Two Friends. Two Weeks. Two Hundred Dollars.
Jessica is widely known for her large GO! Savings balance. Recently, two friends each asked to borrow $100 from her. Since Jessica would trust both friends to rescue her from a burning building, she lent them each $100. Each friend agreed to pay her back in exactly two weeks. One friend paid her back a day early. The other friend paid her back three weeks late.
Are Jessica and the late-payer still friends?
Well, yeah, they were really good reasons. But Jessica was counting on that money to go on a big ski trip and had to borrow money from her dad. Dad was not amused.
So…what does this story have to do with credit history?
Whom would you lend money to?
Both of Jessica’s money-borrowing friends have established a kind of credit history with her. If she reported her experience with each friend to a credit reporting company, she would show one paying on time and one paying late. Would she tell them about the late-paying friend’s good excuses? That would be nice, but…
In a credit report, there’s only room for facts about how you pay, there’s no column for good excuses. If these same two friends came to you and wanted to borrow money, which friend would be most likely to get the money?
Good excuses aside, the late-paying friend has demonstrated that she simply doesn’t have the resources to pay back a loan on time right now. It doesn’t make her a bad person—just a poor credit risk.
And your credit history is how the business world will decide what services to give YOU (and how much they’ll cost) for the rest of your life!
The information used to calculate your credit score comes entirely from the information in your credit report. Credit scores tell lenders and other businesses how likely it is that you will fail to make payments in the next two to three years. Scores range from 380-830, with 830 being the best.
- Over 720: Will qualify for most offers of credit at the best rates
- 680- 720: Will qualify for most offers of credit at good rates
- 620 - 680: Will qualify for some offers of credit at higher rates
- 580-620: Will qualify for very few offers of credit at very high rates
- Below 580: Consumer beware! Will qualify for virtually no credit offers. Any offers will be at extremely high rates and with many consumer pitfalls
Building Your Best Credit Score: 6 Important Factors
1. Make one payment at a time. On time. Every time.
Payment history is the most important factor affecting your credit score. On-time payments boost your score. Late payments lower it. Late payments can stay on your report for up to seven years, although their negative effects will lessen over time (a long time.)
Important Tip! If you can’t avoid missing a payment, it’s imperative that you make a double payment the following month. Why? Because all of your subsequent payments will also show as late until you make up the missing amount. The more late payments on your credit report, the more your credit score will plummet!
Example: You have a Visa Card with a $50 monthly payment. You miss your payment in January, but make a $50 on-time payment for February, March, April and June. Your credit report will show six late payments—not one. You would have to make a $100 payment in February to be current on your account.
2. Avoid Negative Public Records & Collections
Bankruptcies, judgments, and collection items have a big impact and lower your score significantly.
A collection may be recorded if you fail to pay a bill to a utility, cell phone company, medical facility—or just about anything else. When a company is unable to collect from you, they will usually turn the debt over to a collection agency.
Collections can stay on your credit report up to seven years. Bankruptcies can stay on your credit report up to ten years.
3. Don’t take your credit to the limit!
Amount owed. A good rule of thumb is not to carry a balance that’s over 30% of your total credit limit. For example, if your credit limit is $1000, you should strive to keep your balance around $300 or less.
4. Keep your credit clean over the long-haul.
Be patient. A long history of good credit matters. It can take years of good credit management to reach the very best credit score.
Important Tip! A good “credit mix” also helps boost your score. A good mix of credit is a reasonable combination of auto loans, home loans and credit cards. Avoid high-rate finance companies.
5. Don’t open too many new accounts at once.
New accounts. Opening a lot of new accounts in a short period of time can lower your score. So take it easy! Don’t let a trip to the mall turn into a poor credit score. Each account you open should be carefully planned to help you reach your long-term financial goals. After all, you’ll have most credit accounts for several years.
Important Tip! Stores often ask if you’d like to “save 15% on your purchase by opening a credit account.” Never open a spur-of-the-moment credit account! Those cards often have interest rates of 20% or more! You could easily end up paying way more than the 15% you saved on your purchase.
6. Apply for credit sparingly.
Inquiries. Whenever you authorize someone to pull your credit report (usually because you submit some type of application to a lender, landlord, or insurer) a credit “inquiry” is recorded on your report. Too many inquiries in a short period of time can lower your score because it shows that you may be on a hot and heavy search to run up a lot of new credit balances.
Important Tip! If you have several inquiries from mortgage or auto lenders within 30 days, the inquiries will show up on your report, but will only be calculated as one inquiry.
Five Good Reasons to Manage Your Credit Wisely
Now that you know the best way to build a good credit history, you need to know why maintaining good credit is so important.
A good credit history will definitely help you get more credit. But did you know that it can affect your everyday life—even in the near future?
1. Your Car Insurance.
A person with a perfect driving record may have to pay the same high rates as a driver with tickets and accidents. Why? Because in addition to your driving record, insurers use credit history to decide how much you pay. It may not sound fair, but it’s a fact.
2. Your apartment.
Landlords run credit reports. If you have a poor credit history, it will be very difficult to find a decent place to live. There will almost always be someone with good credit vying for the same apartment or house. If you were a landlord, which tenant would you choose?
3. Your job.
Most employers review your credit history before hiring you. Some employers won’t hire someone with a poor credit history. Others may use it to decide between two otherwise equally qualified candidates. In the business world, your credit history is a common measure of how trustworthy you are. Even if you earn your college degree, a poor credit history may seriously limit your earning potential.
4. You will need loans and credit cards.
Cash is not always king. Let’s say your first loan was a car loan. You weren’t so great at making payments on time. Now that car’s worn out and won’t make the long road trip you have planned. You have enough cash to pay for a rental car and hotel.
5. Your everyday finances.
This means how to buy things and pay bills.
Be careful with your checking and savings accounts. Credit reporting agencies aren’t the only companies keeping track of you. ChexSystems is like a credit report for your savings and checking accounts. If you overdraw or mismanage your accounts and don’t pay back the money in a timely manner, you could end up in the ChexSystems database. Once you’re on it, you will have a very hard time even opening a savings account.
Your only option for cashing your paycheck will be to go to a high-priced check cashing facility. You will need to purchase money orders to pay bills and you won’t have a debit card to pay for everyday purchases. While all of your friends have a cool and convenient debit card, you’ll have a wallet full of George Washington.
Who will lend you money?
You may have a good friend like Jessica who will lend you money when you need it—but only if you’ve proven yourself to be trustworthy. Jessica may still be friends with her late-paying borrower, but that friend has closed a door of opportunity and trust. Jessica would not lend her money again.
Building a good credit history is all about making informed choices. Remember, never take on debt that you don’t have a plan for paying back promptly. Keep a good credit history and you’ll be able to responsibly enjoy all that life has to offer. Make too many financial mistakes, and many doors will be closed to you
If you’re having trouble making payments, keep your creditors informed and work with them. It’s always better (and much easier) to deal with them directly than with a collection agency!
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