How is credit granted?
Typically, creditors qualify an individual for credit based on 3 criteria. Do you have the CAPACITY to pay the debt back? What is your CHARACTER, and have you paid back prior debts? What type of COLLATERAL are you willing to put down?
These three qualifiers paint a fairly reasonable picture of you as a borrower. They tell the lender what your likelihood is to pay back the money you borrow, and if you are not willing to pay it back, what concessions will be made in the form of collateral (if you don’t pay back you car loan, they will repossess the car and auction in off to try and recover the difference owed to the lender).
What is a Credit Score?
Your credit score is a numerical value assigned to you based on your CREDIT HISTORY. It takes into account numerous aspects of your financial life and assigns a number based on the calculated risk in lending to you. These factors are listed in the chart below.
Lenders use your Credit Score when they determine to grant or deny credit to an individual. The most frequently used version of the credit score is the FICO (Fair Isaacs and Company) score. FICO scores can range between 300 (extremely high risk) and 850 (low or no-risk). The higher your score the lower the risk in lending to you and the more likely you are to obtain credit.
Is My FICO© Score Good?
Many people have the misconception that paying bills on time is all that is needed to obtain a strong credit score. Timeliness of payments is a very important factor, but it is one factor of many. The truth is that your credit is almost a living breathing entity; constantly changing. The credit score determined for you is merely a snapshot of you and your financial standing at the moment your credit file was pulled. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your credit score less as time passes. There are several ways to improve your credit score:
- Pay all your bills on time –Delinquent payments have a negative impact on your credit rating.
- If you have missed or been late with any payments, get current and stay current.
- Pay down your balances –Try to keep your balances within 50% of your available credit.
- Do not take on any new debt or open accounts.
Should I check for Errors in My Credit File?
The majority of America has errors on their credit report that are in one way or another affecting their credit score. It is wise to request copies of your Credit Report from all 3 reporting bureaus at least once every year, so that you can monitor them for any inaccuracies or activity which might suggest fraud.
Most people are only concerned with their credit score when they are ready to make a big –ticket purchase, such as a car or a home. Ironically, a healthy credit standing is the result of timely and prudent financial decisions, not last minute changes. Although it can be time consuming a well planned and strictly followed budget and payment schedule will allow you to better manage your money, save for the future, and even give you the freedom to forecast your income for the future. Exercising prudence and discretion are the best ways to avoid the pitfalls of debt and poor money management.
It isn’t what you earn, it’s how you spend
Every year Americans make a decided effort to follow through with a New Year’s Resolution. Mixed in with the plans to exercise more and quit smoking is the relatively common idea to “pay off debt.” Ironically, a more sound and lasting plan would be to avoid accumulating debt. Most experts will agree that it is the small and consistent purchases that really add up over time. How you are spending your money can have a major impact on your accumulation of debt. Consider this; a cup of coffee from a coffee house every morning would cost you roughly $3.50 on the low end and close to $5.00 on the high end. If this is a part of your daily routine, you could end up spending $1,000 - $1,200 a year. Another example would be the notorious office lunch debacle; a week’s worth of lunches that you brown bag can end up costing you only $10 for the week, whereas a week’s worth of take out, delivery, or drive-thru dining can run you upwards of $30 per week.
Are these every day extra’s worth it? Sure, it is nice to have a steaming cup of hazelnut roast to start your day and a Shrimp Po’ Boy at your favorite eatery, but is the overall cost worth it? Everyday spending decisions have a major impact on your long term goals. So temperance is key.
