Just how important is credit in today’s economy? It isn’t the sole deciding factor that lenders use to evacuate the risk of lending significant sums to you, but it is high on the list!
The reality is that your credit score can determine whether you’ll be eligible for life-changing loans like a mortgage, car loan or student loan. On the other hand, bad credit will make it more difficult for you to get a credit card with a low interest rate, and it will make it more expensive to borrow money for any purpose.
However, even if you’re not in the market for a loan, good credit can have a major impact on your life, says Liz Pulliam Weston, author of ‘Your Credit Score.’:
“Your credit information can be a factor in whether or not you can rent a nice apartment, how much you pay for insurance or whether or not you can get a job.”
This is because landlords, insurers and employers typically check credit information to see if the people they are dealing with are reliable and responsible.
How Important Is Your Credit Report?
The Federal Reserve website backs up Mrs. Weston’s argument. They note that your credit report is important because lenders, insurers, employers, and others may obtain your report from credit bureaus to assess how you manage your financial responsibilities. For example:
- Lenders may use your credit report information to decide whether you can get a loan and the terms you get for a loan (for example, the interest rate they will charge you).
- Insurance companies may use the information to decide whether you can get insurance and to set the rates you will pay.
- Employers may use your credit report, if you give them permission to do so, to decide whether to hire you.
- Telephone and utility companies may use information in your credit report to decide whether to provide services to you.
- Landlords may use the information to determine whether to rent an apartment to you.
With so much riding on your score, it is also a good idea to review your credit information regularly to protect yourself from a number of issues, such as:
- Identity Theft: An identity thief may use your information to open a new credit card account in your name. When they do not pay the bills, the delinquent account is reported on your credit report, damaging your ability to get credit in the future and subjecting you to calls from bill collectors. Identity theft has even led to bankruptcy and home foreclosures in extreme instances.
- Errors In Your Credit Report: The information in your credit report is not immune to errors, and these errors can have a major effect on your finances. The Consumer Finance Protection Bureau notes that if you find something wrong with your credit report, you should dispute it and be on the lookout for loans or credit cards listed that you never opened, misspelled names, or collection items that were not updated after a settlement was reached and satisfied.
What Factors Affect Your Credit Score?
Most are familiar with what a credit score is but very few know what goes in to the number. Here’s a look at what goes into the score itself.
*Image source: LaToya Irby
35% of your score is dependent on your track record for making on-time payments. This is an easy habit to get into that will improve your FICO score.
30% of the score comes from how much debt you have compared to how much credit you have. This is called your debt-to-credit ratio.
15% of your FICO score is based on how long you have been building up your credit history. Blemishes on your credit record stay for as long as 7 years and will continue effect your credit score.
10% of your score comes from what kind of loans you have. For example, credit card debt is also known as unsecured debt and is a less stable form of a loan. When you have a mortgage or loan out on a car or house it’s considered a secure loan. That is because there is an actual item backing the debt. Secure debt is better received in your credit score.
10% of the score depends on the number of credit applications you have recently filled out. Every time you apply for a credit card (including store cards), car loan, mortgage etc. your credit report is pulled. To differentiate, if you are asked for your social security number on an application, they are going to pull your credit.
Further Reading: Credit Report Myths You Need to Know
4 Ways to Avoid Lowering Your Credit Score
We often talk about things you can do to increase your credit score. It is equally important to talk about the things that can lower that score. Some people may be lowering their score without evening knowing about it. Yahoo! Finance tells us four things we may be doing to lower our credit score.
- Putting a large purchase on a store card:We have all been tempted by the idea of charging a big ticket item to a store card and taking advantage of the fact that there is no interest for a set period of time. This is a good idea in theory except that when you carry a balance that isn’t paid down it can affect your credit score. This is especially true if the charge to the store card is near the card’s limit. It takes a toll on your debt ratio. This can also be a bad idea because after the promotional period you are going to be hit with some very high interest rates.
- Ignoring a traffic violation ticket: No matter where you are when you get a parking or speeding ticket and not matter how much the ticket is for it is important to pay it. If you leave a ticket unpaid the government will eventually report you to their collection agency. Anything that goes to collections will damage your credit score. The same goes for medical bills or rent that goes unpaid. According to Yahoo! Finance, even if you pay the bill after it goes to collections, it will stay on your credit report for 7 years.
- The more cards the merrier: Credit cards are tempting. They may offer you a discount on your purchase for opening a new card or a great cash back opportunity. But ultimately filling your wallet with numerous credit cards is a big mistake. Opening a lot of new cards in a short time period is not good for your credit score. There is a benefit to the expanded credit limits however that will not kick in right away and will first hurt your credit score.
- Taking advantage of a balance transfer to a new card: Your credit score is all about your debt to credit ratio. This means that taking the balance from one card and transferring it to another is not a good plan if the card your are opening has a smaller credit limit. It is smarter to keep a card open that you do not use because it increases the available credit that you have thus increasing your credit score. If the interest rate is better on the new card then do the transfer but keep the other card open so that the available credit is reported on your score. Your score will also lose a couple points when you apply for the new card so make sure it’s a good decision.
Top Ways Improve Your Credit Score
If you didn’t realize the importance your credit score, you probably didn’t know that you can take steps to improve it. In most cases you can improve your credit score, which can increase your ability to do many of the things we mentioned above. Follow these tips to improve your credit score:
- Evaluate your credit report: As we’ve already mentioned, it is important to get a copy of your credit score and evaluate where you stand. In general, you should be in pretty good shape if you have a score above 600, as many creditors would consider giving you a loan. A score between 500- 600 may not sink you totally, but it can certainly hold you back. How important is credit? You’ll find out if your credit score is below 500! Getting loans will be very difficult until you improve your score.
- Combine your debt: Loan consolidation is one way to simplify your debt. A consolidation loan will take outstanding debts and combine them together into one loan with one monthly payment, which will improve your ability to pay off your debts and likely will lead to lower monthly payments.
- Use your cards lightly: According to MSN.com Money, racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month. What’s typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.
- Make loan payments on time: If you make the effort to consolidate your debt and make your payments on time, you are showing creditors that you are invested in paying off your debt. Setting up automatic payments from your bank account can help you pay on time every month.
- Learn the legal steps to take to improve your credit report: The Federal Trade Commission’s “Building a Better Credit Report” has important information on correcting errors in your report, tips on dealing with debt and avoiding scams, and more. Contact your attorney if credit or debt challenges are troubling you financially.
Get Help With Credit Issues
If you are struggling financially and contemplating bankruptcy, facing home foreclosure, having tax or IRS issues, or need some help with a real estate transaction, Suburban Legal Group PC has an experienced team of accomplished professional attorneys to help you through your legal issues.
DISCLAIMER: All information on this website are provided for informational purposes only and are not intended to be construed as legal advice. Suburban Legal Group PC shall not be liable for any errors or inaccuracies contained herein, or any actions taken in reliance thereon.