Tips & advice on getting your finances back on track.
National ‘Get Smart About Credit Day’ is observed annually every third Thursday in October. This day was created to help guide the youth toward better credit habits. Being financially responsible is a crucial life skill, and it’s never too early to start learning. It’s important for younger generations to not only learn about positive credit habits, but positive financial management habits overall.
What is credit and how can it be established?
Credit is obtaining goods or services and paying for them at a later date under agreed upon terms. Common forms of credit include credit cards, mortgages, car loans, student loans, and utility services. In order to build credit, you have to use credit. A great way to start building credit is to open a credit card. Start with a credit card with a low balance and charge small purchases, such as your grocery bill, and pay it off at the end of the month. By making a small purchase and paying off your credit card at the end of the month, you’re building credit. You don’t want to carry over a balance from month to month because that forms a bad credit habit.
Rad More: Everything You Need To Know About Credit
What is a credit score?
A credit score is a number ranging from 300-850 that depicts a consumer’s credit-worthiness. The closer your score is to 850, the better your credit standing is. There are five factors that make up your credit score. These factors are broken down as such:
The lower your credit utilization, the better however, if you have to carry a balance, the ideal credit utilization ratio is below 10%. You can calculate your utilization by dividing the total amount of balances you carry on your credit cards and divide it by the total amount of credit available to you. Try not to have your credit utilization over 30% or your credit score will be negatively impacted. Not only do you want to keep your credit utilization low to help raise your credit score, but you may need to use your credit in a financial emergency such as an expensive car repair. By keeping your credit utilization rate low, you’re putting yourself in a safer financial position while building credit at the same time.
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Where can I check my credit score?
There are multiple ways to check your credit score. You can check your credit score through any of the three credit bureaus: Experian, TransUnion, or Equifax. You can also check your credit score for free through FICO or VantageScore. Since there are various ways that credit scores are calculated, there’s a chance you’ll see a different number at each place you check it. This can be confusing. For example, FICO and VantageScore are two different models that calculate your score. Therefore, you might see a different number depending on which model is being used. All the information in your credit report is used to calculate your credit scores. Additionally your credit score is going to reflect the information that is in your credit report at the time you request your score. So, if something changed from the time you last checked your credit report, you might see a different number reflected.
Negative impacts on credit and how to improve your score
The biggest impact on your credit score is your payment history. A late payment can impact your credit score. If you miss an entire billing cycle, or if you don’t pay a creditor at all, that information will be reported and stay on your credit report for seven years from the original missed payment date.
If your credit score takes a turn for the worse, don’t panic, there are ways to improve your credit. The best way to improve your score is to know which factor, or factors, are impacting you negatively. When you check your credit score, you’ll receive a breakdown of risk factors that come with it. These risk factors will highlight where you’re struggling with your credit. If your payment history is the problem, commit yourself to paying your bills on time moving forward and reduce your debt as much as possible. Don’t actively make charges on a card you’re trying to pay down. You can learn about different debt payoff methods here.
If your debt is too much to handle on your own, you might need professional help to destroy your debt. Credit counseling is a process in which a certified credit counselor can provide guidance regarding your debt and if applicable, help set up a Debt Management Plan to facilitate the manageable repayment of your debts over time. It’s smart to seek professional help from a credit counselor to help pay off your debt. You can click here to contact a Navicore certified credit counselor.
Be patient while you’re working to improve your credit score. Your lenders only update the credit bureaus once every 30 days, so even if you pay off your balance today you may not see an update until the credit bureaus have been updated. Don’t call the credit bureaus or your lenders if you don’t see a change right away. Check back in a couple of weeks after you’ve paid off your balances to see if your score has changed.
Credit Score vs. Credit Report
Your credit score and credit report are two completely different things and two entirely different processes. Your credit score is a three digit number calculated by an algorithm from a risk score model, such as a FICO or VantageScore. They use the information in your credit report to calculate that credit score. Whereas, your credit report is a record of your history of using credit that’s reported to the credit bureaus by your lenders. The credit bureaus simply take the information that is reported by your lenders and add that to your credit history. This information can include your payment history, your current balance, and information about your account. This information is put in your credit file and is updated regularly and then provided to new lenders whom you choose to apply for credit with.
Checking your credit report
As with checking your credit score, checking your credit report is important. You can access your credit report through the three credit bureaus. You can also check your credit report through AnnualCreditReport.com. Initially, you were only allowed to check your report for free annually. However, since the pandemic, you can access your report for free weekly. As mentioned earlier, your lenders only report your information to the bureaus monthly, so you won’t see much change from week to week.
Check your credit report monthly if you’re looking for a specific change. By checking your report often you’re staying on top of the information in your report. You can also spot signs of identity theft or fraud by checking your report regularly. You’ll also be able to spot any errors on your report. If you find any errors, dispute them immediately. When you dispute errors, the credit bureau will verify the information being reported by your lender. Be specific when you’re requesting a dispute and have any supporting documentation available. Give the lender 30-45 days to respond to the dispute. You don’t want your credit score to be ruined because of an error that’s made on your credit report.
Your credit affects so many big life decisions. Credit can play a huge role in helping you achieve your future financial goals. Most people can’t afford to pay for large items, such as a car or a house, with cash outright. So, how you manage your credit today will dictate how you qualify for a loan at an affordable rate in the future. It doesn’t feel good to be quoted a high interest rate or to be denied for a loan outright. To ensure this doesn’t happen to you, it’s important to know the do’s and don’ts of financial management and to equip yourself with the techniques you’ll need in the long run. Don’t wait, get smart about credit today!
Katherine Fatta is the Social Media Coordinator at Navicore Solutions. She creates fun and informative social media posts that engage the public. She’s also the host of Navicore’s podcast, ‘Millennial Debt Domination.’ You can listen to our podcast here.