Consumer Credit Fundamentals

Practicing good credit fundamentals helps avoid excessive debt and other financial problems. No strategy is foolproof, however, as divorce, job loss or illness can lead to financial problems for anyone, no matter how careful they are with credit. People who make a habit of practicing good credit fundamentals arguably have a greater chance of making a successful comeback from financial hardships happening through no fault of their own. With strong credit fundamentals, they know just how to get back on track.

Credit Cards

Credit cards are a leading cause of financial problems with abuses leading to bankruptcy for some people. Credit card debt easily spirals out of control because of missed payments and excessive balances. Missing payments and exceeding the credit limit causes higher interest rates and fees. The snowball effect can turn into a crisis if left unchecked, especially for accounts with larger balances. Making charges mostly for necessities and paying off balances each month prevents problems. Many people with high credit scores of 720-plus never carry a balance.

Credit Scores

Credit scores range from 350 to 850 with scores less than 620 considered below par. A 620 score generally is borderline for approval on on home mortgage loans and auto loans at somewhat favorable rates. Scores in the 700s and higher usually lead to much better rates. The difference over a lifetime is significant, with people with outstanding credit saving as much as tens of thousands of dollars in finance charges compared to people buying homes and other big-ticket items with poor credit.

Credit Inquiries

A notation or inquiry is placed on credit reports each time the report is viewed or checked. Two types of inquiries exist -- hard and soft. An excessive number of hard inquiries can cause a drop in credit score. Hard inquiries occur when people apply for credit and give permission for a credit check. Many people apply for credit only once or twice a year. Multiple credit inquiries throughout several months could indicate financial problems. Soft credit inquiries are not harmful to credit scores. They occur in several ways, including when people check their own credit report and when their creditors make a cursory check of the report. Some creditors regularly review credit reports as they make decisions about increasing or decreasing credit lines based on information on reports.

Free Reports

The Federal Trade Commission recommends people check their credit reports several times each year. Regularly checking reports help prevents credit fraud. People who view reports regularly can check for the presence of unknown accounts suggesting fraud or for other incorrect information accidentally placed on the report. The Annual Credit Report website (see Resources) is endorsed by the FTC to offer three free credit reports a year -- one from each of the major credit bureaus.