Credit Does Matter Samantha Jonas-Rongo
Majority of people are becoming increasingly dependent on using credit to make purchases and decisions. These days, good credit is used for more than just getting a credit card or a loan……Samantha Jonas-Rongo
If you think bad credit isn’t a big deal — think again. The truth is, credit issues can have a crippling effect on all facets of your financial life. So, before you shrug off a low score, think again and work towards building a higher one.
The “American Dream” isn’t cheap. Having a family, purchasing a new car, building or buying a house all cost lots of money. Chances are, you won’t be able to pay cash, (in full), for some of the bigger things your family wants and needs. That is why credit is so essential to not only your current living, but building a better, efficient future that Is reachable due to your past and present spending responsibility and behavior.
Have you ever wondered why you were turned down for an apartment or car loan? Or why you did not receive a job offer you applied for, even though you thought you had nailed the interview? Perhaps it was due to your credit record.
Your credit score, also known as a FICO score, can range from 300 – 850, 850 being the best possible score, (your Vantage score can go up to 990 at max). Your credit score is monitored and reported by three main credit bureaus known as Equifax, Trans Union and Experian. Your credit history begins the first time you apply for credit. The action initiates a credit inquiry to the credit bureaus and also establishes a profile in the system. Credit scores are determined using five types of information about you:
- PAYMENT HISTORY = 35%
Lenders need to know how reliable you have been in the past, and your payment history illustrates just that. This section covers:
- Your payment consistency
- Collections and charge-offs
- Bankruptcies, tax liens, etc.
- OPEN ACCOUNTS AND BALANCES = 30%
Contrary to popular belief, debt can be a good thing when utilized correctly in proportion to your overall credit limits. This section covers:
- Your total number of active loans (e.g., mortgage, student debt, etc.)
- Your credit card debt and credit utilization. The healthiest credit scores are born from using 30 percent or less of your monthly credit allowance. For example, if you have a $10,000 monthly credit limit, you should never use more than $3,000 during that month.
- LENGTH OF TIME ANY ACCOUNT(S) HAVE BEEN OPEN = 15%
In addition to reviewing your track record, lenders want to be sure you actually have one. A credit history of seven years or more is ideal when establishing clean credit, so make sure to keep your oldest accounts active.
- TYPES OF CREDIT USED = 10%
Smart planning is key in every financial realm, and spreading out your spending is a great way to illustrate this concept. Lenders want to see your experience with numerous credit types. If you only have installment loans, consider opening a bank credit – (Not a bank debit card that’s affiliated with your bank account), or another line of credit. Broadening your horizons will demonstrate your flexibility and success with multiple credit forms.
- CREDIT INQUIRIES (DENIED OR APPROVED) – NEW CREDIT = 10%
Every new account will likely depress your scores. Of course, you can’t increase (or even have) a credit score without having a track record to begin with. Just know that, with every new account, your credit score will probably get worse before the longer term scoring benefits are realized. Creditors fear those who appear to depend too much upon acquiring new credit accounts.
To maintain a good credit score, it is important to avoid all of the following actions:
- Making late payments (even one month)
- Utilizing more than 30% of the total credit limit on any credit card(s)
- Closing credit cards you have not used for some time
- Frequently opening new credit card accounts
- Routinely transferring payments between credit cards to obtain rate advantage
Delinquencies on your credit report will have an impact on your credit score and so does the length of time which has passed since your last major delinquency. A bankruptcy may stay on your credit report for up to 10 years, but additional credit may be acquired once a two-year timeframe has passed.
Some of the basic things that we would like to purchase can be placed at a halt or become more expensive and difficult to buy due to your financial responsibility. However, having good credit and containing it can make these purchases more convenient and obtainable.
Having good credit is important when it comes to where you live. Mortgage lenders want to know that you won’t default on your mortgage. If you don’t have good credit, the lender will consider it risky to give you a mortgage loan. Unless you have a lot of money saved and are planning on purchasing a house or thinking of buying a foreclosed abandoned one at a cheap cost of $15,000 and spending at least another $50,000 to renovate it, you will need to pull out loans and mortgages to do so. This could result in a higher cost of borrowing or worse, a denial of the loan. Your credit is used for rental decisions, too. Landlords consider your lease as a loan. You’re being loaned a place to live and the landlord wants to know you’ll pay back this loan. If you don’t have good credit, you can get denied for an apartment especially if you have any evictions or late utility payments on record. More than often, good landlords want good tenants so they will check your credit report.
- VEHICLE FINANCING:
Unless you have all the cash to purchase a new car, you’ll have to get a loan. I’m not speaking in regards of a used car that you purchase from someone else, but a used and new car from any lot or dealership. The cars that come with warranties and are fully approved and checked for safe performance, mobility and consistency unlike those that can be bought from an individual. Your credit not only affects whether or not you qualify for a loan, but also the amount and interest rate of the loan. A lot of people believe you will pay double or more than what the car is worth, but the amount you pay depends on the interest rate which is reflected from your personal report. Generally, loan applicants with good credit qualify for larger loan amounts with lower interest rates. Regardless if a loan is from the dealership, credit union or your own bank, your credit score will be scanned and your finances and cost will be reflected.
Many people have dreams of starting their own business. Business startups require a sizable amount of cash that you might not have available. In that case, you’ll need to obtain a small business loan or a personal loan to get started. Among other things, you need to have good credit to qualify for the business loan. It is near impossible to qualify for a business loan if your credit is poor, especially if you have evictions on record as well. Unfortunately, with a low credit score, your chances of getting any type of loan are slim to none. You might qualify if you have a co-signer with great credit and plenty of collateral, but expect a higher interest rate than someone with an excellent credit history. Your availability to have a co-signer with great credit may be a difficult task as well because that individual may not be able to trust you and your financial stability and responsibility.
Many employers conduct credit checks as a part of the hiring process. If you haven’t demonstrated financial responsibility, a prospective employer might be hesitant to hire you. Why does your credit rating count? Employers in the financial sector often use it as a part of the pre-employment screening process to check out an individual’s character, decision-making skills and of course as a way to measure whether or not they can handle money. It can also be used to make sure new employees aren’t distracted, or stressed out, by financial issues. Its simply standard operating procedure for many companies to do a credit check, along with checking out your work and education references, or even doing a drug test or checking to see if you have a criminal history. When you sign on the dotted line, you may not realize you’re authorizing a credit check, unless you read the fine print. According to federal law, individuals in the pre-employment process must give their prospective employer permission for not only a background check, but a credit check as well. So it pays to read exactly what it is you’re signing.
- UTILITY SERVICES:
It might be somewhat shocking to learn that your credit is needed to establish utility service. Your electric company contends that you’re borrowing one month of electric service. So, before turning on your electricity, the company will check to see if you have good credit. This applies to most utility services including cable, telephone, water, and even cell phone. You may still qualify for a contract or services, but you may need to put down a security deposit when others with great credit do not.
- HOME/AUTO INSURANCE PREMIUMS:
Insuring your life’s most precious possessions is another segment of life that is controlled by your credit score. Insurance companies check your credit and price for risk when determining annual premiums. Insurance companies want to make sure they get paid for their services of insuring your assets. Not only that, but insurance companies see a correlation between low credit scores and insurance fraud when putting in a claim. Some auto insurance providers run credit checks and charge higher premiums to those with low credit scores. The thought behind this is that people with good credit are usually more responsible drivers and those with higher credit scores are more likely to make on-time payments. You can maintain low and affordable premiums by improving your credit score.
- RELATIONSHIPS: When you enter into a committed partnership with a significant other, in which you share everything, that does not exclude your credit histories. Granted, even a spouse is not legally responsible for debt you incurred prior to the marriage. However, any major purchases you want to make together, as a couple, will be negatively impacted if you have bad credit. This not only makes it difficult to buy a house or a car together, for example, but it puts an unwelcome strain on the relationship in general.
Believe it or not, but your credit habits can affect your children’s lives as well. If bad credit prevents you from buying a house or buying an automobile, this affects where and how you raise your children, and whether you’re able to have reliable transportation for your family. Also, if you have a low credit score, you might not be able to co-sign for your child(ren) to get a student or auto loan, or help your child financially in other aspects of his or her life. If you pass away with debt, your debt will rollover as your child’s responsibility and if you have life insurance, the debt will be deducted from the payment as so before being issued to your dependents.
Yes that is correct, landlords, insurance companies, and employers etc.; not just banks and car dealerships, check credit records. Your credit report allows these companies to look into your personal spending habits, your payment history, whether you have been sued, evicted and whether you have declared bankruptcy. Not only do they check, they also report. Having a good credit history is an important part of maintaining a secure, healthy, and financially fit life.
If you have no credit or have experienced some financial setbacks in the past that have negatively affected your credit, lenders won’t be very eager to loan you the money you need, which can keep you from buying that car, paying for school, or investing in a home. Good credit, on the other hand, means you can get the financing you need, and usually at a better rate, which will save you money in the long run.
Even if you never had a credit card you can damage your credit before you apply for one and therefore, you will not be approved and may need to settle for a secure credit card where you need to place a security deposit down. Secured credit cards can help build credit and impact your score, but it will take longer to build and fix your credit. You can monitor your score for free but some free websites such as Credit Karma may only track your actual credit card usage and not reflect your actual score. If you never had a credit card, sites such as Credit Karma may state you do not have enough credit when in actuality, you may have poor credit but not enough credit card usage to higher your real credit score and enough to have been tracked by these sites.
It takes time to rebuild your credit history and positively impact your score. Don’t get discouraged if your report doesn’t immediately reflect the work you’ve put into rehashing your credit file. Just be patient and continue working to gain more control over your finances.
In addition to keeping an eye on your credit balances and accounts, you may want to consider other methods of getting control of your personal finances, such as reducing household spending or creating a detailed budget.
You can also write a personal statement for your credit report. It won’t impact your score, but it can be read by anyone checking your credit report, from prospective employers to potential lenders.
With a little patience and discipline, you can positively impact your credit score and credit file.