By Shannon Cornejo, Member Relationship Specialist Supervisor
Many people believe credit is only necessary if you’re looking to purchase a home or car. However, credit is much more important than some of us realize. For example, your credit can determine whether or not you are eligible for things like auto insurance or a cell phone service plan. Sometimes it can even be the deciding factor in whether or not you’re selected for a job. Here is a brief breakdown of credit and how you can make sure you never miss out on some of life’s most exciting opportunities!
A credit score is a predictor of the likelihood of a person paying a debt responsibly, which is translated into a numerical score. The most common score used is the FICO, which ranges from 300 to 850. The closer a borrower gets to 850, the better: It means lower interest rates and higher competition from lenders for their business. This score is determined by five basic factors: payment history, outstanding balances, history, type of credit, and recent inquiries.
PAYMENT HISTORY refers to your history of regular or delinquent payments. Have you paid as agreed, or have you been frequently or seriously late? Do you have any accounts that were delinquent so long that they were eventually charged off? These types of reporting accounts have a big impact on your score. Try to maintain regular, on-time payments to maintain a good payment history. If you are struggling with your monthly bills, do everything you can to cover at least the minimum payment to protect your score until you can seek advice or help from your financial institution.
OUTSTANDING BALANCES affect your score heavily as well. A good rule of thumb is to use 50 percent or less of your available credit line. If possible, try to go a step further and stay below 30 percent. When you use too much of your available credit, you are not managing your spending in a way that shows you are in control of your budget. Remember, your credit score is simply a snapshot of how you are managing your debt! If your credit lines are close to their limits, that could be a sign of a borrower being overextended in their spending habits.
CREDIT HISTORY tells a lender when you first borrowed money and how you have managed or grown your credit profile since then. The length of time since your first account and how many accounts have been opened and maintained positively is important to show that you’re an established borrower with a pattern of good payments. Think of it this way: If there was nothing in your history, how would a lender know if you were a good candidate to lend to? It is important to establish good payment and spending habits so that when you need a loan, you have a strong profile to prove your character as a borrower.
TYPE OF CREDIT is also important in that you need to have a diverse borrowing history. Only borrowing to purchase a car can mean that you are virtually unknown to a lender for a credit card or emergency loan request that has no collateral involved. Make sure you have accounts of each type so that you can show you know how to handle your available credit lines.
INQUIRIES against your credit can be costly if pulled too often. A hard inquiry affects your score each time it is pulled by a lender. Generally, once you have given your social security number to a lender they at least have the intention to inquire on your credit, if not to fully complete an application for credit for you and then provide you with a loan. To avoid unnecessary inquiries, be selective in who has access to your credit by asking whatever questions you feel are appropriate to ensure you understand what’s happening before giving out your information.
Anyone who would like to see their credit report is allowed to view their own report once per year for free by visiting www.annualcreditreport.com. Keep in mind that only your report is free; scores are available, but cost you a small fee. Remember that your credit is a reflection of you and your experience with borrowing money. Your credit score should not be a weight on your shoulders or a dark cloud over your head, but rather an accomplishment that is cultivated from hard work and patience! Always spend in a way that is reasonable to pay off, and don’t be nervous to ask your financial institution for budgeting help if you find yourself struggling.
*The content provided in this blog consists of the opinions and ideas of the author alone and should be used for informational purposes only. VyStar Credit Union disclaims any liability for decisions you make based on the information provided.