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Credit rating is a crucial factor not only in getting a mortgage, credit card, or loan, but it can dramatically affect everything from car insurance and cell phone contract rates to overall employability.
What is a credit score?
Simply put, it’s a three-digit number that any lender looks at to estimate how risky you are likely to be as a borrower: the higher it is, the better off you’ll be in terms of acceptability. and interest rates. Lenders generally use the FICO credit score model – its scores range from 350 to 850 – and incorporate five factors when calculating it: payment history (30% importance), total amount of debt owed (25%) , length of credit card history (25%). %), credit mix (10%) and new credits (10%).
If potential lenders see that you have been financially irresponsible in the past, you could be in trouble. (After all, would you lend your money to someone who never paid their debts?) And there’s little chance of hiding anything from them, because they’ll probably check the big three credit bureaus : Experian, TransUnion and Equifax. The credit breakdown, on the other hand, is an assessment of the different types of accounts in your name (including credit cards, student loans and personal loans), while the new credit number indicates how many times you have recently applied for a loan.
After your financial history and habits are carefully dissected, you get a credit report – a summary of payment history, credit accounts and balances. Logically, a negative payment history can hurt your score. Also, if you’re more than 30 days late paying a balance, you’ll likely be reported to one of the major credit reporting agencies. Once this appears on a report, you are marked as a subprime borrower, who could stay on a report for up to seven years.
Related: Why is my personal credit score used to qualify for a business loan?
Building a credit score can seem like a daunting process, and in truth it takes time and effort, but there are specific steps to follow.
1. Build your credit file
This is an essential first step in establishing a good balance sheet, and includes opening new accounts which will be reported to the offices. Credit loans or secured cards are great options if you’re just starting out. One way to achieve a higher score is to mix different account types. While it may seem strange to own debt in various forms, it is proof of reliability as long as you pay your bills on time, which brings us to…
2. Maintain good payment habits
Payment history is one of the most crucial factors. It’s simple: a long history of regular payments is the most important factor in calculating the score, so be sure to keep track of loans, credit card balances, and payment dates. And don’t wait more than 29 days after the payment due date, as late payments of 30 days could be reported to the offices. A wise decision to make is to set up automatic payments, while securing associated bank accounts against overdrafts. And if you’re having trouble gathering money for a bill, contact your card issuer to discuss options. It is far worse to just ignore the problem.
If you are having trouble with credit card debt, the wisest thing to do is to consult a credit counselor to create a debt management plan, one aspect of which will be negotiating payments and/or or reduced interest rates.
3. Review reports periodically
Get a copy of your current report (the FTC maintains a good site detailing how and where to get them): see where you are and where you want to go from there. A point that is often overlooked is that there can be mistakes that hurt a score; if you notice any, let the credit bureau know, which usually means explaining in writing what’s wrong and including supporting documentation. For this reason, keep track of payments (banking apps are a blessing in this regard).
Related: Help save your credit score with Lexington Law’s Credit Repair Service
4. Do not use more than 30% of your credit
Keep track of your card limit and try not to use more than 30%. Too much credit use can hurt a score, and it’s always possible to ask a bank to increase a limit to provide more flexibility. Pro tip: To keep balances low, pay your credit card bills twice a month.
5. Minimize new credit applications
“Hard” credit applications for things like credit cards, loans, or lines of credit will most often lower a score (a difference of a few points can make or break an application).
6. Don’t close unused accounts
Don’t close that college credit card. It doesn’t hurt to keep it open; in fact, closing the account could hurt your score. For each account you decide to close, points will be lost.
What if you don’t have credit?
If you haven’t used credit cards or loans in the last ten years, you may not exist in the world of credit reporting at all. However, not having a profile could pose a significant problem once you decide to put a roof over your head or a steering wheel in front of you. To prevent this from happening, check with your bank or credit union to see if you can get a secured credit card (which usually means a deposit). But, of course, then you need to use it responsibly and make regular payments.
Related: How you may be sabotaging your ability to get financing
How long does it take to build a score
Unfortunately, there is no definitive timeline for building or rebuilding credit. The first thing to do is find out what hurts (or fuels) you, then prioritize it. Suppose you only missed one payment. Relax: it shouldn’t take long to rebuild by tracking payments after a mistake. However, if you start missing them on various accounts and fall way behind, it will take you longer to recover.
Once you start taking steps to create it, it might take you a while to notice an impact on a report. However, it is important to persevere. And the truth is, no one solution is right for all situations, so it’s wise to seek credit management help when in doubt.