Understanding Credit

Credit is an essential part of the economy. Without credit, lenders would have no scale by which to create lending standards and determine who should receive credit and who should not. You need good credit to buy a car, a home and sometimes even to qualify for employment.

There are many factors that help create your credit score, though some are weighted more heavily than others. Three different credit bureaus assign and weigh these credit factors. Then there is FICO, the word that, though often used interchangeably with credit score, is not the same thing. With all of these factors and rules, credit can be a hard topic to navigate, but it is essential for you to have.

But what if you have no credit, or worse, what if you have bad credit? Don’t throw in the towel just yet! This guide will answer your questions about credit and help you learn how to build, improve and maintain your credit score.

What is your credit report?

It’s important to know the difference between a credit report and a credit score. A credit report is not unlike the pesky report card you got in school. It is comprised of information from lenders that include payment history, amount of debt and payment frequency.

Unlike your report card, your parents don’t have to see your credit report, but you can show it to them if you want.

Also, did you know that you are legally entitled to one free credit report from each of the three bureaus every year? Yeah, no kidding. You can obtain a free copy of your credit report online at Annual Credit Report or by calling (877) 322-8228. Checking your own report won’t cause your score to go down, only hard inquiries do that – which is when a lender looks at your credit when you apply for a loan or credit. Once you know what you’re dealing with, you can work to improve your credit!

What is a credit score?

A credit score is a three-digit number based on pieces of information found in your credit report.

How is your credit score determined?

Though there are many factors that determine what your credit score is, two of those factors weigh more heavily into the equation – payment history and amount of debt.

Payment history

While the percentages may vary slightly depending on your overall report, nothing is as important as your payment history. Your payment history is comprised of just that: your history of payments on all accounts. It includes information on whether your payments were on time, late or missed. It also includes information on the amount that you paid, whether it was the entire balance, the minimum or less than the minimum. If you have not paid on time and at least the minimum due on your accounts, it will have a negative impact on your score. So while you may not remember the time you maxed out your credit cards for that Vegas trip and spaced out on your car payment while you were there… your credit report might, and likely will, remember.

Amount of debt

The second biggest factor is the amount of debt you currently have. Lenders use a debt-to-income ratio (DTI) which is calculated into a percentage that helps them determine if they should extend credit to you. The more debt you have, the more negatively it will impact your score.

What are debts, specifically?

Mortgage loans, credit card payments, car loans, student loan debt, child support and alimony – anything that would present itself on a credit report.

Things that you pay monthly but should not be confused with debts: Your gym membership, your Netflix account dues, magazine subscriptions, Justin Bieber fan club dues…

What do I do about an inaccuracy on my credit report?

Inaccuracies on your report can negatively impact your credit score. Be sure to closely monitor your credit report for any errors. If there is a credit card account listed that doesn’t belong to you, contact that creditor. You can also dispute an error on your credit report with each credit bureau (Equifax, Experian, and TransUnion).

What is a good credit range?

Most credit scores are scaled on a range from 301 to 850, and categorized Bad, Poor, Fair, Good, and Excellent, with the lowest scores rated as “Bad” and the highest scores rated as “Excellent”, with the other scores scaling in between. Credit scales aren’t set in stone as lenders have their own standards for what constitutes a “good” credit score – but the higher the score you have, the better.

How do you improve bad credit?

  1. Make your payments on time: This is the most important thing you can do to positively influence your credit score.
  2. Get current on all of your accounts: Get current and stay current. Payment history accounts for 35% of your score and has the greatest impact on it.
  3. Improve your debt-to-credit ratio: Pay down your account balances and keep them low. The ideal debt-to-credit ratio is less than 30% utilized, so you should aim to reach that percentage.
  4. Pay off minuscule balances: One of the factors in credit assessment is how many of your accounts have balances. So try this: instead of charging $40 on three different credit cards, you can charge $120 on one card and keep the others at a zero balance. Just make sure you don’t close the zeroed out accounts, as this too can hurt your credit score.
  5. Keep inquiries within a short time period: Every hard credit (new account) inquiry will cause your score to dip (usually a few points) for one year. While it is expected and beneficial for you to shop for the best rate, try to keep your time frame as brief as possible.
  6. Keep paid off accounts open: Even if you don’t think you will use the account, your open accounts determine your account age; therefore, the longer the account has been open, the more it will positively impact your score.
  7. If you have had credit problems, re-establish a clean history: When starting over, start small by opening new accounts and paying them responsibly. This will help you re-establish your credit history.
  8. Pay your fines: Some cities have begun to turn small fines in to private collection agencies. This could include items such as your delinquent library books and unpaid parking tickets.
  9. Ask before you purchase: Did you know that some cable and internet providers run a hard inquiry when you sign-up for their service? Protect your credit by asking companies about their policies before you sign-up.
  10. Don’t close a delinquent account: It may seem counter-productive since you would like to remove it from your active account list, but if you close an account with a balance, it will cause your available credit and credit limit to be reported as zero.

How do you maintain credit?

Now that you have learned how to improve your credit, here are five things to avoid:

  1. Maxing out a credit card: This makes your credit utilization 100% and has one of the worst impacts on your credit score.
  2. Not knowing that paying off a collection account will not remove it: You can’t hide from FICO – the paid account will remain on your report for seven years.
  3. Opening new credit cards to increase your credit: You may think it expands your credit portfolio, but creditors could see it as you trying to max out your credit potential.
  4. Not using your credit cards: You can’t build credit without using credit. Some creditors even have a time period after which your account will be marked inactive, and some will simply close neglected accounts.
  5. Making purchases by using a retailer’s 0% financing program: This offer is usually viewed as a last resort type of loan and could cause creditors to view you as high risk.

Congratulations!

You now have all the tools you need to sell your home quickly. To view all of our educational guides, check out our other guides. We would love to hear how this guide helped you and we hope that you will call us and share any questions or comments you may have. Call us toll free 1 (888) 914-2276.

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