What is Credit?
Credit is the ability of an individual to obtain goods or services based on the agreement that payment will be made in the future and because credit is a loan, you’re obligated to repay the borrowed amount. Available in various forms, loans and credit cards are among the most common. Start by familiarizing yourself with the three major types of credit available:
Usually backed by a major payment network and allows for balances to be carried month to month
Ex:) Credit cards, home equity lines of credit (HELOCs), retail/department store issued cards
Similar to credit cards except you’re required to pay the account in full by the end of each month
Ex:) Charge cards, accounts established with utility service providers – gas, water, electric
Either secured (backed by an asset) or unsecured, installment accounts allow you to repay the borrowed amount in a series of scheduled equal monthly payments, plus interest
Ex:) Mortgage loans, home equity loans, car loans
Your ability to maintain and handle multiple types of credit accounts is analyzed as part of your credit, and when managed responsibly the diversified accounts can improve your score and help you establish beneficial credit behavior.
IMPORTANCE OF CREDIT
Establishing good credit is an essential part of your financial life and will put you at an advantage when you’re in the market for a loan, mortgage or other credit product. When used sensibly, it can help you achieve both your short-term and long-term goals, like owning a home, going to college or financing a car. Individuals with good credit enjoy rewards like lower interest rates and favorable terms. Individuals with poor credit will find it challenging to get approved and often penalized with higher interest rates and less agreeable terms. Not only examined when applying for credit products, a number of authorized entities and organizations may review your credit history when you submit an application for employment or housing.
BENEFITS OF CREDIT
- Convenience – buy now, pay later
- Security – enjoy a layer of protection for purchases and billing errors
- Tracking – analyze spending habits for budgeting
- Reassurance – access to an emergency line of credit
- Options – transact over a variety of channels
- Opportunity – build your credit and improve your score by exercising smart credit usage
- Perks – earn and redeem rewards from purchases
Although your credit score is calculated based on the information provided in your credit report, the report itself won’t include your score. Knowing your score will put you at an advantage when you’re in the market for a loan, mortgage or other credit product by preparing you with a rating of your creditworthiness. Consumers with higher credit scores pose less of a risk for lenders, exhibiting the ability to repay debts on time whereas lower scores reveal more undependable borrowing habits and are less likely to result in approval and favorable terms. For example, the interest on a loan will be lower for a higher score and higher for a lower score since interest rates are often tied directly to your credit score. Higher credit scores will also qualify individuals for additional benefits such as more negotiation power and higher credit limits. In order to equip yourself with your most truthful credit score, you must first carefully review the information detailed in your credit report for accuracy. Any errors or inaccuracies should be reported immediately upon discovery as a mistake on your credit report can unrightfully and negatively impact your credit score.
Get Your Credit Report
Using information gathered from lenders, employers, insurers, and credit card companies a report is generated exhibiting how you’ve handled your current and past financial obligations including:
- Applications for new credit
- Available credit being used
- Bill payment history
- Current unpaid debts
- Debts sent to collection
- Quantity and type of loan account(s) (and duration they’ve been open) and
- Whether you’ve been sued or have filed for foreclosure or bankruptcy
Federal law entitles you to a free copy of your credit report from each of the three national credit reporting bureaus – Equifax, Experian, and TransUnion® – once every 12 months. You may also purchase an additional copy from one of the three credit reporting companies for a reasonable fee. You’ll need to provide the following information: full name, address (for the past 2-5 years), Social Security number, and date of birth:
Credit reports requested online can be accessed immediately whereas calling or mailing in a request will result in a 15-day processing delay. It is a good idea to stagger your requests and send for one every four months to regularly monitor your credit.
Review your Credit Report
Several organizations will examine your report to determine your level of financial reliability and because credit impacts many aspects of your life it is vital to make certain the information reported is correct. Serious errors on your report can negatively impact your credit and result in a lower score than you actually deserve. Be sure to carefully review the following information:
- Verify all personal information is accurate
- Validate all credit accounts listed are yours and reflect the correct credit limit and balance information
- Review payment history to ensure a payment made on time wasn’t recorded as late or missed
- Examine inquiries to see if they match all the places you applied for credit
- Confirm accounts you’ve closed state they were “closed at the consumer’s request” and
- File a dispute for any inaccuracies listed with the reporting credit bureau
Understand Credit Score Models
Different scoring models and formulas will result in more than one credit score being available to you and while Fair Isaac Corporation (FICO) and Vantage Score are not the only existing scores, they are widely used by both consumers and lenders. In order to efficiently track scores over time, decide which score brand and version you should use to evaluate your score and stay consistent:
Allows for a shorter credit history, only requiring one month and one account. Late mortgage payments are more damaging than other types under the FICO model and penalized more harshly. An inquiry grouping period of 14 days is recognized to dedupe multiple inquiries made in a short period of time to consider them as a single inquiry. Payment history on credit cards and loans is the most influential factor to this score, followed by total debts and amounts owed.
Requires six months of recent credit history and one account reported within the last six months. An inquiry grouping period of 45 days is recognized. Accounts sent to collection totaling balances less than $100 are not taken into consideration and payment history and the age and type of credit are the most influential factors of the Vantage Score.
Get your Credit Score
Procuring your credit score is considered a “soft inquiry” and will not impact your score. In addition to purchasing your credit score from one of the reporting credit agencies, scores can oftentimes be acquired for free through credit scoring websites and particular credit card issuers. A majority of the free sites offer complimentary credit monitoring and additional services:
Credit Karma: Vantage Score updated daily. Free credit monitoring, tax preparation rewards credit card reviews.
Credit Sesame: Vantage Score updated monthly. Free identity theft protection.
Credit.com: Vantage Score updated monthly. Credit management plan and expert guidance offered.
Maintain and Improve your Credit Score
Once receiving your score it’s likely you’ll see areas in need of improvement. While there is no quick fix for improving your credit score, implementing these tips will help you start to see a more positive credit history down the road:
- Ensure loan payments are made on time by setting up automatic payments and enabling electronic reminders through online banking
- Apply for new credit only when necessary
- Avoid leaving a balance and pay the whole credit card bill every month
- Use credit to make purchases only when you know you can pay that bill the same month
- Monitor how much revolving credit you have versus how much you’re using – usage should not exceed 30% of your total credit limit
- Safeguard against identity theft and fraud by checking credit accounts and reports regularly