Understanding How Credit Works

The Consumerism Commentary, (one of the many financial blogs I frequent) recently posted an article about The Components of your FICO Credit Score.

FICO

As you can see, the main stickler for helping out your credit is making all your payments on time. It helps to incorporate the mindset that I have adopted over the last year or so in that I pay all my bills and myself first, then figuring everything else out later. Before everything else, including groceries, festivals, etc, I make sure my bills are taken care of, and that I have put something away into savings, and this has worked out quite well. It has also instilled in me the value of frugality.

A lot of people don’t seem to understand how credit (or even their own personal finances) works, and surprisingly I used to be in the same boat when I was married. I chock that up to being young and stupid.

When I left my husband, my credit score was 525. Granted that’s somewhere “in the middle” but the reality is, to people looking at your credit, that’s awful. I couldn’t get approved for anything, and I certainly wasn’t going to get approved for a car loan at that point.

Since then however, I’ve been slowly hacking away at my credit, and last I checked it was close to if not 700 or more. And being over 700 is right where you want to be.

I got my start with Capital One, which approved me for a meager $250 credit card a few years ago. I slowly worked up my credit, have an increase to $500 on that particular card, and was approved for another one with my military insurance for $5,500. After building up my credit with both of those cards, I was finally approved for an auto loan and now have my lovely mustang, and my very first new car. All it takes is time, regular payments, and understanding that buying things on credit is never a good idea. I do not buy anything unless I have the money to pay for it. If I don’t, it takes a lot of convincing for me to even consider it.

There are several agencies that claim that they will give you a free credit report. I used one called FreeCreditReport.com once, and while detailed and very use-friendly, it was also a scam, because it wasn’t actually free. And they also enroll you in a $12.95/month credit monitoring service.

Your best bet is to check your credit once a year at annualcreditreport.com, which will check with all 3 major agencies, and it -is- absolutely free.

My next step will be my first mortgage in the next year or two. By then my car should be paid off completely (if not sooner).

And remember, you are never too poor to fix your finances, and make sure you don’t commit the 10 most common mistakes when dealing with credit.

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