Put a Shine on your Credit Score: How to Build Credit!
By: Bob Anderberg
If you have ever taken out a bank loan, which many of us have, you will inevitably have your credit score pulled to determine the cost of the loan. A person’s credit score is more than just a loan-worthiness score; it is how the financial community views the likelihood you will repay your debt!
“A person’s credit score is more than just a loan-worthiness score!”
You might say it is a window to a person’s financial character and reputation. Because of this, a credit score may also be pulled by a landlord to evaluate whether they will lease a property to a renter, and credit scores might even be pulled by an employer as they evaluate a job applicant because of this character aspect of the score.
Why a good credit score is essential
A good credit score can make it easier to get a job, buy a house or a car, rent property, obtain credit cards and more. These important life goals are met with the greatest ease and the lowest cost with a good score. A poor credit score will throw up obstacles of cost and accessibility for these same things. There are three major Credit Bureaus that Lenders use: Experian, Equifax, and Transunion. Scores can range between 300 (poor) to 850 (excellent) How they evaluate your score and how you can improve it is based on the following criteria:
BILLS: Do you pay your bills on time?
Paying your bills on time!!! This is the single largest thing you can do to improve and maintain a healthy credit score.
- Up to 35-40% of your credit score is weighted on your payment history.
- Being a month late for just one account can lower a score almost 100 points, and it can take several months to over a year of paying bills on time to recover from a late payment.
- A life event which prevents all bills from being paid for a month can lower a score almost 200 points, and it can take years of paying all bills on time to recover from this.
At the end of the day, a lender is most concerned about you paying your bills in a timely fashion.
AMOUNT: How much credit to you have—and how do you use it?
How much credit do you have available, and how do you use it?
- If you have credit cards or lines of credit that are maxed out or close to the limit, this can impact 25-30% of your score.
- It is important to keep your credit usage below 30% of your credit limit.
- One might think that simply adding more credit cards and thus adding a higher credit limit would improve a credit score. This is not the case if you are near your credit limit. Instead, it may have the opposite effect.
- Increasing the balance on an existing credit card can raise a score if it is low in usage. Adding credit responsibly can be beneficial, but adding more because you are maxed out will harm your credit score.
HISTORY: How old is your credit?
How long have you had credit? This can amount to 15% of your credit score.
- If you have an old credit card that you do not use anymore, it can hurt your score to cancel the card if you have had it a long time.
- The longer you have established credit, the less risky you are perceived to be by the credit bureaus. It is beneficial to have lines of credit with a long history of usage.
TYPES: How diverse is your credit?
How many different types of credit do you have? 10% of your credit score is based on the types of credit you have.
- Having a mix of different loans and lines of credit can help your score. A person who is applying for a mortgage for the first time will be in better shape score-wise if they have shown they are responsible stewards of both an installment loan (e.g., an auto loan, where you borrow once and then make payments) and a revolving line of credit (e.g., a credit card), compared to someone who only has one type of credit (e.g., only having several credit cards).
- Thus, having a mix of installment and revolving credit will have a positive impact on your score.
HARD INQUIRIES: How often do you have hard inquiries?
Multiple credit inquiries in a short period of time can impact 10% of your score. There are two types of inquiries:
- A soft inquiry does not affect your score, and includes inquiries for background checks, preapprovals for financing, and when you order your own credit score.
- In contrast, hard inquiries happen when you apply for additional credit including credit cards, mortgages, and other bank loans. The credit bureaus frown on these inquiries because it raises the questions of whether the ability to pay existing credit will be impacted by the new credit being applied for. It is important to limit these hard inquiries to loans you intend to utilize.
OTHER RISKS: Multiple credit cards, many balance transfers, errors, or unpaid accounts!
- Other ways to damage a credit score, besides not paying bills on time, include balance transfers and having too many credit cards.
- If you find that you have incorrect information on your credit report, you will want to contact the credit agencies in writing to dispute this inaccurate information. Credit repair companies can help with this process. If harmful credit information is correct on your credit report, sometimes the only thing that can remove it is time.
- If you are taken to collections, default on a student loan, or have an unpaid judgement, this can stay on your record for 7 years. A bankruptcy can impact your credit score for 10 years, and criminal convictions stay on your credit record forever.
Your credit score reflects your financial health. Growth is possible—and support is available!
Your credit score goes a long way towards your ability to buy a house, an automobile, and finance other large purchases at lower costs. Your character and general financial health are reflected in this score, so it is important to maintain a good to exceptional rating. Having a good financial advisor can help you navigate the best way to manage your debt and credit. For more information on how we can help you please visit us at www.f5fp.com, or schedule a free consultation.
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