Personal Credit Reports

Why it works and how to make it work for you

The three major credit bureaus in the United States: Experian, TransUnion, and Equifax, are in the business of exchanging information. When you apply for a loan of any kind, the creditor requests your credit report from at least one of these bureaus. There are many other credit bureaus throughout the United States, but they are mainly affiliated with one of the major three.

Remember that the credit bureaus are moneymaking businesses and are not affiliated with or working for the U.S. government. Their goal is to collect, maintain and sell financial information about Americans.

Here's how they work:

1. The credit bureaus receive information about you from your lenders. They have agreements with these lenders concerning exchanging information, and they require the credit grantors to pass the information that occurs during the history of your loan on to the credit bureau.

2. Your lender passes on information concerning late payments, skipped payments, balances, and other lending-related matters.

3. The credit bureau(s) add this information to your credit report.

4. These reports keep track of not only what your current status is, but also the entire history of your credit.

5. The credit bureaus then sell the information they have on your credit history to other credit grantors who wish to review your history before they lend you money.

Following are some pointers on building and maintaining a good credit report.

Don't open too many accounts in any period of time

Lenders become nervous if they see you applying for too many accounts all at once.

Your existing credit should have a minimal amount of activity

Having accounts with no balance or activity can sometimes be treated as not having them at all.

Avoid too many inquiries

Keep the number of inquiries on your credit file to a minimum. More than one or two inquiries per year can make you a higher credit risk because viewers think you are desperate for money.

Keep your debt reasonable

Try to keep your balance-to-Limit ratio a reasonable number. Normally balances kept over 75% of the limit are considered high.

Warning Signs

People many times have problems handling credit, especially when they're just starting out. Signs that your good credit history may be in jeopardy include late payments, calls or letters from credit agencies, and denied or revoked credit. Try to estimate where you are credit-wise. Always keep a running balance of your approximate current charges in your head. Trim down or stop card usage well before you reach your limit. Save some credit for emergencies. And keep in mind that a bad credit rating can have serious negative consequences down the road. If you can't make your payments, don't panic. Contact your creditors immediately. They'll want to work with you, and together you should be able to figure out a realistic payment schedule.

Stay in Good Graces

Most payment cards offer a grace period within which you can pay off the total balance of your account and avoid any finance charges. In a way, it's like an interest-free loan for up to 30 days, because purchases paid off during the billing period during which they were incurred do not accrue interest. In fact, many consumers pay their balance in full during this period.

Pay on Time

Whether you choose to make the minimum payment or to pay the total outstanding balance, your payment must reach the financial institution or business by the payment due date. Otherwise, you will incur late fees, and you may damage your credit history.

Know Your Limit

Obey your credit limit. Exceeding your limit is usually considered a breaking of your account agreement and may result in additional fees or penalties, or the freezing or cancellation of your account.

Major credit cards are considered better than "retail" cards. Not to mention they usually carry lower interest rates.