Credit Risk, Credit Score, and Getting Good Credit
Is Credit Important?
There is value in having good credit, but there are a lot of things that contribute to your credit rating. With so many people unemployed, getting behind on bills, or just facing challenging times, understanding what makes your credit score is essential in the life and times of modern America.
There are so many reasons that we need credit these days. One of the most common is that it is very difficult to even live without a credit card. To rent a car, check into a hotel, book an airline ticket, and so much more requires a credit card. A lot of times a debit card won't even work or if it will work you may just freeze up a large balance of your cash and cause other items to not clear. Your credit rating will determine how much you pay for credit and how much credit you can obtain. So it is very beneficial to have good credit.
In this HUB I would like to give you some tips on how to keep you credit in tip top shape.
What Does Your Credit Score Mean?
Your credit score is a numerical system. The higher the number the better the score. As a basic rule of thumb the score can be analyzed this way:
Above 719: If your credit score is above 719 you are considered to have an excellent credit rating. You should be able to obtain the most favorable rates from lenders. Therefore, you should consider shopping around and expecting to obtain the best rates.
675 to 719: When your credit score drops below 720 you can no longer expect to receive the best rates. In this category you are considered to be credit worthy, but you may have to work at getting favorable credit.
620 to 674: You are considered to have a below-average credit score. With this score you will find that you have options that have been reduced greatly and your costs have increased. Many times the vvery process of obtaining credit will take longer as more documentation of your ability to repay could be required.
619 or less: Well, to put it bluntly you are a high credit risk. While it is still possible to obtain credit you options shrink considerably and the credit you do obtain will cost a lot more. You will probably be asked to provide additional security or a co-signor for the credit.
There are things that you can do, some obvious and some not so obvious, to improve your credit score. I will outline some items for you.
How to Increase Your Score
There are several things that positively and negatively affect your score, which is what I want to cover here. The key is to increase your score so that you pay less for the credit that you have. Don't be loyal to banks and finance companies because they are not loyal to you. Every percentage point that you pay is money out of your pocket and into the banks. To increase your wealth you need to keep as much in your pocket.
If we were to ask 100 people what the number one thing that determines if they have good or bad credit was you would find that people would state, "how they pay their bills." Paying your bills on time (as agreed) will increase your score and paying your bills late will decrease your score. Try to make sure your bills are paid on time.
The number one consideration of any lender is, "will I get my money back." When the lender looks at your credit the very first thing they will look at is how you pay other bills. If you pay other bills on time then more than likely you will pay them on time also.
Another factor in determining your credit score is the size of your lines of credit. Many think that having smaller lines of credit is better because it limits how much debt your can create. But a lender is looking for your credit worthiness. Low lines of credit means that no one trusts you with very much of their money. Having high credit limits is actually a plus when it comes to determining your credit score.
You should make it a practice to periodically call your lenders and ask for an increase in your line of credit. Each time your credit is increased your score will most likely go up also.
Having said that consider the alternative. Having high balance-to-limit ratios is negative. So on the one hand having a high credit limit can be positive, maxing out your limits is negative. Again, lenders are looking for your ability to handle credit. Don't max out your lines of credit. It is better to have multiple lines of credit carrying a 50% balance then having one line of credit maxed out, even if the amount of debt is the same.
Even though a credit inquiry (someone requesting a credit report) is not necessarily negative, having too many of them is. Don't apply for credit unless you absolutely are wanting to obtain the credit. If you are curious about your credit go through a credit reporting company and obtain a soft credit inquiry. This does not negatively affect your credit as you are only seeking information, not the creation of new debt.
Car salesmen are trained to pre-qualify you quickly to determine if you have the ability to buy a vehicle. They know that their best chance of making a sale is "now" while you are on the lot. They have many methods of trying to get you to allow them to pull your credit. Of course it is always for your benefit! Really, it's for their benefit. But if you are not careful you could end up allowing three or more credit inquires before you even decided to purchase the car. Never allow anyone to pull your credit until you have decided you want to do business with that company. Then and only then should you sign the release.
Many times they will tell you that it is hard for them to give you cost information until they know your credit score. In those cases, you either should already know your score or ask them to give you general information based on where you think your credit is. You want to keep your score as high as possible.
Finally, try to limit public records from showing up on your credit. Public Records are bankruptcy, liens, lawsuits, and judgments. These items can stay on your credit for 7 to 15 years depending what they are. If you have any of these types of items try to get them paid off and removed. This can make a significant difference in your report.
Identity Theft and Credit Report Awareness
Unfortunately, in the day of digital information identity theft is a big problem. There are many type of credit report monitoring services available with a quick google search. Are they worth it? In my opinion, yes!
While you will end up paying a monthly or yearly fee most will monitor your credit and notify you of any significant changes. This will alert you to items that could negatively affect your credit and/or someone trying to steal your credit.
Some service will give you a copy of your credit report so that you can look at it once a year or so. This is a great benefit also. This seems to be a competitive market and many of these services offer an introductory period of time. I know that the service I use gave me an immediate 50% discount when I called to cancel within their introductory period. The discounted rate was an amount that I felt made the service worth it. Again, loyalty in today's world has gone through the windows. Companies are not loyal to their customers so don't feel like you have to be loyal. If someone is offering the same service at a cheaper price be willing to change.
I recently changed banks because the bank that I had several accounts with imposed a fee on their checking account. When i closed out my accounts I was asked why and I told them it was because of the fees they were imposing. I was quickly told that because of my balances I would not be charged the fee. I understood this I replied, but just for the fact that you want to charge me and the credit union across the street doesn't I will give them my business. In my opinion the best way that citizens can insure their rights is by how they spend their money. If you don't like what companies are doing don't give them your business, but I guess that is a topic for another discussion.