Does a lender only focus on credit scores when determining whether to extend credit or not? This is a question I am asked frequently. Lenders usually consider a lot of information when making their decision, and people are unsure what they might typically look at. Many lenders go beyond simply looking at your credit scores and also view your full credit report, as well.
When a lender pulls your credit report, they can see identifying information, your trade lines (accounts), credit inquires, public records and accounts in collection. Your credit report also shows things such as the different types of credit that you use, the length of time your accounts have been open, and whether or not you’re paying your bills on time each month. Information like this adds the layers lenders need when making conclusions about your creditworthiness.
All the factors that go into calculating your credit scores are shown on your credit report, and the report itself tells a vivid story of your credit use over time. Your credit report shows what types of credit you use (and when in the past that credit mix has changed), and whether or not your accounts are in good standing. It tells lenders how dependent you are on your current credit and if you’ve been seeking out new sources of credit. Your lender can gather other information about you and your financial habits from other sources – and they certainly might – but your credit report gives them the most complete view of your credit history.
Some lenders also use credit scores that are weighed specifically for their industry. For example, a mortgage lender may use a different scoring model than an auto lender because the risk associated with each type of loan is different. Others may rely upon a combination of scores assigned to you by credit reporting agencies. Although this sounds confusing and maybe even a little unfair, there can be advantages. There’s a chance that the credit score used to determine your loan eligibility, in some circumstances, may be different than the credit score you check on your own.
Of course, there are two sides to every coin. While it’s possible that the credit score your lender uses may differ from the one that you use, the good news is that FICO® Scores are used by the majority of lenders. Differences can happen, but there are ways to have confidence about your credit scores, credit history and report.
Make sure you’re employing best practices for your credit by making all your payments on time and using your credit cards responsibly. Use your FICO Score powered by Experian (link to “What are the different scoring ranges?”), as a general guide, as you won’t know exactly which credit scoring model a prospective lender may use. Across the credit scoring models, credit scores tend to be relatively consistent when it comes to risk. If the credit score that you see categorizes you as excellent, a lender’s scoring model of choice will likely see you similarly.
I knew little to nothing about the importance of good credit when I was in college. Of course, I understood the need to pay my bills on time, but there were so many credit myths I simply accepted as truth. As a result, I had to learn to separate myth from fiction the hard way. Fortunately, this doesn’t have to happen to you.
Your Credit is Your Future I didn’t realize that the poor choices I made in college would follow me for so many years. It felt like the money that new credit offered me didn’t have strings, and I was a busy student. As I began looking for employment, many companies viewed not only my grades and my limited résumé, but also my credit scores. About 33 percent of all employers perform a credit check before making a hiring decision, according to a survey conducted by the Society for Human Resource Management.
That was when I learned that the delinquencies I had let slide could remain on my credit file for up to seven years, and that other financial bumps in the road, such as bankruptcies, can remain for up to 10 years. From that moment, I carefully considered each and every credit decision I made. Especially to a new graduate, a decade can feel like forever.
Using Every Bit of My Credit
My credit cards helped me establish a credit history, but not necessarily a good one. I didn’t realize how using too much of the credit available to me would end up hurting me. I was making timely payments on the cards but my credit scores suffered anyway because I used every penny of the credit lines that had been extended to me. This was when I learned about the all-important credit utilization ratio. This ratio compares the amount of credit you’ve used to the amount of the credit available to you. A higher credit utilization ratio can negatively impact your credit scores, whereas a lower ratio can affect it favorably. Many experts recommend a credit utilization ratio somewhere between 30 to 35 percent as ideal. So if your credit limit is $2,000, you’d want to keep your balances in the neighborhood of $600 to $700.
Monitoring May Help Lower Your Credit Scores I never bothered to monitor my credit report because I thought that doing so would adversely impact my credit scores – another big myth. But, this isn’t the case. When you request your credit report or use a service to get a copy for yourself to review, these are known as “soft” inquiries, which don’t affect your credit scores. Creditors can’t see you’ve done this when they look at your credit report.
With many credit myths out there, it’s important to separate fact from fiction. It may make a difference in your credit scores, and it will definitely make you more knowledgeable about credit.
Good credit can literally open doors for you – like the doors to a new house or car. But bad credit can slam those same doors shut, lock them and throw away the key. Smart consumers protect their good credit by knowing when to use credit, when not to use it, and how to use it without falling into a debt trap. Read on to learn the biggest mistakes you can make with your credit.
Your credit report is a summary of the information that impacts your credit scores, and if there’s bad stuff on your credit report, that usually translates to a bad score. Smart consumers check their credit report regularly. Doing so allows you to identify problems in the way you use credit (such as late payments or high balances), correct anything that isn’t accurate, and even spot signs of identity theft, such as accounts or applications you don’t recognize.
There’s nothing wrong with living debt-free if you can manage it. Some people, though, not only have zero debt, they don’t have any credit accounts at all – not even a credit card. They may be shocked when they’re turned down for a home, car or another loan because they have no credit history established. Lenders check your credit to see whether you can be counted on to repay the money you borrow. If you’ve never borrowed money before, they’ve got nothing to go on. This isn’t about the system “wanting” you to get into debt; it’s about demonstrating that you can be trusted with paying back the money you borrow.
Credit scoring models have a lot of moving parts, but here’s one thing you need to know about them: the biggest factor in almost every credit score is your payment history. A late or missed payment on your credit report counts against you, and the later it is, the more damage it can do. In most cases, payments will be reported as being late only if they’re at least 30 days past due – but once a late payment appears on your credit report, it can remain there for up to seven years. Set a reminder on your phone or scrawl a note on your bathroom mirror if you have to, but pay on time without fail.
A big part of your credit score is what folks in the credit business call your utilization ratio, or credit usage. That’s the calculation of how much of your available credit you’re using. For example, if your credit cards have a combined credit limit of $5,000 and a combined outstanding balance of $1,000, your credit utilization ratio is 20%. The lower the ratio, the better. Even if you’re making your payments on time, a high ratio is a red flag. For one thing, maxed-out or nearly maxed-out accounts suggest you may be living beyond your means. For another, high balances limit your availability to draw on credit in an emergency, which means an unexpected expense could push you over the edge or cause you to fall behind on making payments.
Your utilization ratio has two elements: your outstanding balances and your total available credit. When you take on more debt, your ratio goes up. Reduce your available credit, and your ratio also goes up. That’s why it may be a bad idea to close a credit card account. In fact, closing unused credit cards may be the single biggest credit mistake people unknowingly make. To keep your ratio down, consider leaving the account open and just not using the card – assuming you can resist the temptation.
Just because you’re paying bills doesn’t necessarily mean you’re getting much closer to paying off your debt. If you have a $2,000 balance on a credit card with an interest rate of 15 percent and only make your $30 minimum monthly payments, it will take you more than 11 years to pay off the debt. You’ll also pay nearly $4,200 – paying more in interest than the original amount borrowed. And that’s if you don’t put anything else on the card. Paying only the minimum doesn’t do much to get you out of debt, lower your balances or improve your utilization ratio.
It’s one thing to borrow money to buy a car, a house or a new refrigerator. While you’re paying off the debt, you get to drive that car, live in that house and keep your orange juice cold. It’s something else to borrow money for everyday expenses. Pay for groceries with a credit card without paying it off every month, and you could still be paying for that orange juice long after it’s gone. If you’re regularly using credit to cover regular expenses because your cash is low, you may want to take a hard look at your budget.
Cash advances on a credit card usually incur a higher interest rate than purchases, come with transaction fees, and have no grace period. So, interest on the money usually starts adding up immediately. It would probably be cheaper to simply use the card to directly pay whatever expense you need the cash for. Whatever you decide, taking cash advances is a good sign that there is a problem with your cash management.
Credit can be a lifesaver in a pinch – giving you the ability to replace a broken appliance or finance an unforeseen car repair. But credit is no substitute for savings. If your income is disrupted because of a job loss or a medical emergency, for example, the money you spend from savings doesn’t have to be “paid back”. But anything you put on a credit card becomes debt. Work toward building emergency savings, with enough money to cover your expenses for six months or so. That will help you avoid possibly digging yourself a financial hole you can’t get out of.
When you apply for a credit account, the inquiry the credit or lender makes will show on your credit report, and it can impact on your credit scores. Credit applications suggest that new debt may soon be showing up on your credit report, so they can affect whether you’re approved for loans. If you’re going to be in the market for a mortgage, car loan or other big-time credit deal in the near future, try holding off on applying for credit cards and other accounts for a few months beforehand.
Credit isn’t the sort of thing you want to experiment with until you get it right – it’s a lot easier to kill your credit health than it is to fix it. You only get one chance to build your credit history from scratch, so before you begin, it’s important to get educated on the basics, like what factors go into your credit score and how to read your credit report.
How: If you’re reading this, you’ve already taken the first steps! Nowadays, it’s easy to learn the ins and outs of credit and personal finance. Take advantage of the Internet and regularly read up on how you can improve your financial situation. Don’t worry, you don’t have to become a credit expert – just a little education can go a long way in helping you start your credit journey off right.
I think majority of us have been in a situation where our credit score or history has prevented us from getting something. If only we had the right information about credit, maybe we could avoid some of these unfortunate situations. Lets take a look at a few tips that can help you maintain a high credit score.
The longer you have tradelines on your credit report, the stronger your credit history will be and the higher your credit score will be. Therefore, it is important to establish credit at an early age. A sure way to do this is to add your adolescent as an authorize user on a credit card that has a high credit limit, no late payments, and a long credit history. If you are already an adult, you need to establish at least four tradelines. A car loan, a two credit cards, and your student loans will count as four examples. It is important that you don’t get any late payments on anything.
If you have a credit card that has a credit limit of $700, don’t use the entire $700. This will hurt your credit score. You typically don’t want to use more than 30$ of your credit limit in a given month. However, I understand things happen. So if you are forced to use more than 30% of your credit limit, try to pay it down to 30% of the limit or pay it off as soon as possible.
Not paying your bills on time can hurt your credit severely. Additionally, it is incredibly difficult to recover when you have multiple late payments. Here is a little bonus for you. Try to avoid having any late payments within the past 24 months when applying for a car loan and past 12 months when applying for a home loan. If you have a late payment that is on your credit report when applying for a car loan, your interest rate will be higher. If you have a late payment within the past 12 months when applying for a home loan, you will not be able to qualify for a mortgage.
Type of credit you have
This is one little rule that many don’t know will hurt them. Just like your investment portfolio, it is important to have a diverse credit report. For example, you don’t want to have 7 credit cards as your only tradelines on your credit report. This will hurt your credit score severely. Have a healthy mix of credit. For example, a mortgage, car loan, personal line of credit, two credit cards, and student loans.
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1. This is the only rate you qualify for
If you are going for a FHA or conventional loan, there are a series of rates you qualify for. For FHA, as long as your credit score is above a 620, then the rates will not change based on your credit score. To keep it simple, a 620 and a 720 is the same in a FHA loan. So in a FHA loan, the lowest rate you qualify for may be a 4.0% while the highest may be a 6.0%. However, in a conventional loan, your credit score will dictate what series of rates you qualify for. The lower your credit score, the higher the rate. The higher the credit score, the lower the rate. Just like FHA, conventional may qualify you for a series of rates between 3.0% and 5.0%. So what dictates which rate you get? Read #2.
Credit cards can help get you out of a rough spot, but they can also put you in a rough spot. The difference between a credit card hurting you and helping you is you being educated about how credit cards really work. The purpose of a credit card is not for everyday use. It is kind of like a emergency fund. However, their are some things you need to know about a credit card before you decide to use it.
1. Understand the interest
In fact, credit card companies often rely on the fact that you will not understand how your interest is constantly compounding. Therefore, you need to protect yourself by understanding how compounding works in relation to credit card interest. The term “compound interest” means that any interest charges are added to the principal (which is the amount you originally borrowed) so that your debt grows exponentially.
If you have a $100 debt and it accrues 10% interest every month, then the first month you will be charged ten dollars (100 x 0.10). With compound interest, that ten dollars is added to your original debt, so now you have $110 of debt. The second month you are again charged 10% interest, which this time comes out to eleven dollars (110 x 0.10), so now you have $121 of debt. Compound interest has a big impact on how credit card interest works. Most people know their APR, which stands for Annual Percentage Rate. In general, your APR is supposed to equal the approximate percentage you will pay in interest over the course of a year. However, the actual amount you will pay is often slightly higher than the APR.
2. How it affects your credit
Most people are unaware of how credit cards affect their credit. Credit cards can be a great way to build good credit and maintain a good credit score, if used correctly. However, if you are maxing out your credit card and not making timely payments, then you will destroy your credit. Credit cards were not invented to be used as another source of income. So if you have 4 or 5 credit cards that are close to being maxed out or are maxed out, your credit score will be lowered.
3. How to use them wisely
Use your credit for monthly purchases such as gas, coffee, and small purchases. Payoff the balance every month. This will help you avoid paying interest on the credit card and will contribute to raising your credit score. Remember, credit cards are suppose to be used as an emergency fund or very small purchases. Do not get in the habit of going on shopping sprees, buying stuff on vacation, or going to the All-Star Game via your credit card