I am not a professional licensed to give financial advice so please make decisions at your own discretion. I’m just trying to help people understand their finances rather than being sued. I’m also not making any money from promoting these links or products. I just really like them. Thank you!
While I’ve mentioned the disclaimer above, I would also like to say that I am not completely unqualified in this field. I’ve worked in the loan industry before and was surprised at how many people were so unaware at how much credit impacted their lives as well as how blissfully unaware that they were while applying for something they were inevitably going to be denied. Please sit and join me in talking about credit:
The textbook definition of credit is “the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future”. The key phrase here is “trust”.
In the real world, that “trust” is known as your “credit score”. This credit score is comprised of a lot of different factors and ranges from as low as 300 to as high as 850. While it can be difficult to pinpoint what the “average” credit score is due to the different scoring models, most sites will say the average is around 680. If yours is higher than that, congrats! If it’s lower, you may need some help rebuilding it 😬. You might not even have any credit! If that’s the case, check out this post where I tell you how you can start building credit.
There are numerous factors that affect your credit score but the major ones include:
Payment history – 35% Very important
Having a long history of payments is great and looks favorably on you because it shows consistency and a trend of being responsible. The opposite, however, can be very dangerous if a lender sees you consistently making late payments. This factor accounts for a large chunk of your credit score.
Credit Usage – 30% Very important
Your credit’s health is also a vital component of your credit score because it measures how responsible you’ve been managing your debt. The golden rule most want to abide by is a credit utilization of less than 30%
Meaning if you have a credit card with a limit of $1,000 you want to make sure you only have a balance on your card of $300 or less. If your balance is $950 and you only have $50 left on your card, you’ve almost maxed it out and appear as being irresponsible in the eyes of lenders. ESPECIALLY if you’ve maxed out several cards/lines of credit.
Length of credit history – 15% Somewhat important
Lenders want to see you having some history managing credit much like employers want to know you have some experience before hiring you. Lenders want to see how much debt you’ve handled, how long you’ve had credit, how much new credit you have, and the overall credit utilization.
Although this is somewhat important, it’s not something you have much control over just yet.
Credit mix – 10% Somewhat important
This is fairly important in the eyes of lenders because it shows you can be responsible for different kinds of lines of credit. For example, you could have a credit card or two, a car loan, and some payments already made to your student loan.
Though it is fairly important, I am in no way saying you should go out and get a credit card or car loan you don’t need simply to increase your credit mix. Allow this to grow organically once you can afford to do so.
Inquiries – 10% Less important/Somewhat important
An inquiry is something that occurs when a lender of any sort checks your credit before making a lending decision. Meaning any time you apply for a line of credit like a credit card, it will count negatively against you.
“Financing” is another word for “getting a loan”. Don’t do this unless you can afford to see it on your credit report. Don’t let those salesmen pressure you to apply for something that will lower your score like financing for a phone you don’t need or a department store credit card that will only end up saving you 5% on purchases you are only allowed to make in that store.
Public records
This can be a little rarer depending on the situation but public records that can affect your credit score negatively include bankruptcies, tax liens, and collection items. Be sure to avoid these as much as possible because they can lead to lawsuits depending on the severity.
I tried briefly explaining the factors that affect your credit score, but if you want a more detailed explanation, check this article out!
The way you live your daily life affects your credit score, or the “trust” companies place on you. When applying for a loan in the future, lenders will want to see a trend of consistent payments and be more likely to offer you the loan with a competitive rate so you choose them.
On the other hand, if you are consistently late on payments or don’t even pay the money back, lenders will notice this trend and be wary of lending you anything. If they do, it will include a crazy amount of interest to make sure they get their money’s worth from you.
I highly recommend you order your credit report as you are entitled to 1 completely free report per bureau. When ordering your free annual credit report, you have the flexibility to request all three of your reports at once, or you can space them out over the course of the year. Head over to Annual Credit Report in order to request your report.
In the coming posts, I’d like to talk to you guys about the different credit bureaus, my two cents on your credit score, and how you can start building credit.
