Guide to Credit Management

The word "credit" can conjure up images of burdensome debt, but good credit management can improve your quality of life and result in increased buying power and long-term savings. In today's world, the use of credit is expected, so it's important to understand what choices will positively or negatively affect your credit rating on your credit report.

Using credit wisely is better than not using it at all
The old mindset that paying with cash is better than using credit is outdated. Like the habit of stuffing your life savings into your mattress or a sock, this principle is no longer applicable. Almost every major purchase depends on good credit, so establishing a healthy credit history is essential for those times when you need credit. If you pay for everything in cash, you won't have the proof that you are a responsible borrower, and lenders will be reluctant to extend credit.

Instead, plan your credit use wisely so your credit use today will build a positive credit rating. All lenders check your credit report before extending credit-even for those preapproved offers you get in the mail or see advertised. The three major credit bureaus (Experian, Equifax and TransUnion) keep track of records sent from all major creditors. The credit bureaus assign a grade to your account, referred to as your credit score. Lenders check this score and the details of your credit record to see if you have a history of using credit wisely. What they find on that record determines the amount of credit you can get, and the interest rates that you will be offered.

Credit and everyday life
You'll be surprised to know that wise credit use can enhance more than your interest rate on a mortgage, credit card or automobile loan. Insurance premiums (even on auto insurance) and employment opportunities are also affected by your wise or unwise use of credit. All of these organizations-employers, insurance providers, credit card companies and lenders-will check your credit history before offering you credit, insurance or possibly even a job.

Using credit wisely also affects how much interest you are charged by lenders, and these savings add up over time. Mentally estimate the following savings: lower interest rates on credit cards, lower rates on our mortgages and car loans and lower insurance premiums. Now add in the financial benefits of better employment opportunities, and you'll see that wise credit use pays off.

Evaluating your credit use
It's challenging to find out if you've been using credit wisely, but there's a way to take most of the guesswork out of the game.

Order three copies of your credit report from the three major credit bureaus, and compare the reports to see how you're doing. The Fair Credit Reporting Act (FCRA) requires all three bureaus to give you free copies of your credit report annually if you request them. You can order these reports online at the following Web addresses: www.experian.com, www.equifax.com and www.transunion.com.

Compare all three credit reports, look for misinformation and dispute any incorrect data. Make sure that positive accounts are being reported to all three bureaus, since every positive report improves your overall credit rating.

Your credit report is a basic guideline for using credit wisely. Basically, the credit bureaus penalize you for not making payments on time, borrowing more money than you can repay in a reasonable amount of time or extending yourself too far by spending more money than you make. By reversing these statements, you can outline a plan for wise use of credit.

Be sure, too, that your credit isn't maxed out and that you don't hold too many credit cards. Consolidate debts if needed to reduce your debt and the number of credit cards. One of the biggest parts of using credit wisely is having some breathing room. Lenders like to see that you're not using all of your available credit.