If you do not have cash to buy certain goods and services (a car, for example), then the salesperson may be willing to sell the item to you in exchange for your promise (almost always made in writing) to pay the purchase price over time in installments. That is buying on credit. Your ability to buy on credit depends on your credit rating. If you have a good credit rating (for example, you have a history of paying your bills on time or you have a dependable income), then you are more likely to be able to buy goods and services on credit.

How do I get a credit rating?

Credit ratings are developed by private companies called credit bureaus or credit reporting agencies and are made available upon request to most businesses where you ask for credit. These reports let them know whether you are a good credit risk. Although the records often include confidential and personal information, by law they cannot include information regarding your marital status, race, religion, color, ancestry, ethnic origin, sexual preference, or political affiliation, except as required by government record-keeping.

Because your credit rating is so important, the law allows you to check personal or financial information in your file at the credit bureaus. Consumers can request and obtain a free credit report once every twelve months from each of the three nationwide consumer credit reporting companies. provides consumers with the secure means to do so. There are also free secure websites where you can check your credit regularly, i.e.®. Also, several credit card companies now offer free credit score and credit monitoring as part of their services.

You also can request your credit report by mail by filling out the request form and mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You also can order your free report by calling (877) 322-8228. Ordering reports by phone or by mail is recommended to avoid impostor websites and identity theft. If you dispute in writing any of the information in your file, the credit bureau must investigate and correct the mistake if it finds an error.

If the bureau decides that there is no error but you still dispute the information, you may file a brief statement explaining your side of the story, and the credit bureau must put this information in your file. You also are entitled to be given the names of persons or companies who recently received your credit rating.

It is important to use credit wisely and, if possible, build your credit rating over time. There are several factors that help to make up your credit rating. The most important is your payment history. You are expected to pay your creditors on time every month. If you are late in paying your creditor, you will usually have up to thirty days to make your regular payment before you are reported to the credit bureau as being late on your payment. Generally, the creditors will report whether you are thirty, sixty or ninety days late on a payment. Every late payment negatively affects your credit rating and the later the payment, the more severe the impact on your rating.

Another important factor is credit utilization — the percentage of credit being utilized. It is important that you obtain credit limits that allow you to use only a percentage of your total available credit. For example, if you have three credit cards with $1,000 credit limit on each, you should avoid high credit balances and try to manage your credit so that your debt balance on each card is as low as possible (preferably, pay off your balance each month and never exceed 50 percent of your available credit on credit card accounts). If you must use your credit to make a purchase, try to utilize the cards with the lowest interest rates first.

The next factor to consider is “derogatory remarks.” Creditors report information regarding actions taken on your credit account, such as foreclosures, civil judgments, tax liens, garnishments, loan defaults, bankruptcy, or if your account has been placed into collection because of failure to comply with the terms of your credit agreement. These “derogatory remarks” can have a significant impact on your ability to obtain new credit. Other less important factors that may also affect your credit rating include: the age of your credit history; the total number of open and closed accounts; and the number of credit inquiries. Checking on your own credit is not considered a “credit inquiry” for reporting purposes and does not have a negative impact on your rating. Be careful! Applying for multiple credit cards at the same time will be considered a “credit inquiry” and will have a negative impact on your credit.

If you are successful in handling your credit, in the future you will be able to borrow money at lower rates of interest and have other avenues open to you. If, however, you develop a bad credit rating, that bad credit rating has a number of consequences, such as: you can be denied future credit and/or loans; your existing credit cards and/or loans can be terminated; you may not be able to rent or buy a house or car; and prospective employers may not hire you because they view you as being unreliable or untrustworthy. You are starting with a “clean slate” as far as your credit is concerned. Be careful, make wise use of these opportunities, and do not bite off more than you can chew!

Don’t ever “lend“ anyone your credit. Do not take loans out on behalf of another person with the expectation that they will repay it to the creditor. It is your responsibility to pay your debts and if the third party fails to pay on time, then your credit will suffer — not theirs. Avoid “co-signing” loans with third parties (even family members) unless it is to obtain an interest in specific collateral (ie., you are purchasing a 50 percent interest in a house, car, boat, etc.).

What is collateral?

Collateral is real property (a house or land, for example) or personal property (an automobile or bank account, for example) pledged to ensure that a debt is repaid. For example, a car can serve as collateral to secure payment of the loan used to buy the car. Most people who buy cars do not have enough money to pay the purchase price in full. Therefore, they borrow the money from either the car manufacturer or a bank. The buyer pledges the car to assure the lender that the loan will be repaid. Pledging the car as collateral for the loan gives the lender the ability to take the car away from the buyer if the buyer fails to repay the loan. If the lender has to repossess (take back) the car because the buyer fails to pay the loan, the lender can sell the car and use the proceeds to pay off the loan. If the sale does not provide enough money to pay off the loan (and the costs associated with the sale), the buyer still is responsible for the deficit.

What if the store does not offer a way to purchase on credit?

You may go to a bank and apply for a loan. Many people purchase cars by obtaining a loan from their bank rather than financing the car through the automobile dealership. Banks also will check your credit rating to determine if you are a good credit risk. When purchasing anything on credit it is best to shop around to see what stores or banks give the best rates and terms for lending you money to purchase the product you want.

What if I buy a TV or stereo on an installment contract and have problems getting it fixed?

As a general rule, you still must make your required payments to the lender.

What if I need to borrow some money?

Banks and credit unions are preferred lenders when borrowing money for the best interest rates. Be aware of the interest rate on a loan prior to signing a contract. Some places may charge up to 300 percent. In particular, you should try to avoid “Pay-Day Loans” and “Car Title Loans” for short term needs. Alternatives may include among other things less expensive short-term financing from another financial institution, family, or friends, a cash advance on a credit card, an account with overdraft protection, or a loan repayable over several months.

What can happen if I miss payments or don’t meet other obligations of a contract?

If you breach (fail to perform) your contract with another party, you may be liable for all damages (losses) suffered by the other party as a result of your breach. The other party can take you to court and seek judgment for money damages or, in some cases, force you to perform the contract. When you buy goods on credit such as automobiles, televisions, or furniture, the creditor (seller) may be able to repossess (take back) the item sold to you. Even if the item is repossessed, you still may owe some of the debt to your creditor. Also, if judgment is entered against you by the court, your wages or bank accounts may be garnished (paid to the creditor) or your personal property may be subject to sale by the sheriff.

Can a store automatically take some of my wages if the purchase contract says it can?

No. A store or other creditor can garnish your wages only after the court has granted a judgment regarding your debt. Provisions in a purchase contract that say your wages can automatically be taken, or that say you grant permission for your wages to be automatically taken, are not enforceable.

What can I do if I owe more money than I can pay?

If you cannot make your payments as they come due, you should contact your creditor as soon as possible, explain your situation, and seek to work out a new payment schedule or extension. Never ignore your creditors. Always be courteous and explain your situation. If your creditor will neither give you an extension of time nor reduce your payments, you may have to file bankruptcy. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you must undergo a “means test “ to qualify for Chapter 7 (liquidation) bankruptcy. The means test is used to determine who can file for Chapter 7 bankruptcy. Your income and expenses are examined in detail to see how they compare to the standard for your area as set by the IRS and the Census Bureau. If you earn less than the median income for a family of your size in your state, you can file for Chapter 7 bankruptcy. But if your income from the last six months is greater than the median income and you can pay at least $7,700 over five years or $128 a month toward your debt, you are not allowed to file for Chapter 7 bankruptcy but must file for Chapter 13 bankruptcy instead. Chapter 13 (reorganization) bankruptcy will require you to use all of your “excess” income to repay a portion of your debts over three to five years. A part of the means test requires that you file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy. Also, under the law, when you file for bankruptcy you must receive approved credit counseling and a budget analysis at your own expense. Credit counseling should address the means test calculation for you. Bankruptcy should be seen as your last resort if you are in financial trouble and should be chosen only after very careful consideration. Additionally, some debts are not dischargeable in bankruptcy. Consult an attorney before you choose bankruptcy.

What are some of the consequences of bankruptcy?

If you file for bankruptcy, you may be forced to turn over your non-exempt assets (real property and personal property) to the bankruptcy court, and these assets will be used to help pay your creditors. Non-exempt assets are those assets that are not protected by state or federal laws (exemptions) that keep the assets from being turned over to your creditors. You should speak with an attorney to determine what exemptions, if any, apply to your assets in bankruptcy. Once the bankruptcy proceedings are successful, you will receive a discharge, which means that in most cases your prior debts will be wiped out. There are negative aspects of bankruptcy, however, including a poor credit rating that will make it more difficult for you to obtain a loan in the future.

How long does it take to clear up a bad credit report?

Most derogatory remarks and other negative credit notations (late payments, loan defaults, etc.) are maintained for up to seven years in your credit file. Bankruptcy notations are maintained for ten years in your credit file. In the event of a disagreement with a creditor, a letter can be placed in your credit file explaining your position. In the event of computer error, a conference with the appropriate representative of the Retail Merchants Association will assist in correcting the problem.

So You’re 18 is presented by the Virginia State Bar Conference of Local and Specialty Bar Associations.
For print copies of So You're 18 contact (804) 775-0521 or [email protected].