A good credit history is essential in today’s economy. Traditionally, you only had to worry about having a good credit history for credit cards and large purchases such as home and automobiles. However, good credit is vital in even the smallest financial transactions, like getting your utilities turned on or establishing cellular phone service. When you don’t have good credit, these service providers require you to pay a deposit to establish service. Start building a good credit history as early as possible to avoid paying hefty deposits.

Paying your bills on time is the easiest thing you can do to build a good credit history. Even bills that aren’t credit cards should be paid on time. While utilities and similar bills aren’t regularly included in your credit history, when unpaid, they can wind up on your credit report as a collection. Collections have a negative impact on your credit.

The timeliness that you pay your bills has the biggest impact on your credit history. When you are current on all your bills, lenders view you as less of a credit risk. This, in turn, will benefit you with lower interest rates than if you had delinquent payments in your credit history.

You don’t have to pay the full amount of your credit card balances each month, but you do need to make at least the minimum payment. Any time you pay less than the minimum payment, the creditor reports your payment as being late for that month.

Always be aware of your credit limit and balance for your credit cards. Be careful that you don’t go over your credit limit. When you exceed your credit limit, your creditor will charge an extra fee, in addition to your regularly scheduled payment. This extra fee can make it harder for you to make your minimum payment. Not only that, going over your credit limit will be included in your credit report. Future creditors will deem credit limit overages as an inability to handle credit.

If you have any credit cards that are not being used, and you don’t anticipate using them, these should be cancelled. Make sure the balance of the card is completely paid off before cancelling the credit card, to continue building a good credit history.

Credit card companies seldom teach first timers the proper way to use a credit card. Why would they? They make more money from people who don’t know exactly how to be responsible with a credit card. In all the excitement of receiving your first credit card, there are some common mistakes that you can avoid to ensure your credit remains favorable.

One of the most common mistakes that beginners make with credit cards is charging more than they can afford. At first, a credit card seems magical. You can purchase almost whatever you wish, without having to spend any of your money. This mentality is why many beginners max out their credit card within only a few months of receiving it. The best rule of thumb is to charge only what you can afford to pay. It may sound contradictory to the theory of a credit card, but it is the best way to keep your head above debt waters.

Another credit mistake that beginners often make is getting too many credit cards during a period of time. With all the pre-approved offers in the mail and store clerks asking you to get their credit card, it can be tempting to open several credit cards at one time. Many beginners think the more credit cards they have, the more they will be able to spend. While this is true, there is another side to that coin. The more you spend, the more you will have to pay. Chances are if you have several cards with balances, you will run into some difficulty making the payments. One or two credit cards are sufficient for someone just starting their credit history.

Paying the minimum payment only gets many beginners into more debt than they expected. When you make only the minimum payment it usually covers the interest and a small amount of the credit card balance. It could take years to pay off a balance as low as $300 when you pay the minimum payment. Although you don’t have to pay the entire credit card balance every month, you should pay a little more than the minimum balance. This is especially true if you are continuing to accrue new charges

One very important element in your overall credit worthiness package is your FICO score. But what exactly is that and how does it affect your debt management choices?

FICO is an acronym formed from the letters of its founder, the Fair Isaac Corporation. It is a number between 400 and 800 that ranks credit worthiness according to a proprietary algorithm invented by the company, with 400 being worst and 800 being best. Other companies now have their own variations.

Though the details of the algorithms are closely held trade secrets, over the decades many people have reverse engineered several of the important factors. Any late payments will lower your score, and the more of them and the later they are, the more heavily the score is affected. The total amount of debt carried per month is another element. A less important factor is the number of credit cards and credit checks performed.

Any score below about 620 is considered marginal and below 580 is decidedly poor. 720 and above is very good to excellent. A range between 620 and 720 represents a kind of gray area, where items other than your FICO will play a more significant role in loan decisions.

Banks, mortgage companies, credit card issuers and other lenders will use your FICO score as a very important criteria for deciding whether to make a loan, and at what interest rate. Other things being equal, the higher your score, the better interest rate you can obtain.

Of course, many times all other things are not equal. Prevailing interest rates in general, the current demand for loans, the general economy and other factors have a heavy influence on the willingness of lenders to lend and at what rate.

How the current economy and credit crunch will affect you

The entire lending industry has undergone at least two significant shifts in the last 20 years. With the increasing use of computers and modern financial techniques, underwriting loans is done very differently today. Also, not surprisingly, the Internet has shifted finance to a very different mode of working. However, most significant has been the fallout from subprime loans, the housing bubble burst and the resultant economic domino effect this has had. Without an excellent FICO score and solid employment history, it will be very difficult to obtain credit for at least the next decade. Those with marginal credit will find current credit card limits reduced and interest rates raised.

Because of these changes, the FICO score remains a primary tool for lenders. It may not determine the final decision, but it definitely influences the ‘first cut’ when presented with a stack of applications to approve or disapprove.

Fortunately for those who have slipped up financially, there are alternatives. Though your FICO may be low, you may have several options. The first thing to do is set into motion a plan to improve your score. Even though you may be unable to obtain credit – even though you may not want to obtain credit immediately – your FICO score is a work in progress and when you go to obtain credit, you want it to be as high as possible. There’s no better time than now for working on improving your credit rating and reducing your debt-to-income ratio.

As you work to remove those outstanding overdue debts – either through paying them off or negotiating with the lender – your FICO will gradually improve. The age of 30 day past due, 60 day past due (or longer) late payments is a factor in calculating your FICO.

At the same time, you can shop around for lenders willing to take a higher risk by lending you money. The downside is those loans almost always carry a higher interest rate. Your best approach is to try to forego borrowing for as long as possible while you work to improve your debt situation. Your FICO will follow suit.

Credit reports are often regarded with dread, especially by those who have entered turbulent financial waters. But reality is never your enemy, even when it is unpleasant. In order to promote financial health, and resolve any debt problems you may have, it’s essential to have the best information possible about your credit status. That information is found – both by the lender and, more importantly, by you – in your credit reports.

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Those reports are maintained – at least in the U.S. – chiefly by the three major credit reporting agencies:
<ul>
<li>Equifax – <a href=”http://www.dpbolvw.net/1t65dlurlt8BFI9BD98A9DCDIBE” target=”_blank”>Get Your Equifax Credit Report Now!</a><img src=”http://www.ftjcfx.com/kr118g04tzxILPSJLNJIKJNMNSLO” border=”0″ alt=”" width=”1″ height=”1″ /></li>
<li>Experian</li>
<li>TransUnion</li>
</ul>
The reports contain a multi-year history of your credit cards, home loans and other debt. They also record any late payments that occurred and how late they were, 30-day past due, 60-day past due, etc. The reports will list any current and old address, and often your phone number and social security number.

That information is readily available to any qualified party – a bank, a mortgage lender, a credit card issuing company and certain others during legal proceedings. But, though the companies all genuinely try to maintain accurate records, the reports may contain errors. It is important to check your credit report and make sure it’s accurate.

They may list loans as active that have been paid off. They may list current credit cards you canceled long ago. And, they may fail to list payments made to make up overdue amounts. Often, this isn’t sloppiness on the part of the credit bureaus but simply a reflection of timing and other common human errors in keeping records. The world may be computerized, but those databases still don’t always communicate effectively between companies using different systems.

The only thing an individual can do about this – out of self-protection, if nothing else – is to get copies from all three agencies and review them thoroughly. Make a note of any errors, establish proof of the error, then send a registered letter with the proof to the agency asking them to correct the data.

Remember that your credit score is affected by the number of inquiries. If you are planning on financing (or refinancing) a loan, getting a line of credit or auto loan and you want to know where you stand, it’s best to plan ahead. Order your credit report 6 months in advance, if possible.

You can order your credit report free of charge, one time a year, from any of the above companies. However, there are services that will not only provide you with a free report, but will help you interpret the report and score. Try some of the following companies:
<ul>
<li><a href=”http://www.anrdoezrs.net/to114p-85-7NQUXOQSONPOSUSVTR” target=”_blank”>Get your FREE credit score and more!</a><img src=”http://www.tqlkg.com/2a110h48x20MPTWNPRNMONRTRUSQ” border=”0″ alt=”" width=”1″ height=”1″ /></li>
<li>Go Free Credit: <a href=”http://www.pntrs.com/t/QTxHRUM8QEhDQkU8QURI”>Do you know all the facts about credit scores? Click Here!</a><img src=”http://www.pntrs.com/i/QTxHRUM8QEhDQkU8QURI” border=”0″ alt=”" width=”1″ height=”1″ /></li>
</ul>
Remember these free services provide you with the same information as Experian, Equifax and TransUnion. There is no need to order a report from all three agencies or from a free service AND the agencies.

On a more positive note, having the information at your fingertips allows you to develop a debt-free plan for your future. Understanding your past credit history is the first step in creating that plan.

Review your history and note any current overdue amounts. Clear those up first, as quickly as possible. One method is to pay off any smaller outstanding amounts first. That frees up funds to be used on the next larger outstanding amount. Working your way up, you will eventually begin to see light at the end of the tunnel.

We will be covering ways to clear errors in the report, what it takes to raise your credit score and how to manage your money and stay out of debt. Please subscribe for updates.