Everything You Need To Know About Credit
Credit is the ability of a customer to obtain goods or services before payment, based on the trust that the payment will be made in the future. During your life, when you need to make a big purchase, you will more than likely use credit. In order to make these big purchases, you need to prove that you will be able to pay them off in full over a defined amount of time. It takes time for a person to build their ideal credit, but only a few bad decisions can destroy it. With that in mind, here's everything you need to know about credit and credit scores.
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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. Paying your credit card on time isn't the only way to have good standing credit. Your payment history is the predominant factor in calculating your credit score, but there are actually 5 factors that make up your credit score. These factors are broken down as such:
- Payment History: 35%
- Amount Owed: 30%
- Length of Credit: 15%
- Credit Mix: 10%
- New Credit: 10%
How can you improve on your credit score?
If you need to improve on your payment history, focus on paying your bills on time. You can set up automatic payments to help you pay your monthly bills. This will help reduce your missed or late payments. If you do find yourself with late payments due to a lack of money, create a budget to get an understanding of how you are spending your income and how you can catch up on these late payments. Paying your bills on time is the biggest factor in calculating your credit score.
The next most important factor in determining your credit score is the amount of debt you owe. Get into the habit of paying off your credit card in full every month. If you can't do this, at the very least, pay more than the minimum due every month until you have paid it down to zero.
Length of credit history makes up 15% of your credit score, so if you're new to credit, this is where you might lose points. Don't close your oldest account unless you really need to. Your credit history takes into account how long your credit accounts have been established, including the age of your oldest account, the age of your newest account, and the average of all of your accounts. Credit cards aren't the only way to establish credit. Having loans, such as student loans, or even mortgage payments can establish credit. Use these different types of credit, as well as your credit card, responsibly and you'll see a positive impact on your credit score.
Credit card companies are always sending you offers in the mail to open a new credit card. Don't act on all of these offers. Opening too many new accounts at once will negatively impact your credit score.
How do I establish and maintain credit?
Credit Card usage is one of the best ways to establish credit. With credit cards being so accessible, they're also easily abused. In fact, 55% of Americans with credit cards have debt. If you're just starting to purchase on credit, start off by only opening one credit card. Make one purchase a month on your card to show the creditors you're actively using your credit. The most important part of credit card usage is to pay off your balance in full at the end of the month. If you're only making one purchase a month on your credit card, this shouldn't be too difficult to do. You don't want to carry over a balance from month to month because that forms a bad credit habit. Don't charge something unless you're sure you can pay it off, in full, at the end of the month. By paying off your credit card in full at the end of the month, you'll maintain your high credit score.
There are other ways to build credit if you're not comfortable with a credit card. You can become an authorized user on someone else's credit card. This is a great way to establish your credit if the primary cardholder is willing to have you as an authorized user. You can use the primary cardholder's credit and gain from their credit card activity. Their card activity will positively impact your credit even if you never use their card.
Read More: Establishing or Reestablishing Your Credit
Did you go to college and now have a great deal of student loans? Student loan debt always seems to be deemed as a negative impact on your life. Federal student loans are a good way to get credit started. If you don't need to take out loans, don't do so just to start credit, but if you were already considering them then student loans are a part of your credit. In order for student loans to positively impact your credit score, you're going to have to make sure you're paying at least the minimum monthly payment on them. By doing so, your credit score will be positively impacted.
In fact, all types of loans can impact your credit score. This means your credit will be impacted by mortgage payments, a car loan, or a personal loan. Just like your student loans, you need to make sure you're paying at least the minimum monthly payment on these loans in order for your credit score to be positively impacted. Failure to make the monthly payment will negatively impact your credit score.
A way to maintain your high credit score is to only use about 30% of your credit. This means if your credit limit is $10,000 try to spend a maximum of $3,000 on your credit card. If you exceed more than that 30% then your credit score will be negatively impacted. The less of your available credit that you utilize the better your credit score. People who have exceptional credit scores tend to keep their credit utilization under 10% for each card and for total card use. High credit utilization can signal over borrowing, lack of borrowing capacity, and potentially difficulty making payments. Make your goal to spend less than 10% of your available credit every month. If you don't think you can do this then make sure to not exceed more than 30%.
What is a credit report?
A credit report is a detailed breakdown of an individual's credit history and you can find your credit report at one of the three Credit Bureaus. A credit report is a history of your financial background and highlights your personal payment history and lending and credit worthiness. Many Americans don't read their credit report and 32% of Americans have never obtained a copy of their free credit report. Not checking your credit report can put you at financial risk and puts you at a higher risk for credit fraud.
Your credit report and credit score are not the same thing. A credit score is a formula that turns your data into a three digit number whereas your credit report is a list of your present and past credit accounts. Check your credit report at least once a year, unless you're applying for a loan or working to rebuild your credit. This will help you to monitor your activity more closely. By checking your credit report, you're also checking to make sure there are no fraudulent charges. Being aware of your credit report will in turn positively impact your credit score. Check your credit report for errors with one of the three Credit Bureaus: Experian, Equifax, and TransUnion.
What happens if I end up in debt?
Unfortunately, debt negatively impacts your credit score. Sometimes you aren't prepared for a big financial hit like a medical bill or large car repair. Just because you have a large amount of debt and your credit score is in the danger zone doesn't mean you'll never recover financially. If you're running out of money at the end of each month and struggling to pay your bills, a certified credit counselor may be able help you regain control of your finances.
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Speaking with a credit counselor about your situation doesn't affect your credit. At Navicore Solutions we have certified credit counselors that will help you on your debt management journey. When you reach out to one of our credit counselors, you will be asked about your current financial situation so that counselor can gain an understanding of your specific financial circumstances. Then, if it is the best solutions, you can enroll in our debt management plan that is personalized for your finances. The debt payoff process takes time, but by sticking to your debt management plan, you will become debt free and your credit score will gradually improve.
It's not only important to have credit, but to maintain your credit. Strive to pay off all of your balances and bills at the end of the month and don't carry over a balance. The earlier you start building credit; the better off you will be financially in the long term. If you want to start off building credit with a credit card, that's fine, but make sure to start by only opening one credit card. Only once you're financially stable, consider opening another credit card. Keep yourself out of credit card debt by keeping up with paying your card off in full. If you find yourself in financial trouble, reach out to a certified credit counselor for more help.
Katherine Fatta is the Social Media and Content Specialist 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.