Your Financial Reputation
Strong credit isn’t complicated. In fact, you can build good credit by employing some simple habits and being aware of how credit works.
In order to grasp the details, you need to understand the basic concept of credit: It’s your financial reputation. Your reputation is made up of certain behaviors that help lenders decide if you are a risky customer or not. In a nutshell: “Are you going to pay me back?”
1. Credit Score Calculation
Creditors look at credit scores as risk indicators, and while there are many scoring models, they utilize these five categories of a consumer’s finances:
- Payment history (35%)
- Credit Utilization Ratio (balances, available credit and the ratios between them) (30%)
- Length of credit history (15%)
- Mixture of Credit (10%)
- New accounts (10%)
In order to maximize your credit score, and look more appealing to creditors, pay your bills on time, avoid bad debt and keep your debt levels low. Take on only debt you can afford, use credit continually (not excessively) and avoid opening a lot of new accounts in a short period of time.
2. NOW: The Time to Build Credit
You should not put off improving your credit, because credit scores positively reflect long credit histories. Young adults should start establishing credit early as authorized users on parents’ cards and get their own cards when they are eligible and prepared to handle them responsible.
If you haven’t started building credit, start now. Consumers with no credit or bad credit can get secured credit cards and eventually, after keeping up with payments, move on to non-secured cards. And if you are recovering from hard times that have wrecked your credit, look forward at what you can improve: Make a plan to pay down debt, and pay off loans with the highest interest rates first.
3. Good Credit Saves You Money
Having good credit scores helps you save a lot of money. People with higher credit scores are offered lower interest rates, meaning they pay less for goods in the long run. Good credit stems from strong financial habits that help consumers avoid paying fees or penalties, as well.
4. Don’t Take On Too Much Debt
One of the most important questions you should ask before applying for credit is, “How will I use this?” Make sure you’re not hoping credit will give you a lifestyle you can’t really afford. Financing is a tool to help consumers buy what they can afford by breaking down a large expense into a series of manageable payments. When looking at buying a home, taking out an auto loan or using a credit card, look at the monthly costs, and if they are uncomfortably large, look for less expensive options. A guideline for student loans: If you’re going to graduate with a debt load greater than your expected annual salary, it’s time to consider different options.
5. Check Your Credit for Free
You can’t improve your credit if you don’t know anything about it. You are entitled to a free annual credit report from each of the three major credit reporting agencies (Equifax, TransUnion and Experian). If you want the score, you’ll have to purchase if after you’ve gotten the initial reports.
If you have any questions about credit, feel free to contact us at info@reclaimcreditconsultants.com.
