Personal Finance: Good credit is 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.

Christopher Hopkins

Christopher Hopkins

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.