What is credit? Why does it matter? And how do you find out if yours is good or needs improvement? These are all really good questions to ask as your credit helps different companies determine whether or not they will lend to you. Poor credit may affect everything from credit cards, car loans and apartment rentals, to school loans, and buying your own home.
Your credit-worthiness is determined by your credit score; a 3 digit number calculated by five different categories of information in your credit report, including:
- Payment history
- Length of credit history
- Recent activity
- Overall capacity
This 3 digit number helps creditors and lenders determine whether or not they think you’ll repay the loan you’re asking for. Let’s take a closer look at the categories that make up your credit score.
- Payment history is by far the most important factor of your credit report. It’s essential to pay your bills on time, every single time. Any late payment is going to have a significant effect on credit scores. Your payment history accounts for about 35% of a credit score. 1
- Utilization, which is the balance-to-limit ratio on your credit cards, is the second most important criteria. You never want a balance to be higher than 30% of the credit limit on a single credit card or in total. To determine your utilization rate, add up all of your balances and all of your credit limits and divide the total of your balances by the total of your limits. That percentage should not be more than 30% as a maximum. It has been found that the people with the best credit scores have zero late payments and utilization rates of less than 10%. Your utilization rate accounts for about 30% of your credit score. 1
- Length of credit history, which is based on the length of time each account has been open and your credit mix, which is the different kinds of accounts you have including mortgage, credit cards, auto loans, etc… Having a variety of credit types can increase your score slightly, but you should not apply for a number of accounts all at once to try to improve this element. Doing so will do more harm than good.1
- Recent activity looks at how much credit you’ve received or applied for in recent months. Specifically, it will look at if you have applied for new credit in the past 3 – 6 months, new inquiries, and whether you are paying off accounts or taking on more debt. 1
- Overall capacity, such as how much installment debt you currently have outstanding. 1
While different creditors and lenders have their own standards for rating credit scores, generally, a score of 700 or higher is considered good.
As it pertains to a mortgage, which may be the biggest purchase you ever make using a loan, having a good credit score may mean the difference between getting approved or denied. Even if you have a credit score that qualifies for the lender, a better credit score means less potential risk to that lender, and they can offer you a better interest rate. With a better interest rate, you may be able to qualify for a higher loan amount. To qualify for the best possible rate, your score should be in the mid-700s or higher. But keep in mind, your credit score is just part of what lenders look at for determining your credit-worthiness. Even with an acceptable credit score, your credit report will be reviewed for items such as bankruptcy, foreclosure and other derogatory credit items.
Which brings us to credit reports. It’s a good idea to review your credit report on an annual basis, making sure the information is accurate, complete, and up-to-date, especially before you apply for a loan. Reviewing your report also helps guard against identity theft. Identity thieves may use your information to open a new credit card account in your name. When they don’t pay the bills, the delinquent account is reported on your credit report, potentially affecting your ability to get credit, insurance, or even a job. 2
The good news is that the Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies – Equifax, Experian and TransUnion – to provide you with a free copy of your credit report, at your request, once every 12 months. To order your free report, visit annualcreditreport.com, call (877) 322-8228, or complete the Annual Credit Report Request Form and mail it to the address found on the form. 2
If you find inaccuracies or errors, be sure to tell the credit reporting company, in writing, what information you think is inaccurate. Credit reporting companies must investigate the items in question – usually within 30 days. When the investigation is complete, the credit reporting company must give you the written results and a free copy of your report if the dispute results in a change. 2
All-in-all, your credit score is a very important piece, used throughout your life to obtain many of the larger items purchased during different life stages. If you find that your credit score could use a little improving, consider these five ways to help: 3
- Make sure your credit reports are accurate
- Fix any late payments
- Clear up any collection accounts
- Limit credit applications
- Consider getting a credit card and pay the balance each month to build good credit
If you’re interested in obtaining a loan, or have questions regarding your credit as it relates to a loan, Bank Five Nine is happy to help! Give us a call at (888) 569-9909, visit your nearest branch location, or find a lender near you.
1 Information sourced from https://www.experian.com/blogs/ask-experian/how-is-your-credit-score-determined/
2 Information sourced from https://www.consumer.ftc.gov/articles/0155-free-credit-reports
3 Information sourced from https://www.credit.com/credit-repair/how-to-improve-credit-score/