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Confused by Credit? You're Not Alone

Christine DiGangi

To anyone who has ever felt overwhelmed by credit reports, credit scores, debt management, budgeting, choosing credit cards or applying for loans: It’s OK. You’re not alone.

Because personal finance touches most aspects of life, there are myriad tools for understanding and managing it, and if any of it seems confusing, there’s certainly something or someone out there with the ability to make it easier.

Know Where to Start

Whether you have good credit, bad credit or no credit means nothing unless you understand what credit is. An individual’s creditworthiness — whether a lender is likely to accept you as a borrower — is determined by past behaviors such as on-time payments and amounts borrowed.

You are your own best example of how credit works (assuming you have a credit history): If a lender denies you credit, it’s likely you have some poor financial behaviors in your past, like making late payments, using a high percentage of your available credit or frequently applying for new accounts.

If you have little or no credit history, the best you can do is play by the rules: pay bills on time, spend within your means, apply only for credit you’re qualified for and apply for it conservatively. You’ll see how credit changes as a result of your own behavior.

Take Advantage of Available Resources

There are many ways to measure these behaviors, starting with looking at credit reports. All consumers are entitled to a free annual copy of their credit reports from each of the three major credit bureaus: Equifax, Experian and TransUnion. These reports list accounts in good and bad standing, as well as payment history, and you can get an idea of how your credit profile looks to a lender.

Credit scores are based on these reports, so high or low scores can be explained by the reports’ contents. If digesting a report seems intimidating, there are tools to help you analyze them. One such tool is the free Credit Report Card, which provides free credit scores and a monthly review of your credit profile. It assigns letter grades to the different components of credit scores, so users can identify areas for improvement.

In addition to these tools, there are dozens of educational websites and online forums for discussing personal finance and credit. Putting in the effort to learn is a huge part of making good, informed financial decisions.

You may not grasp the ins and outs of mortgages, personal loans or credit cards, but you don’t need to have an arsenal of knowledge to have good credit. Having sound finances and being a good consumer takes the willingness to monitor your own situation and ask questions when necessary.

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