Your credit, believe it or not, is like a progress report, sent home from your teachers, when you were in school. It is a report of your financial dealings, to whom ever you have given access to look at it. Whether you are applying for a car loan, credit card or even some jobs, they want to know how you have been behaving with your finances.
Just when you thought you were an adult and you no longer had to answer to anyone, well except the authorities. Yep, you have a financial report card that will follow you for the rest of your life.
Having good credit is involved in creating the circ*mstances needed to grow wealth. Credit has a greater impact on your finances than clipping coupons. Of course, there is nothing wrong with clipping coupons, they just don’t tell a story.
What Is Your Credit?
Your credit consists of two things, your credit report and your credit score.
Your credit report gives potential lenders basic information about you. It tells them about your accounts and your payment history. Any credit related activities you engage in, are tracked by your credit history.
Your credit score or FICO score, represents your credit risk to lenders. This number is between 300 and 850. The higher your credit score the better.
Your credit score and things like your salary, age and credit history, are all taken into consideration by potential lenders, to decide if they will loan you money. Based on this information, they will also determine how much interest they will charge you on the loan, if they do decide to lend to you.
Why is Knowing About Your Credit Important?
Knowing about your credit can save you time and money. As you probably already know, when you need to borrow credit, your credit determines whether you will get approved, how much you will get approved for and how much they will charge you in the form of interest.
Perhaps you are not in need of a loan now, but one day, you may want to buy a house or finance a new car. Preparing now, for this possible future need, will help in making those decisions lighter.
How is Your Credit Score Determined?
Your credit score is based on several things. Payment history is 35% of your score. The lenders need to know if they can count on you to make consistent on time payments.
Credit utilization affects 30% of your score. Credit utilization is pretty much, how much you already owe in credit and how much credit is available to you. Using less than 30% of your overall credit limit is generally what is recommended.
The length of your credit history is 15% of your score. The longer the better, lenders like to see you have had credit for awhile. The longer you have had your account the more valuable it is for your credit score. 10% of your score is based on new credit.
Different types of credit make up the last 10% of your score. Lenders like to see a variety of credit history, like student loans, auto loans, credit cards, etc.
What is Included in Your Credit Report?
Your credit report includes basic information about you. Your name, addresses, date of birth, employers, etc. It also includes a list of all your credit accounts, whether they are open or closed. Whom you have paid or not, how consistent you were with those payments and if you were ever late.
If you have or had loans, the amounts are reported. Whether they are in good standing or not is also included.
Any bankruptcies or collections that you may have had are also listed on your report. Of course these things do fall off your report over time. But it takes a lot of time. 7 or 10 years, depending on the type of bankruptcy and 7 years for collections to fall off, although this is based on how the collection is dealt with.
Credit inquiries are reported as well. So anytime you give someone permission to run your credit, this is an inquiry and it is reported on your credit.
Summary
Having knowledge of your credit, can make your financial life a little easier. You can have the confidence in knowing whether or not you qualify for lower rates on loans, better more rewarding credit cards and you will not have to wonder if your credit history caused you to miss the greatest job opportunity you would’ve ever had.
So if you haven’t already begun keeping tabs on your credit and how you are treating it, it’s never too late to start. You may find applications like credit karma, to be useful in helping you keep track of your credit and credit history.
Checking your report at least once a year, will help you to also spot potential errors and fraud. If you see something on your report that you are not familiar with, dispute it. Disputing is easy and free to do.
I certainly hope you found this information to be helpful and informative. If you have any tips to share, please do so in the comments below.
