Credit 101
Credit?!..
What is Credit , Good Credit, Bad Credit?
Why is Credit important?
The official definition of credit is; "The ability of a customer to obtain goods or services before payment is made based on the trust that payment will be made in the future".
You guessed it. There are a lot of people who are not trustworthy as far as repaying a debt. Did you know that the idea of credit began in England in the early 19the century? Here in America, Credit is a major part of our lives. It determines what we can purchase, how much we pay for a purchase, whether you get a credit card, what we pay for insurance, even what job we qualify for. The other alternative is to pay cash for everything. That would be awesome if most of us had enough cash to pay.
The main Credit Reporting Agencies are Experian, Transunion, and Equifax. You will find out that your credit score is different on all 3 agencies. So even the agencies have issues with credit scores. Not having established a credit rating may be as bad as having a low credit score. So I guess as adolescents we need to start building credit for years so that when we are adults we will be credit worthy. I have heard that Credit card companies send credit cards to students who enter college. Without proper guidance that could lead to negative credit issues upon entering adulthood. Credit scores sometimes referred to as FICO Scores are three digit numbers ranging from 300 to 850 and represent your credit worthiness. The lower the score, the greater the risk to a creditor which ensues a higher interest rate. The higher the score, the more credit worthy you are and the lower the interest rate will be. A credit score under 580 is considered "Poor Credit". Most merchants will not grant you a loan based on your credit worthiness, or the merchants that will grant you a loan would charge you an astronomical interest rate. A credit score from 580 to 669 is considered "Fair Credit", More creditors will grant you a loan but will charge you a hefty interest rate based on your history of repayment. From 670 to to 739 is considered "Good Credit". Many creditors will be willing to trust you with a loan with a decent interest rate. 740 to 799 is considered very "Good credit", and from 800 to 850 is considered "Excellent credit". Most creditors will be willing to trust you with a loan and therefore charge you a lower interest rate.
How is credit score calculated?
There are several different components used to calculate your credit score with different levels of importance. Each credit reporting agency will report different credit scores using the same information. Payment history which includes how long you have had the line of credit and if you have late payments, carries the highest weight of about 35%. The optimum number of years that merchants look for an established line of credit is 7 years.
Your total debt which is how much you owe the merchant compared to your total income is referred to as debt to income ratios, counts about 30%. If your expenses, including rent or mortgage, auto loans, credit card debt, etc. are higher than 30% of your income, you might be considered a risk. The length of your credit history counts about 15%, and new credit lines and the mix of credit types count for about 10% each. Even if your credit score is high, if your credit lines are fairly new merchants will count that as negative and may refuse your loan or charge you a higher interest rate. Credit utilization rate or ratio is determined by the amount you owe divided by the credit limit. For example if one credit card has a limit of $5000 and your debt is $2500, your ratio is %50. The optimum percentage is under 30% for each line of credit. Merchants look at all of these factors before taking a chance on giving you a loan.
What do you do if you are not satisfied with your credit?
Credit scores can and will change either by decreasing or increasing. Sometimes a credit score seems to change instantly. If a negative item appears on a credit report there could be a sudden drop in the credit score, however it takes a much longer time for a credit score to increase even if the cause was a mistake. Items on a Public record such as bankruptcy will negatively affect your credit for 7 to 10 years. Chapter 13 bankruptcy will remain on your record for 7 years and Chapter 7 bankruptcy will remain on your credit report for 10 years. Other negative public reports include foreclosures, repossessions, charge offs, debt settlements, etc. decrease your credit score and my last from 7 to 10 years. Even if you establish a good credit score during that time, creditors still view you negatively because of a negative report on your credit record. When you apply for credit, a merchant pulls your credit score from one or more credit bureaus. It is called either a "Hard" pull for a "Soft" pull. Hard inquiries such as loans for mortgage, auto, credit card, etc. remain on your credit report for 2 years and may cause your score to decrease depending on the number of inquiries. Hard inquiries may decrease your score up to 5 points or more. Soft inquiries such as quotes for insurance do not affect your credit report.
There are specific steps or procedures to address discrepancies in your credit report. If there is an item on your credit report that is incorrect, you may contact the creditor either verbally or in written form to get information. The creditor may need additional information to prove that the item is incorrect. You may also notify the credit reporting agency or the 3 main agencies; Experian, Equifax, and Transunion, that there is a discrepancy on your credit report. The credit reporting agency will require documentation to prove that the item is truly a mistake.
You may establish credit by acquiring a "prepaid credit card". The bank will hold a determined amount from you bank account to secure the ;purchases that you make. After paying the monthly payments on time over a period of time, they will increase your limit and continue sending positive reports to the credit reporting agencies. Eventually you will begin to build positive credit and your credit score will increase. There are a variety of companies that assist is repairing or building credit both for personal and business credit.
So knowing how important Credit is, you should monitor your credit consistently. There are many companies both for a fee and for free that allow you to see your credit scores. You can establish a membership with the credit reporting agencies for a fee or
research companies online that allow you to check your credit scores for free such as Credit Karma, Creditsesame, etc.
Follow up with me for more tidbits about "Credit".
What is Credit , Good Credit, Bad Credit?
Why is Credit important?
The official definition of credit is; "The ability of a customer to obtain goods or services before payment is made based on the trust that payment will be made in the future".
You guessed it. There are a lot of people who are not trustworthy as far as repaying a debt. Did you know that the idea of credit began in England in the early 19the century? Here in America, Credit is a major part of our lives. It determines what we can purchase, how much we pay for a purchase, whether you get a credit card, what we pay for insurance, even what job we qualify for. The other alternative is to pay cash for everything. That would be awesome if most of us had enough cash to pay.
The main Credit Reporting Agencies are Experian, Transunion, and Equifax. You will find out that your credit score is different on all 3 agencies. So even the agencies have issues with credit scores. Not having established a credit rating may be as bad as having a low credit score. So I guess as adolescents we need to start building credit for years so that when we are adults we will be credit worthy. I have heard that Credit card companies send credit cards to students who enter college. Without proper guidance that could lead to negative credit issues upon entering adulthood. Credit scores sometimes referred to as FICO Scores are three digit numbers ranging from 300 to 850 and represent your credit worthiness. The lower the score, the greater the risk to a creditor which ensues a higher interest rate. The higher the score, the more credit worthy you are and the lower the interest rate will be. A credit score under 580 is considered "Poor Credit". Most merchants will not grant you a loan based on your credit worthiness, or the merchants that will grant you a loan would charge you an astronomical interest rate. A credit score from 580 to 669 is considered "Fair Credit", More creditors will grant you a loan but will charge you a hefty interest rate based on your history of repayment. From 670 to to 739 is considered "Good Credit". Many creditors will be willing to trust you with a loan with a decent interest rate. 740 to 799 is considered very "Good credit", and from 800 to 850 is considered "Excellent credit". Most creditors will be willing to trust you with a loan and therefore charge you a lower interest rate.
How is credit score calculated?
There are several different components used to calculate your credit score with different levels of importance. Each credit reporting agency will report different credit scores using the same information. Payment history which includes how long you have had the line of credit and if you have late payments, carries the highest weight of about 35%. The optimum number of years that merchants look for an established line of credit is 7 years.
Your total debt which is how much you owe the merchant compared to your total income is referred to as debt to income ratios, counts about 30%. If your expenses, including rent or mortgage, auto loans, credit card debt, etc. are higher than 30% of your income, you might be considered a risk. The length of your credit history counts about 15%, and new credit lines and the mix of credit types count for about 10% each. Even if your credit score is high, if your credit lines are fairly new merchants will count that as negative and may refuse your loan or charge you a higher interest rate. Credit utilization rate or ratio is determined by the amount you owe divided by the credit limit. For example if one credit card has a limit of $5000 and your debt is $2500, your ratio is %50. The optimum percentage is under 30% for each line of credit. Merchants look at all of these factors before taking a chance on giving you a loan.
What do you do if you are not satisfied with your credit?
Credit scores can and will change either by decreasing or increasing. Sometimes a credit score seems to change instantly. If a negative item appears on a credit report there could be a sudden drop in the credit score, however it takes a much longer time for a credit score to increase even if the cause was a mistake. Items on a Public record such as bankruptcy will negatively affect your credit for 7 to 10 years. Chapter 13 bankruptcy will remain on your record for 7 years and Chapter 7 bankruptcy will remain on your credit report for 10 years. Other negative public reports include foreclosures, repossessions, charge offs, debt settlements, etc. decrease your credit score and my last from 7 to 10 years. Even if you establish a good credit score during that time, creditors still view you negatively because of a negative report on your credit record. When you apply for credit, a merchant pulls your credit score from one or more credit bureaus. It is called either a "Hard" pull for a "Soft" pull. Hard inquiries such as loans for mortgage, auto, credit card, etc. remain on your credit report for 2 years and may cause your score to decrease depending on the number of inquiries. Hard inquiries may decrease your score up to 5 points or more. Soft inquiries such as quotes for insurance do not affect your credit report.
There are specific steps or procedures to address discrepancies in your credit report. If there is an item on your credit report that is incorrect, you may contact the creditor either verbally or in written form to get information. The creditor may need additional information to prove that the item is incorrect. You may also notify the credit reporting agency or the 3 main agencies; Experian, Equifax, and Transunion, that there is a discrepancy on your credit report. The credit reporting agency will require documentation to prove that the item is truly a mistake.
You may establish credit by acquiring a "prepaid credit card". The bank will hold a determined amount from you bank account to secure the ;purchases that you make. After paying the monthly payments on time over a period of time, they will increase your limit and continue sending positive reports to the credit reporting agencies. Eventually you will begin to build positive credit and your credit score will increase. There are a variety of companies that assist is repairing or building credit both for personal and business credit.
So knowing how important Credit is, you should monitor your credit consistently. There are many companies both for a fee and for free that allow you to see your credit scores. You can establish a membership with the credit reporting agencies for a fee or
research companies online that allow you to check your credit scores for free such as Credit Karma, Creditsesame, etc.
Follow up with me for more tidbits about "Credit".
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