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Why do so many people have bad credit histories?

A good way to understand why so many people have a bad credit history is to examine the use of credit cards. There are two ways to use a credit card. One is as a convenience. Those who use credit cards solely for convenience tend to not want to carry a lot of cash and find writing checks to be a nuisance. They pay for their purchases with their credit card and each month pay their credit card bill in full.

If this describes you, you have made the credit card a useful tool. You may even get extra benefits, such as cash back or airline miles. However, in the credit card industry, you are called a deadbeat. Using a credit card to your benefit is not what the credit card company had in mind when it issued the card. Some credit card companies will charge you a fee for not making installment payments (paying interest). Even though the credit card company charges a fee to the seller of your purchases, the big money is made on interest paid by the credit card holder. Furthermore, while you have made your credit cards a valuable tool, you are not developing a credit history, as the loan companies mainly look at how you handle making regular payments on a balance so they can determine how you will handle making a thirty-year mortgage payment.

The second way to use a credit card is to pay less than the total monthly bill, thereby costing you an interest payment. You are borrowing money every time you use your credit card, and what that costs you depends on how you use the card. While paying this interest is certainly costing you money, it is giving you a credit history you can later use to borrow greater sums of money, such as what you will need to buy a house. All of this depends on your ability to properly manage your credit cards and your payments.

What kind of credit card user am I?

When you see some jewelry or clothing that you would like to own, do you ask yourself if you want it badly enough to borrow the money and pay interest to have it? When you go out to eat, do you wonder if you want the meal in that restaurant badly enough to borrow the money to eat there? Many people do not think to ask themselves these questions. This can lead to overspending, which forces many to pay interest on the new clothing or meals for many months to come. While you want some interest payments to show up, you want to be in control of the cards — not have the cards be in control of you.

From the Expert

The old way of looking at a credit report was to look for AA beside each item. AA stood for as agreed. As long as you made the minimum payments (or more), you had AA credit. Today, a complicated formula is used to determine your credit score. Paying your credit card off in full each month could give you a lower score than if you pay interest.

Another common abuse of credit is excessive optimism. Do you really believe that you will never get sick or that your car will never break down? Do you have cash put away for such possibilities? Do you realize that the kids need clothes for school in September or that you may spend more money in December for holiday gifts than you will spend at other times of the year? Have you prepared by saving cash, or will you have to charge everything and make monthly payments?

All of these financial planning failures can get to a point where paying bills on time becomes difficult. When an underwriter looks at your credit history, he or she is looking to see if you borrowed money and repaid it in a timely manner. Did you keep your promise to make payments on time? If so, chances are your promise to repay the loan for which you are applying will be kept. If you did not keep past promises, the underwriter must wonder if you will keep future ones.

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