

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