The Essential Guide to Understanding Credit

Credit scores are so important to U.S. citizens, yet 14% of the population is “credit invisible”. This means they have never received a line of credit or borrowed money in the past seven years. While most people aren’t interested in working towards a perfect score of 850, there are major disadvantages to having little to no credit on your record. FICO and Vantage are two of the most common scoring models and they range from 300 – 850. As of 2019 the average FICO credit score is 695 and the average Vantage score is 673. Even if you aren’t planning on purchasing a home or taking out any major loans, your goal should be to have a credit score over 650. This isn’t an iron clad threshold, but consumers with a score below 650 are viewed as higher risk customers who are more likely to default on their payments. A low score qualifies you for the highest interest rates for credit card companies, bank loans, or car purchases if you are even approved. A common practice in the rental industry is landlords pulling credit scores and denying applicants with low scores or even charging a higher security deposit. Cell phone companies check credit scores before providing service and may require you to choose a prepaid option if you can’t get approved. Insurance companies are notorious for raising premiums for covered individuals with below average credit scores due to a predicted risk factor. Anyone looking for a job should be greatly concerned that half of all U.S. employers use credit scores when considering applicants. For these reasons, and many others, credit scores effect our lives in a big way.

Advantages to Building Credit:

There are advantages to building credit and raising your score as high as possible. An obvious advantage of an excellent score (720+) is being approved for the best possible credit cards. For more information on what to look for in your credit card search, take a look at https://molentax.com/what-to-look-for-when-selecting-a-credit-card/. Generally, a great credit card will offer low interest rates and enticing rewards. A high score will make you more hirable to employers, pay lower insurance premiums, and even allow you to rent a nice house or apartment. First time homebuyers are greatly influenced by their credit scores when applying for a mortgage. Very few applicants are accepted with a below 620 score, and the best interest rates are given at a score above 760. Entrepreneurs looking to fund their business through a small business loan should have a minimum score of 550 before applying, but this low of a score will mean higher than average interest rates and monthly payments. These are just a few of the benefits to raising your score, but the key idea is that a higher score will save you money.

How Do You Raise Your Score?

There are several things you can do now to get a short-term increase. Pay off debt, call a credit specialist, dispute any errors on your credit report, negotiate terms with creditors and collection agencies, and try out Experian Boost to get a quick bump up in your score. Creditors report your balance due on the last day of your monthly statement. By lowering this amount due from the previous month, the creditor will report the decrease in your total utilization rate. There are many reputable credit counselors that work with clients to understand credit and will assist in contacting creditors and collection agencies to dispute any derogatory marks or missed payments. If you don’t need that level of support, it is still important that you review your credit report and dispute any errors that are bringing down your score. Starting a dispute is as simple as logging into the reporting agencies website and disputing any misinformation. If you’re in a hardship situation and trying to recover, it is important to call any creditors and collection agencies to inform them of your situation. This way you can negotiate the terms of paying off the debt and plan the removal of these marks from your credit report. Experian Boost is an easy way to strengthen your credit score by adding payment history from bills such as phone and internet. This may not give you an immediate boost in score but is certainly worth a try.

How to Build Your Credit:

Building a strong credit score takes time and understanding. The first step to long-term credit success is knowing what your score is and how it is calculated. I recommend checking out Credit Karma, Credit.com, or your bank’s credit score service to see a detailed breakdown of your score. Making payments on time is one of the largest factors FICO uses to calculate your score. Paying at least the minimum amount due every month on all your credit accounts will improve your score unless you have a perfect 100% payment history. This portion of your score also includes any accounts that have been sent to collections, so it is important to deal with these situations as soon as possible. Credit card utilization measures your total debt against total credit made available to you. By paying off enough debt to have this calculate below 30% or increasing a current line of credit, your score can improve dramatically. The number and type of credit accounts in good standing will show creditors that you are experienced and responsible. For example, having 11 or more credit accounts including credit cards, student loans, mortgages, car loans, and personal loans that are in good standing will positively impact your score. Total length of credit history is treated as an average of all credit accounts. The best way to increase this is by avoiding opening new lines of credit, as this will bring down your average. Another issue with opening too many new credit accounts in a short period of time is hard inquiries. Hard inquiries are added to your credit report when lenders check your credit score because you send them an application. Each inquiry typically stays on your credit report for around two years, so it is important to be intentional when applying for credit in any form.

Benefits of an 800 credit score:

When you achieve an excellent credit score you should take advantage of the many perks associated with excellent credit! Only 20% of people have a score of over 800, so falling into this category means you will be approved for the absolute best benefits creditors have to offer. Call up any creditors that are charging higher than average interest rates and negotiate more favorable terms or apply for a new account with better rates and a higher limit. There are premium credit cards available to high scorers that offer exclusive benefits such as member lounges, free hotel nights, and personal concierge services. Refinancing any loans or mortgages you have will give you smaller monthly payments, and less interest spent overall. It might make sense to negotiate home and auto insurance rates with your newfound credit worthiness. Get the best possible mortgage rate on your dream home, a sweet deal on a new car, or get that small business loan approved! There are endless financial benefits to a pristine credit score, but it won’t happen overnight. Building credit is a lifelong process that requires knowledge, planning, and most importantly self-control.