Understanding “Credit Worthiness”
“Your approval will be subject to your creditworthiness” – Everyone, Everywhere
If you have ever received a loan, opened a new credit card, or even applied for a new job, chances are you have had your credit history pulled. There are many good reasons companies, banks, and organizations use credit reviews as a basis for financial approval decisions. For instance, the information is easily available, it provides important financial information about an individual, and it can be a predictor of financial reliability. For people with great credit, the thought of a credit review provokes no cause for concern. If you are one of the millions of people who have less than great credit the prevalence of credit checks can seem daunting. Here we will address some of the most common questions, concerns, and topics regarding credit.
These simple tips will help you in the future for securing any type of credit. Whether you plan to apply for a home mortgage or an auto loan, following this advice will improve your chances of approval. Furthermore, better score will also save you big cash in the long term on interest rates.
What Is My Credit Score and Where Can I Find My Credit History?
To begin understanding your credit score and your credit history, the first step for any responsible consumer should be reviewing their credit report and their credit score. Every person has their credit history monitored by the major credit bureaus – Experian, TransUnion, and Equifax. Federal law in the United States requires consumer access to their credit report for free, available every 12 months. The only federally authorized website to provide this information is www.AnnualCreditReport.com and consumers can receive their full credit report annually at no cost. Additionally, there are many free credit score services such as Credit Karma which provide weekly credit score details.
A credit score is assigned to consumers based on a many variables all of which have varying degrees of impact on your score. The most well known and widely used credit score is The FICO Credit Score (score range from 300-850). The exact calculation for FICO scores is not available. It takes considerations for several major aspects including:
- Your past payment history
- Existing accounts on your credit report
- The overall length of your credit history
- The make up of your credit accounts (types of accounts)
- New credit and new credit checks on your report
We will explore these topics further but for now understand that each category impacts your score differently. The approximate weight for each aspect looks something like this:
Simple Strategies to Dramatically Increase Your Credit Score – Credit Cards and Loans
We have reviewed what a credit score is and how you can find your credit history report. The next important topic is what consumers can do to improve and maintain great creditworthiness. It may seem counter-intuitive at first but it is very difficult to have strong credit without first having a line of credit issued to you such as a credit card or a loan. The single biggest factor contributing to your credit score (as shown above) is your payment history. Without a track record of timely payments your score will suffer. The second biggest factor contributing to your credit score is the amount you owe on your existing accounts. These two factors account for nearly two-thirds of your score. There are some simple strategies you can use to positively influence both.
How Credit Cards Can Be Used to Positively Influence Your Score
Many consumers are concerned about credit cards due to high interest rate and the potential to fall behind on your payments. With that in mind, the first thing to consider when opening a credit card account is your ability to use your card responsibly. Credit cards can be an amazing financial tool when used properly. They can also cause a major and almost immediate impact to your score. A great way to maintain responsible credit card use is to use it as if it is directly attached to your bank account. Try your best to never exceed an amount that you are willing and able to pay off in full.
Here are some tips for maximizing the impact a credit card can have on your score:
1. Make your credit card payments are on time and paid in full. Maintaining a very small credit card balance may not negatively impact your credit score substantially. This said, revolving debt (credit card debt) can be seen as more detrimental to a credit score than other debt such as an auto loan.
2. Periodically request an increase in the line of credit on your existing credit card accounts to minimize your debt to credit ratio. To illustrate – a credit limit of $1,000 with a $500 balance would be 50% credit utilization. That same $500 balance on a credit limit of $5,000 would be a 10% credit utilization. The lower your credit utilization is, the better.
3. Maintain your oldest credit card accounts and keep them open to extend your account history. Having an account with a long history of payments is seen favorably when your credit score is calculated.
4. If your current credit history prohibits your approval for a credit card, consider finding a low fee intro credit card. These cards report to the credit bureaus just as other cards would. Many do not have strict credit requirements to open.
How To Manage Loans To Maximize Your Credit Score
The average American family has nearly $140,000 worth of debt. This may seem like a staggering amount of debt at first. When you consider the many sources of debt such as car loans, mortgages and student loans it quickly becomes apparent how fast we accrue debt these days. For consumers who do not have loan accounts, there is certainly no reason to open an account for the sole purpose of improving your credit score (see the credit card tips above instead). For the rest of us who have multiple loans, it is important to understand how to make payments to best benefit your credit score.
Here are some tips:
1. Never allow an account to become delinquent. Missing a payment at the due date rarely results in a report to the credit bureau intermediately. Allowing your account to become delinquent typically means you are 30 days behind your payment can result in a negative mark on your credit report.
2. Pay off your high interest loans first. This does not directly impact your score. With that said, making payments beyond the minimum due on your highest interest loans you are saving money on the life of the loan. These savings can ultimately be passed on towards other accounts to reduce your existing debt burden.
3. If you are having trouble meeting your minimum payments shop around to see if better loan options exists. Loan consolidation or refinancing options can often result in lower monthly payments and better interest rates. This can save substantial money and help you avoid missed payments on loans.
4. Set up automatic payments to make sure your loan payments are always paid on time.
Benefits of Maintaining a Great Credit History
As mentioned at the opening, your credit history can have major impacts on aspects of your life you may not have realized. Credit checks are routinely used from opening a new bank account to signing up for new cell phone services to applying for a new job. One of the best things a young adult can do to set themselves up for a bright financial future is to begin thinking about their credit history early. A missed payment early in life can impact your credit history a decade later. Never live under the impression that one misstep will not follow you in the future.
Having a great credit score will allow you to confidently apply for loans. When you apply for a car loan or mortgage without having to worry about your approval odds you will find it to be a huge relief. A great score will allow you access to credit cards which provide fantastic rewards. Great credit will ensure a potential landlord does not turn you away on the apartment of your dreams. Building strong a strong credit history does not happen overnight. As discussed, there are actions you can take daily to ensure you set yourself up with the best chance possible of achieving excellent creditworthiness. If you try hard, one day you could reach a perfect 850 FICO score!