Good credit: hard work that pays off

Some financial counselors will understandably insist that young adults eschew the use of credit. Too many of us fail to appreciate early the importance of good credit, leading to mistakes that can shadow us for years. But access to credit and its responsible use is actually very important as we move through life.

A little attention now developing habits of disciplined borrowing and prompt repayment will pay huge dividends over your lifetime.

Roughly one fourth of American adults have no credit history at all, having never entered the traditional financial infrastructure. Of those who have a record, one third have a “poor” rating (FICO score of 620 or less on a scale of 300 to 850). That means that about half the U.S. population has limited access to important transactions like getting a mortgage or financing a car through conventional channels. Alternatives like “buy here, pay here” car loans and even payday lending are absolute last resorts, rack up huge interest and fees, and should be avoided if at all possible.

You probably know that there are three major repositories for all transactions related to any borrowing activity we undertake. Experian, TransUnion and Equifax collect detailed data on loans, payments and outstanding balances for millions of Americans. Those statistics are used to estimate the creditworthiness of borrowers by calculating a numerical rating, known as a FICO score, upon which lenders rely in making loans. In recent years, an alternative metric called VantageScore has been introduced using slightly different criteria but the same scale.

Roughly 80 percent of all lending decisions are based upon your score, so building a good one is critical. If your file contains few reported transactions, you should work diligently according to a plan for adding positive events like on-time repayments to your record. If you have a few dings, you can also create a plan to systematically repair your score over time.

Visit Annualcreditreport.com to obtain one report from each of the three agencies each year. Never enter a credit card number or pay a fee, as federal law entitles you to a free look.

Next, look for errors. If inaccurate information has found its way into your file, you have the right to have it corrected by contacting the agency. It is actually in their interest to maintain accurate data, and they will work with you to correct errors.

A poor history is reason for resolve, not despair. Commit to make every payment on time going forward. Negative events do not remain forever, and recent history is more important to lenders than ancient history in making credit. You can’t change the past, but you definitely can control your future record of timely repayment.

If you lack a credit history, start creating one. Apply for a credit card. You may not qualify for some cards with low interest rates given the lack of history, but a high rate is only a problem if you carry a balance, which you will not. The key is to establish a pattern of reasonable borrowing and timely repayment each month.

If you can’t qualify for a traditional credit card, get a secured card. With a secured card, you deposit an amount (typically $500 to $1,000) to serve as collateral. Verify that your card issuer reports to all three bureaus, then use it every month and repay the entire balance on time.

Debt is an indispensable tool as we progress through our careers and build our families. Early attention to nurturing a solid credit history will pay big dividends down the road.