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Credit: American Dream or Nightmare?

Publication Number: P2399
View as PDF: P2399.pdf
Image of a house with a for sale sign in the yard.

Credit is a privilege that can make dreams come true. It also can be a nightmare if it is not used wisely. Without credit, most people never could achieve the American dream of owning their own home.

In American society today, you can hardly function without a credit card to make travel reservations or to rent a movie. Your credit history also can affect your ability to rent a place to live, to get a job, or to buy a car and insurance. Yes, what you do with credit today can keep coming back to haunt you, or it can help you for a long time.

Take the time now to learn how to make credit work for you, and make your American dream come true.


Follow this guide to learn about

  • Credit history — How your credit past can affect your financial future.
  • Credit reports — How to find and read your credit report.
  • Credit scores — How you rate when it comes to credit scoring and qualifying for credit.
  • Credit costs — How to comparison-shop for credit and decide when to use credit.


Credit History: Do You Have One?

A credit history is a record of a person’s credit accounts and payment habits. If you never have used credit, you may have no credit report. In addition, the Credit CARD Act of 2009 requires that young adults under age 21 who want to open a credit card account need to show that they can afford to make payments based on income unless they have a cosigner who is 21 or older.


Make History!

To establish or re-establish credit:

  • Apply for an account with a local or hometown store or lender.
  • Borrow against your savings account at a local bank.
  • Take advantage of special offers for student or employee credit cards.
  • Find someone who will cosign with you for a loan.
  • Maintain steady employment at one job or occupation for 2 years.


Credit Reports: What’s Hidden in Yours?

Equifax, Experian, and TransUnion credit bureaus are in the business of collecting and selling information. They sell credit-reporting services to creditors and, in turn, collect payment history data from their customers.

Credit reports contain four main types of information:

  • Personal identification information — Name, social security number, present address and employer, former address and employer, number of dependents, and spouse.
  • Payment records — Credit accounts, limits, payment terms, account balances, and past due status.
  • Public records — Judgments filed against you in court, bankruptcies, foreclosures, and repossessions.
  • Inquiries — A list of creditors who have requested your credit history recently.

Creditors look for stability and ability to repay in your credit history and application. Although information stays in your record for 7 years, your recent past–the last 2 years–is most important to lenders.

The Fair Credit Reporting Act gives you the right to learn what is in your credit report free if you have been denied credit in the last 60 days. Any error you find must be investigated and corrected at no charge to you.

As of June 2005, every consumer can get one free report from each credit bureau each year. There are three ways to get your free credit reports:

1) Follow the instructions at

2) Call (877) 322-8228.

3) Mail a request form to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.


Credit Scores: It All Adds Up!

Credit scores help lenders predict who will repay loans in full and on time to reduce their risk of losing money. Keep in mind that the more risk to the lender, the more the credit may cost you.

Credit scores usually range between 350 and 850. People who have high credit scores usually qualify for loans with the best terms and lowest interest rates. If your score is below 680, you may wind up paying more in loan costs.

Information that figures into your statistical credit score includes the following:

  • Payment history — Delinquent payments hurt your score.
  • Amounts owed — Charging up to your credit limit can lower your score, too.
  • Length of credit history — Lenders look for good old accounts.
  • New credit — Applying for credit too often can lower your score.
  • Types of credit — Do you have a good mix? Lenders like to see that you can handle a variety of types of credit. For example, a mortgage, a store or gas card, and a bank card account.


this is a sample credit report

Credit Costs: Choose and Use Credit Wisely

Always read and understand all contracts completely before signing credit applications. The Credit CARD Act of 2009 requires that credit card companies print specific information on the billing statement that includes the time and total interest it would take to pay off the current card balance if you make only the minimum payment. The bill must also disclose the monthly payment required to pay off the card balance in 3 years. This statement is designed to show cardholders how they can get out of debt more quickly by paying more than the minimum. The disclosure also must include a toll-free number for credit counseling and debt management services.


Compare Credit Costs

Consider these costs when comparing credit offers:

  • Total finance charges (dollar amount)
  • Annual percentage rates (APR)
  • Annual fees ($0 to $75 or more each year)
  • Security deposits (savings for collateral)
  • Cash advance fees
  • Early pay-off penalties
  • Late fees
  • Add-on insurance, protection, or other services and penalties


Choose from Several Types of Credit

  • Revolving
  • Bank cards, like Visa or MasterCard
  • Store cards
  • Charge cards
  • Oil company cards
  • Entertainment cards
  • Credit union loans
  • Bank loans
  • Mortgages
  • Finance company loans
  • Installment loans


Use Credit Wisely

Ask yourself these questions before you apply for credit or make a purchase with credit:

  • Will more payments fit into my current budget?
  • Will this item last longer than the payments?
  • Will I want this item as much when I am making payments as I do right now?
  • Will this item increase my income, save time, or improve my health?
  • How much will using credit add to the cost?
  • If I lost my income, how would I make the payments?
  • Am I using credit for convenience with a plan to pay the balance later, or am I using credit because I do not have enough money for the item?

To view an online video companion to this publication, visit

Publication 2399 (POD-12-16)

Revised by Rita Green, PhD, former Assistant Extension Professor, Human Sciences. Written by Bobbie D. Shaffett, PhD, retired Extension Professor, Family & Consumer Sciences.
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