Tag Archives: Credit Score

Credit Score

Posted on by

Credit scores are mathematical formulas that help lenders determine how likely you are to pay back a loan. Credit scores:

  • Range from 300 to 850.
  • Are not based on your income.

Here’s a breakdown of all the factors that affect your scores, according to Nerd Wallet:

Payment history. Your credit reports reveal your payment history, or whether you’ve consistently paid bills and other obligations on time. FICO says payment history accounts for 35% of your score. Paying bills late by 30 days or more can dent your scores — and the later you pay, the greater the damage.

Credit utilization The amount of your credit limit you use, expressed as a percentage, is called credit utilization. FICO says the amount of available credit you use counts for 30% of your score.

Other credit score factors you should know about

Other credit factors that also affect your scores include:

  • The length of time you’ve had credit: Longer is better, so keep old accounts open unless there is a compelling reason to close them, such as an annual fee on a card you no longer use.
  • The kinds of credit you have, or credit mix: It’s best to have a mix of installment accounts — those with a set number of equal payments, such as car payments or mortgages — and credit card accounts.
  • The length of time since you’ve applied for new credit: Each application that causes a hard inquiry on your credit may take a few points off your score.
  • Total balances and debt: It’s best if you’re making progress in paying off your debt.

Factors that don’t affect your credit score

  • Checking your own score: If you get your own score through your bank or a free credit score service, it does not affect your score. That’s because checking your own score is considered a soft pull on your credit. You can check it as many times as you want with no impact to your score.
  • Rent and utility payments: In most cases, your rent payments and your utility payments are not reported to the credit bureaus, so they do not count toward your score.
  • Income and bank balances: Credit reports do include some employer information, but it’s used only to match account data to the right person. Getting a raise won’t bump up your score, and it is possible to build credit on a small income. And since reports list only credit accounts — not savings, checking or investment accounts — your balances in those also won’t help your score.

Want to raise your credit score? Here are some tips!

  • Start by checking your score (for free).
  • Tackle your debt, even when you can’t pay very much.
  • Avoid asking for more credit.

It’s an often repeated myth that keeping a balance when using credit cards will raise your credit score. The truth is that paying on time, every time, is what’s good for your credit — and paying in full is the most economical, because it lets you avoid interest, explains Nerd Wallet.

It’s important to put at least some of your spending on a credit card from time to time, but spending more will not benefit your score. Aim to use no more than 30% of your credit limit on any of your cards, and less is better. That’s because the second-biggest influence on credit scores is credit utilization — the portion of your credit limits you use.

To keep your credit utilization low, you can:

  • Sign up for balance alerts via text or email from your credit card issuer so you can stop using a card if the balance gets close to 30% of the limit.
  • Consider making several payments throughout the month to keep balances low.
  • If your credit is good or your income is up since you applied, ask for a higher credit limit. This will lower your credit utilization by bumping up your total credit limit, as long as your spending stays the same.
  • Think twice about closing old or little-used cards, because they contribute to your overall credit limit. Your credit utilization could shoot up due to the loss of available credit from a canceled card.
  • You could also increase your available credit by opening a new credit card, but it’s important to research the best credit card for your financial needs before applying.

Checking your credit score

There are several ways that you can check your credit score for free. A great place to start is to check if your bank or credit union offer this service for its customers. Additionally, each of the three credit reporting agencies (Experian, Equifax and Transunion) allows you to check your credit score for free.

Everyone is entitled to one free credit report a year from the three agencies at annualcreditreport.com, according to the federal government.

References:

  1. https://www.nerdwallet.com/article/finance/credit-score-does-carrying-a-balance-help
  2. https://apnews.com/article/business-0a536993ce494fc8d6fe2c5d637da5b5

Your Credit

Posted on by

“Your credit is a lot like your health. To keep it in good condition, you want to take care of it, minimize risk, watch for warning signs, and make responsible decisions.” Capital One

Credit consists of information about your borrowing and repayment history. It is a record of how you, as a consumer, has paid credit accounts in the past, and is used as a guide to determine whether you are likely to pay future accounts on time.

Good credit histories generate good credit scores and are rewarded by lenders with lower rates and favorable terms; bad credit can cost you.

Good Credit Habits to Practice Daily

To keep your credit healthy, here are four regular habits to practice every day, according to Experian:

1. Pay Your Bills on Time

The most important thing you can do to maintain a good credit score is to pay your bills on time. Payment history accounts for the largest share of your FICO® Score. To make sure you don’t accidentally miss a payment deadline, consider setting up automatic monthly payments for at least your minimum amount due. You should also consider reviewing your balance and making payments throughout the month instead of waiting until your bill comes due. This can help you avoid interest and make certain you don’t miss you don’t miss a payment. Remember: Any payment made more than 30 days past the due date can stay on your credit report for seven years.

2. Keep Your Credit Utilization Low

Credit utilization measures your credit card balances against your credit limits. Here’s how this works: Add up the credit limits on all your credit card accounts to find your available credit. Next, add up all of your credit card balances. Divide your total balances by your total available credit and convert to a percentage to get your credit utilization ratio.

When it comes to credit scores, the lower your utilization, the better. As a general rule, keeping your utilization below 30% will prevent credit score harm; those with the highest credit scores tend to have credit utilization ratios in the low single-digit percentages.

3. Check Your Credit Score Regularly

It’s always handy to know where your credit score stands and how it has changed: It helps you understand what effect your actions have in your scores. Beyond this, checking your credit score regularly can help you detect any problems that might be brewing and reverse course if you’re getting off track. If you’re in the process of improving your credit, a rising score is great positive feedback.

Checking your credit report periodically is also a good idea. Not only will you spot any negative or inaccurate information that might crop up, but you can also make sure there aren’t any new accounts you haven’t applied for—those may be a sign of identity theft.

4. Apply for New Credit Only When Needed

Having multiple accounts and a mix of credit types is good for your credit score. It’s a signal to lenders that you have the know-how to manage different types of credit.

But too many recent credit applications can be a drag on your creditworthiness. Each time you apply for a loan or credit, the lender runs a request for your credit report known as a hard inquiry. Although one hard inquiry on its own might result in a minor and momentary dip in your credit score, many recent applications can affect your credit more noticeably. A constant stream of hard inquiries—or a recent flurry of them—may cause lenders to view you as more of a credit risk.

When you do apply for new credit, make sure you understand your creditworthiness, and only apply for credit when you think you have a high likelihood of being approved.

Good Habits and a Healthy Outlook

Developing these four basic habits can help you keep your credit in good shape. In addition, monitoring your credit can help you track your progress and keep your goals top of mind.

  • Your spending habits—including purchases made with credit cards, as well as payments for insurance, car loans, utilities and cell phone bills—are the blueprint for your credit history and can make or break your reputation as a borrower.
  • Paying bills on time and in full is key to good credit and makes it easier for you to secure a mortgage, car loan or private student loan in the future. Regardless of how long you’ve had good credit, missed payments put a black mark on your report. On the other hand, a good balance of credit with consistent and timely payments can boost your score and keep it healthy.
  • Paying late or defaulting on payments is a red flag for lenders. If you have poor credit history, you’ll likely be seen as a risk and may not get a loan or credit card, or may be given one with a higher interest rate. Negative information and late payments remain on your credit report for seven years from the date of the initial late payment. The effects of these black marks on your credit score will, however, lessen over time.
  • And, you can’t hide debt or bankruptcy. Having too many credit cards and credit card debt affects your credit. And, bankruptcy does not erase bad credit history. Although declaring bankruptcy frees you from paying back all or part of your debt, the delinquent accounts aren’t deleted from your credit report. Instead, they’re added to show they were included in bankruptcy and can remain on your report between 7 and 10 years.

Terms like “credit history,” “credit report” and “credit score” are important to understand. They are three critical and separate entities that are directly related to one another.

  • Credit History: an unofficial record of your debts and repayments. You need a history of responsible credit use to establish a solid credit history and credit score. If you don’t establish and maintain various types of credit accounts, your scores won’t be as good as someone with a long history of responsible credit use.
  • Credit Report: an official record of your credit history collected from sources like lenders, utility companies, landlords and collection agencies, and compiled by the three credit bureaus, Equifax®, Experian® and TransUnion®
  • Credit Score: a statistically calculated numeric value indicating your creditworthiness based on the information contained in your credit report. While there are several credit-scoring formulas, FICO® (the acronym for Fair Isaac Corporation, the company that provides this model to financial institutions) is the most widely recognized. Scores range from 300 to 850, with under 400 typically indicating very poor credit and above 670 demonstrating you’re a responsible borrower. It’s important to understand that your income has nothing to do with your credit score and isn’t even reported to the credit bureaus

Credit scores are available for lenders, landlords and others to use in assessing if you’re a good financial risk to take on. Ranges of scores are often translated into quality ratings, such as good, fair and poor.

The amount you have in savings doesn’t impact your credit score or show up on your credit report, but chances are, if you have good savings habits and other good financial habits, you probably have a good credit score.

https://youtu.be/WL72pAZkiiI

The way you use credit can have a positive or negative impact on your credit (or FICO®) score. Each time you apply for credit, an inquiry is reported. Inquiries come in two forms: hard and soft. Both types of credit inquiries enable a third party, such as you or a lender, to view your credit report.

On the other hand, a good balance of credit with consistent and timely payments can boost your score and keep it healthy. Although credit is easy to use, you may hurt your score if you use a high percentage of the credit available to you. Here is how to keep your utilization rate low:

  • Use your credit cards wisely. Don’t use them to purchase more than you can pay off each month. Instead, set aside money each month to use for these purchases to pay your bill in full. For larger, more expensive purchases, save in advance so you can pay off the balance right away, thus avoiding high interest rates. “Used wisely, credit is an important tool in your financial toolbox,” explains Stefan Ross, vice president of credit card products at Fidelity. “Using credit cards in the right way can help you build wealth and get better loan terms.”
  • Control spending. It’s easy to spend $20 here and $40 there without thinking too much about it, which is how trouble starts. Keep track of your spending by reviewing your payment history online or saving receipts for one or two months to see where you can cut back.
  • Pay more than just the minimum. If you have credit card debt, paying just the minimum may cost you additional money. Paying the minimum may cover the interest only, which may be high for credit cards. You could spend years and thousands more than is necessary to pay it off, so increasing your payments may allow you to get rid of this debt faster.

Five factors determine your credit score: payment history, amount you owe, length of credit history, new credit and forms of credit.

  • Payment history. Although this is only one piece of your credit picture, it’s one of the most important. However, a good overall credit picture can outweigh one or two late payments.
  • Amounts owed. Owing money isn’t an automatic blot on your credit score. In fact, a healthy balance and timely payments can actually improve your credit score. However, if you’re using a high percentage of your available credit (which is called your credit utilization ratio or balance-to-limit ratio), it can indicate you’re overextended and a potential risk. Aim to keep your balances across all accounts below 30 percent of your available credit.
  • Length of credit history. A longer credit history generally will increase your scores, depending on how the rest of the credit report looks. Accounts paid as agreed remain on file for up to 10 years from the date of last activity.
  • New credit. Opening numerous accounts at one time can be detrimental to your score, especially if your credit history is short. That is because new accounts will lower your average account age.
  • Types of credit in use. Generally, your credit mix is more important if your credit report does

Source: myFICO.com.

The two most important factors on a credit report that make up the majority of your FICO score are your debt-to-available credit ratio, or credit utilization, and your payment history. So keeping your debt level low and making on-time payments help make you more attractive to lenders.the amounts you owe and your payment history.

A good general rule of thumb is your spending no more than one-third of your income on credit repayment—including mortgages, credit cards, and loans (e.g., car loans, student loans, and lines of credit) and track your spending to make sure that you’re staying within your budget. A budget outlines all of your income and your monthly expenses. This will help you map how much you have available to spend, and how much debt you can you can afford to take on and repay.

“If you don’t have the money to pay for an item now, you probably won’t have it after the credit-card bill arrives,” says Robin Holland, senior vice president for customer service operations at credit reporting agency Equifax. “We need to be wise about the use of credit. If you can’t pay for an item in a reasonable amount of time, you shouldn’t be charging it.”

Many people treat and think of a credit card as free money. Instead, you should think of a credit card as an unsecured personal loan from the bank that allows you to buy goods and services now and pay later. A wise consumer pays the balance in full each payment cycle and effectively uses the bank’s money interest free for about a month.

“Credit is a financial tool, debt is the financial problem.”

References:

  1. https://www.navyfederal.org/makingcents/knowledge-center/financial-literacy/understanding-credit/what-is-credit.html
  2. https://www.fidelity.com/viewpoints/personal-finance/credit-cards
  3. https://www.capitalone.com/learn-grow/money-management/use-credit-wisely/
  4. https://www.forbes.com/2005/12/19/creditcards-visa-mastercard-cx_sr_1226credit.html?sh=5fc49ee63879

Your Credit Score and How it Works

Posted on by

It is important for consumers to understand how your credit score works.  Since, not understanding how credit scores work can actually hurt your credit score.  Your credit score can affect your financial future and you need a good credit score to get the lowest interest rates on future loans.

Stack of credit cards and dollars.

Most consumers understand that bankruptcy or foreclosure is going to negatively impact their credit score for seven years, but there are plenty of other small mistakes a consumer can make that can turn a good score of 750 or higher into a mediocre 680.

One mistake people make is thinking that carrying a monthly balance on your credit card statements helps improve your credit score.  The truth is that you can build a great credit score without carrying a balance and paying interest on your purchases, according to consumer advocate Clark Howard.

The smart and responsible way to use credit cards is to have a budgeted amount that will go on your credit card each month and pay your bill in full each month.  Clark Howard also recommends that consumers do not charge more than 30% of your available credit card balance.  Preferably, keep it below 10% if you want to boost your credit score quickly.

According to Clark Howard, your payment history makes up 35% of your FICO score and it is important to understand this fact when bills are due.  Consequently, you can attain a good credit score by paying your bills on time and keeping a low credit card balance.

References:

  1. Howard, Clark, Big mistake can hurt credit score, The Atlanta Journal-Constitution, October, 1, 2020, pg. D1
  2. https://finance.yahoo.com/news/7-small-mistakes-that-will-hurt-your-credit-score.html