Our bodies cannot live without blood and our economy cannot live without credit. In fact, it’s no exaggeration to say that if we didn’t have credit, we wouldn’t have an economy. Most transactions today are done on credit cards, houses are purchased on credit (mortgages) as are automobiles. For that matter, countries actually grant credit to one another. Here are eight things you need to know about credit that are covered in this article.
1. The biggest benefits of credit
2. Your credit report
3. Credit scoring
4. How your credit score is computed
5. How to get approved for a credit
6. Other ways that your credit report affects your life
7. How to get your credit report free
8. How to improve your credit score
The biggest benefits of credit
The biggest benefit of having credit is that it gives us the ability to purchase something now and then pay for it later. The two most obvious examples of these are mortgages and auto loans. Both allow us to have something we need now but then take years to pay for them. A second important benefit of credit is that believe it or not, it can help in getting a job. Employers today routinely use credit reports in screening job applicants. If you were to not have credit in the form of a credit report, you might find it virtually impossible to get a decent job.
Your credit report
Speaking of credit reports if you ever purchased anything using credit, the three credit reporting agencies (Experian, Equifax and TransUnion) all have credit files on you in the form of credit reports. Whenever you apply for credit of any kind, the first thing the potential lender will do is pull your credit report. If you have a good, clean credit report – with no or very few negative items – you should be able to get the credit you applied for. Conversely, if your credit report shows a lot of accounts turned over for collection, late payments, judgments or liens, it’s unlikely you will get that new credit.
Credit scoring is based on your credit report. In fact, it’s a mathematical representation of your report in the form of a three-digit number. Most people don’t realize this but you actually have a different credit scores. The most important of these is your FICO score, which ranges from 300 to 850. You may have seen the commercial with the children sitting around a table who all agree that more is better. The same is true of your FICO score. More or in this case higher is better. If you don’t know your credit score, it would pay you to get it. It’s available on the website www.myfico.com for $19.95. Or you can get it free if you’re willing to sign up for a trial subscription to the company’s Score Watch program.
How your credit score is computed
Only FICO and the three credit reporting bureaus know precisely how your credit score is computed. This is because it’s done using a formula or algorithm known only to them. However, it is known that your credit score consists of five components. They are.
• Credit history – on time vs. late payments)
• Capacity used – how much credit you have available vs. how much you’ve used
• Length of credit history – or how long you’ve had credit
• Types of credit used
• Credit applications – or how many times your credit report has been requested and by whom
For more details about your credit score, watch this video featuring the CEO of Equifax – which is one of the three credit reporting bureaus.
How to get approved for credit
The most important requisite for getting credit is your credit score. If you have a score of 750 or above, you should be able to get just about any type of credit you wish from a home mortgage to a platinum credit card. Conversely if you have a poor or bad credit score of 580 or less, you may find it difficult to get any credit.
As you have read, your credit report will dictate whether or not you are able to get new credit. But it doesn’t stop there. Your credit report (or score) will also have a large impact on the interest you are charged on any credit you are able to get. As an example of this, you might be able to get a mortgage with a poor credit score but your interest rate would likely be 2% or even 2 1/2% higher than if you had a good or excellent credit score. Insurance companies are now routinely checking credit reports when they calculate your premiums. And as noted above, you might not get a new job or be passed over for a promotion based on your credit report.
How to get your credit reports
You can get your credit reports free by contacting the three credit reporting bureaus individually. However, a simpler solution is to get all three simultaneously at the website www.annualcreditreport.com. These reports are free but only once a year. If you want to get your credit report more frequently than annually, you will need to contact one or all of the credit bureaus and pay for your report.
How to increase your credit score
There is no magic secret for having a good credit score. You just need to use credit sensibly. This means making all of your payments on time and paying off your balances at the end of each month. Where most people get in trouble with debt is carrying balances forward from one month to the next. The reason for this is that when you carry balances forward, you incur interest charges that will be added to your balance due. If you’re not careful this can spiral into a huge amount of debt in practically no time at all.