Your Credit and Information You Need to Know
Updated: May 12
Think of it this way, a high credit score buys you most things on sale!
Good credit is as important as a good education and determines much more than the loans you can get and the interest rates that you pay. If you have a landlord, they will look at your credit, insurance companies use credit scores, utility companies, and your cell phone company will use credit scores. It will affect most parts of your life so it is crucial, especially the feeling you get if your credit is poor and you go to buy a car. you'll be treated like a second-class citizen and that's unfortunate but the way it is.
Why Credit Scores are so important?
To put this bluntly if you have a bad credit score you will overpay on almost everything that requires or utilizes credit. FICOS and Vantage scores Are on a 300 to 850 scale. Someone with a FICO score in the 600 range would pay $68,000 more on a $200,000 mortgage than someone with a FICOs over 780. This is huge! On a five-year auto loan for $30,000, if the borrower has a low FICO score, they will pay $5,100 more! In the case of a 15-year home equity loan of $60,000, a borrower with poor FICOs scores would pay a whopping 45% more than someone with good credit which equates to $27,000. There is no doubt that lenders exploit this, however, they are taking on more risk based on their lending models. Credit scores are such an integral part of our financial lives, It is essential to keep a close eye on your credit and understand how your practices affect the numbers.
Often people run into hardships and create more credit card utilization which will drag your score way down even if you pay on time. A good rule of thumb is to never be more than 30% utilized on any one credit card. By looking at your credit reports often this is a pretty easy practice to adopt. And if you're able to achieve this you will most certainly be proud of yourself, it is good money management and you should pat yourself on the back.
“If you’re going to use credit cards, use them as a tool for points than pay them completely off”
- Mark B
How credit scores work
There are three different credit bureaus, which means you have three different credit reports. Your scores will differ based on the scoring formula used by that particular credit bureau you used, which means you will need to monitor all three credit bureaus. When applying for funding those lenders will generally use perhaps two out of the three to make their decision. Above and beyond that, the lender may also apply their own internal models to their decision. And even if they told you what credit bureaus they used, resolving an issue can take many months. It is a long process by design and encourages people to maintain good credit, that being said, if you do not keep a decent credit score the lenders get paid more for charging a higher interest rate.
Good credit habits
Pay your bills on time. It is absolutely essential and nothing counts more. Life happens, however, something so easily avoided can't keep you in really good shape if you're just consistent with it. So do what I do, put everything on auto-pay and you don't have to think about it.
Regular use on your credit cards is important. of course you do not want to over-utilize your cards, however, small purchases and then paying them down is a recipe for a good score.
Pay off your balances in full! Do not subject yourself to these crazy interest rates! Pay it down and you'll be happier for it. Any credit card interest rate it's too high, especially if your credit isn't perfect.
Avoid closing accounts. This one thing that throws everybody off. You pay off your balance and decide to close out the account, thinking this would be the responsible thing to do. Unfortunately, this hurts you, because the credit card companies look at an account in good standing for a long period of time as one of their calculating metrics.
Below is a breakdown of how your FICO score works:
Over Utilization Problem
Over-utilization surprises many people, because you can still have relatively good credit, however, to lenders you are non-lendable and will not be able to even consolidate out of a precarious debt position without paying high interest. Banks make a lot of money off people with good credit history, that are overconsumed.
Maybe an emergency happened of some kind, someone got sick, a storm knocks the tree down on your house, and damaged property. You were in a car accident, whatever the case may be, and consolidating would solve your problem taking your debt out of the “revolving credit” category and shifting it into a loan. I like to call this the “gotcha” moment from the banks. Here is a program that can help fix this situation.
Build credit without debt
There are many people who don't have credit scores because they simply haven't used credit cards or perhaps haven't used them recently enough to create the scores. There are a couple of ways to build credit without having generated any scores based on your debt.
Credit Builder loans - these loans allow you to place the money you borrow into a certificate of deposit or savings account that you can claim after you make 12 monthly payments. some of the credit unions and Community Development financial institutions offer credit Builder loans, In addition to some online lenders.
Secured credit card - These cards work by keeping a deposit amount equal to the amount that you will be borrowing as credit, securing the credit. Overtime with no late payments your debt scores will improve.
Here Are 10 Good Credit Benefits to Remember
Loan approval is considering many factors, including credit consumption, income to debt ratio, payment history and so on. And of course, good credit scores will increase your chances of being approved for any line of credit and you may apply with confidence.
2. Low-interest rates
One of the costs for you as a borrower. The interest rate that you get is directly tied to your credit score from the three credit bureaus. If you have good credit you'll get a lower interest payment and if you have great credit you'll get the cheapest interest payment. This will allow you to pay the debt off at a much more aggressive rate and save you an awful lot of money.
3. Negotiating power
A high credit score most certainly gives you the ability to negotiate and of course leverage your credit score in your favor. With a low credit score, this would not be an option. For those that have a great credit score, a very good strategy for negotiating is certainly using one bank against another to get the rate you want and you'll have no shortage of offers. At this point, you are a hot commodity to a lender.
4. Higher limits
How much you are able to borrow is based on your income and credit score. Banks are willing to let you borrow more money if you've demonstrated in the past that you have paid the debt back on time. Having a good credit score validates that with hard numbers to lenders. With bad credit you may still get approved however the amount you borrow is limited.
5. Rental houses and apartment approval
Landlords that outsource too larger companies all use credit scores to vet their tenants As a part of a tenant screening process. Anyone who owns property knows that getting someone evicted for nonpayment is extremely difficult and I would be truly surprised if any landlords avoid the step. Maybe they're doing you a favor because they know you. In many cases, bad credit scores may be directly related to previous evictions or outstanding rental balances. A good credit score saves you the time and hassle of finding a landlord that will approve renters with bad credit.
6. Better insurance rates
Insurance companies too are in the business to make money and if you are deemed a higher risk by virtue of poor credit they will charge you for it. Insurance companies put together a risk profile on each client which includes credit scores, which helps them produce a risk score. For those that have a low credit score, they will be penalized with higher insurance premiums. With a good credit score, you typically pay less for insurance than similar applicants with lower scores.
7. Cell phone contracts without security deposits
Add cell phone companies to the list. if you have a bad credit score cell phone companies may not offer you a contract. They'll offer you a pay-as-you-go option, which again, at the end of the day will be more expensive. If they do offer you a contract there may be a security deposit required. people with good credit will avoid paying security deposits and may even receive discounted purchase price on some of the latest phones by signing an annual contract.
8. Utilities without security deposits
For utilities like your electric bill or gas bill customers with poor credit will be required to put a security deposit down. These security deposits can range from $100 to almost $300 that will not be accessible until the account is relinquished. A good credit score means you will not have to pay a security deposit when you establish utility service in your name or transfer service to another location.
9. Exceptional Loan offers
With good credit and low consumption, you'll find your mailbox receiving a barrage of exceptional credit card and loan offers. Which in and of itself is quite ironic, since as soon as you over-utilized from those special offers - there goes your credit score down the tubes. So certainly Choose Wisely, and consider perhaps restructuring debt using those offers.
10. Additional Incentives by Credit Card Companies
If you are in extremely good standing with the credit card companies they may offer you double the points or if it's a charge card pay overtime. Or perhaps additional bonus points on travel, restaurants, grocery stores, fuel or any number of ways to get you to spend more using their credit cards. You would be considered a much lower risk to do business with and they will reward you for it.
11. You will not be a Target for Rehabilitation ads
These ads are extremely demeaning and target people with poor credit to exploit them. I certainly find them to be in poor taste, however, that's what banks do for that market and to capitalize off of them. Once you're on that bad credit list you'll get spam in your email and you'll get marketing calls even on your cell phone literally harassing you.
If your credit is not so good, this is a journey and not a destination. Once you start to repair your credit just follow these key principles mentioned above and you will get there I promise.
For those of you with good credit, once again this is a journey, not a destination. Managing your credit consistently will help you keep that coveted position with very little effort.
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Just remember, you got this!
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