Understanding Credit

We hear a lot about credit, credit monitoring, credit reports, credit freezes, and credit scores. What does it all mean for you? The credit matters because it affects your ability to get a loan, a job, insurance, housing, and more. It is important to understand what your credit is.

 

What is the credit, and it matters, why?

When people are talking about the credit, they mean from this is your credit history. The credit history will tell about how you use money. For example:

• How many credit cards do you have?
• How many loans do you have?
• Do you pay your bills on time?

How you handled your money and bills in the past will help lenders decide if they need to do business with you. Your credit history helps them determine what interest rate to charge you. If they see that you always pay your bills on time and never take on additional debt than you can pay back, they will usually feel more confident doing business with you. If they see that you’re late on your payments or owe more on credit cards or loans than you can repay, they cannot trust that you’ll pay them back.

 

Why do we have credit reports and scores?

The reporting system of credit history helps banks to avoid lending money to clients who have a history of not paying their debts or who are overextended. Banking was a personal experience less than 100 years ago. If you borrow money, you will walk into a local bank and convince a loan officer to give you the loan. You will have required to show proof of employment and, quite possibly, personal references who can vouch for your character. Back then, nearly all lending was secured, meaning you will need to put up collateral in order to take out the loan. The most common example of a secured loan is a house mortgage in which the bank takes an interest in the property. Since then, the rise of credit cards as a convenient, electronic purchasing equipment has made unsecured lending quite common. And though unsecured lending may be more profitable for banks, it is risky because there is no collateral for the bank to repossess if the debtor does not pay back the loan. As a result, the credit report system was made to give banks a centralized source of info about potential borrowers.

 

When did credit reporting start?

By the late 1950s and early 1960s, banks started collaborating to share client credit data including account balances and payment histories. These early credit bureaus were little and limited to individual communities. By 1970, however, some big companies emerged as leaders in credit reporting. These companies become the 3 credit bureaus i.e. TransUnion, Experian, and Equifax. In 1970, Congress passed the Fair Credit Reporting Act for regulating how credit reporting companies handled customers’ personal details, but credit reporting was primitive compared to the comprehensive reports today. By the 1980s, credit bureaus began to electronically store the detailed personal details (Social Security numbers, dob, addresses) and the loan, inquiry, and payment data that comprise credit reports.

 

How do you know if your credit is good?

Bad or good credit is based on the credit history. You can find out what your credit history seems like by checking your credit report.

 

What information is on your credit report?

Your credit report contains info that identifies you like your name, address, and Social Security number and info about your borrowing activity like loan applications, payment, and balances histories. In addition to your name, Social Security number, and date of birth, your report can contain previous addresses and employment info. Despite all of this great information, credit report mix-ups are yet quite common, if you have a common last name like Jones or Brown. The bulk of your credit report contains detailed info about recent activity on your financial accounts. This includes:

Credit inquiries: Any time you apply for credit whether or not you’re approved.

Open loans: Data will involve the bank, the loan amount, the date you opened the loan, your monthly payment amount, and your payment history.

Open revolving accounts: These are your credit cards. Data includes the bank, your credit limit, the date you opened the account, your payment history, and the balance on the account as of your last statement date.

Closed accounts: Accounts will remain on your report even after they’re closed for up to 7 years.

Collections accounts: In the event, you got a bill sold to collections; this account will seem on your credit report. This can occur even if the original debt was not included on your credit report like a medical bill.

Public records: These include tax liens, court judgments, and bankruptcy filings.

Comments: Credit bureaus give you the ability to add comments to your credit report to explain records. Creditors can add comments.

 

How do banks use your credit report?

Nowadays, companies use the data in your credit report to make credit scores, which most lenders will use in their underwriting as an alternative to manually reading your credit file. That said, you can expect an underwriter to look further closely at your credit report when you are applying for a bigger loan like a mortgage or in cases where your credit score is on the fence. In addition to approving your loan, your credit can determine how much you will pay for the credit. The high your credit score is; the less interest bank will charge you for the loan. Who cares? Well, you should if you care about saving money. For instance, the difference in total interest payments on a $250,000, thirty-year mortgage between a 5-% interest rate and an 8-% interest rate is about $179,000. That is the price of less than perfect credit. Companies utilize the credit score for other decisions sometimes. For instance, you can be asked to submit to a credit check when renting an apartment or applying for a job that includes financial responsibility. (few employers have used credit checks further broadly in their hiring procedure. Finally, insurance companies frequently use a specific version of your credit score in determining how much you will pay for car insurance.

 

Who cares about your credit history?

Landlords, lenders, insurance companies, and potential employers are some who can look at your credit history. Your credit history can make a huge difference when you:

• apply to get a credit card or loan
• look for a job
• try to rent an apartment
• try to purchase or lease a car
• try to get home insurance

Because these lenders, landlords, and others care how you handle your bills and other financial decisions, you can want to care about your credit, too.

 

What is a credit score?

A credit score is a 3-digit number derived from the data in your credit report that indicates how possibly you’re to repay a loan on time in relation to other borrowers. Different companies produce different credit scores under brand names such as FICO Score and Vantage Score. All these companies have various versions of their score for various end uses. Finally, every of these credit scores can differ depending on which of your 3 credit reports was used to pull the data. There are 3 credit bureaus: TransUnion, Experian with enrollment in Experian CreditWorksSM, and Equifax. Though most of your credit reports will be similar across all three, there can be differences. Generally, all credit scores can fall somewhere between 350 and 900. The higher the score, the great your payment history and creditworthiness. A low score means banks will consider you a high-risk customer.

To calculate your credit score, companies first pull info from your credit report, such as:

• how much money you owe?
• whether you have paid on time or late
• how long you have had credit
• how much new credit you’ve?
• Have you asked for new credit in recent times

Then, using a statistical program, companies compare this info to the credit behavior of people with the same profiles. Based on this comparison, the statistical program assigns you a score. Typically, credit scores fall between 300 and 850. A high score means that you’ve good credit. Businesses believe you’re less of a risk, which means you’re more possible to get credit or insurance or pay less for it. A lower score means you’ve bad credit, which means it will be harder for you to get a loan or a credit card and you’re more probably to pay high-interest rates on credit you do get.

 

 

What is a good credit score?

Though it depends on which score, you are looking at, you can be confident that a score of 720 is best on most scales, while a score of 800 is very best on most scales. If you have a score of minimum 700, you will have a good chance of getting approved for the good credit card offers, auto loan rates, and mortgage rates. Scores in the higher 600s are not necessarily bad, but they would not qualify you for all loans or better rates. With a sub-700 credit score, you can yet be declined for many of the great credit card offers. Finally, it is important to note that once your credit score approaches the high 700s to low 800s, any more increases would not do much for your banks will give you the best rates. (It is like if a prof awards an A+ to numerical grades of 97 to 100, once you hit 97 there is no more benefit to getting a 98 or 99, etc.)

 

How do you get a good credit score?

There are 3 components behind the best credit score, making a mix of loans and revolving accounts over time, paying bills on time, and avoiding high levels of debt.

How long it takes to make a good credit score?

The first step building credit by establishing a healthy mix of loans and revolving accounts is frequently the trickiest because it is a catch-22. You should get credit before you have a credit history, but it is difficult to get credit before you have a credit history. There are many ways to establish credit for the first time, but it is arguably easy to do when you are young and either in college or yet dependent on your parents. For instance, you can:

• Ask a parent to make you an authorized user on one of their credit cards.
• Take out a federal student loan, which usually doesn’t need a credit check.
• Take out a loan with a cosigner.
• Get a secured credit card, which works such as a prepaid debit card except it builds credit.

 

Get a credit builder loan

Use a free service such as Experian Boost™, which allows you to advantages from on-time payments that otherwise won’t be included in your credit profile. Once you’ve one open account, it becomes easy to get more accounts after about 6 months. Over time, you will get a good credit score when you have a minimum of 1 or 2 credit cards and one or two loans (such as student or auto loans). That said, having more accounts isn’t essentially better. Another important part of credit scoring is time also. It usually takes 3 years of responsible credit use to have an average credit score in the mid to higher 600s and up to seven years to develop the best credit score of 700 or more.

How does debt affect your credit score?

Too much debt is bad for your finances and it is bad for your credit score, too. Your overall debt level accounts for 30% of your credit score. Credit-card use affects your credit score. The high your combined balances in relation to your combined credit limits, the further your credit score will suffer. For the good credit score, you need to keep this utilization ratio as low as possible. Keep in mind that even if you pay your balance in complete every month, your credit report reflects your card balance on the previous day of your billing cycle. If you often use most of your available credit every month, your credit score will suffer even while you are paying the balance in full every time. You can avoid this by paying off most of your balance on the day before your credit card billing statement closes. Your credit report will show a $0 balance or close to it.

 

Conclusion

Credit reports record your payment history on all of your installment loans and credit cards. Credit scores rapidly summarize your creditworthiness on a scale between 300 and 900 based on the data contained in your credit report the high your score, the high your chance of getting the good rates on loans and credit cards. Banks use credit reports and scores to decide whether to loan money, but your credit info can be used for apartment rentals, employment screening, and insurance underwriting. Maintaining a best credit score is not difficult. Do not overextend yourself, but do not avoid credit altogether. Get a loan and a couple of credit cards and pay the bills religiously.