Let your credit work for you

When I was in high school there was a commonly accepted definition of the American Dream, a two bedroom house with a white picket fence. We believed that if you graduated from high school, then college, and then went to work you would be successful in your life, and you would by default achieve the American Dream. What I failed to understand as a child, and in most of my younger adult years, were what tools that I would need to make this dream happen. One of these tools, and quite possibly the most important tool, is a good credit score.

First, I would like to cover what a credit score is. We hear about it all the time, but what is it and why is it so important? Your credit score is used by many organizations that you come in contact with in your daily life. It’s used when you apply for a job, purchase insurance, apply for a loan, and when you submit an application to rent a house. A good credit score may help you land that dream job, big house, and a fancy car; conversely a poor credit score may keep you from ever being able to cut the strings from a co- signer, paying higher interest rates, and get your job application or rental application rejected.

There are three major credit bureaus; Experian, Equifax, and Trans Union. These companies use an algorithm to evaluate your spending, borrowing, and repayment habits. Then, they assign you a score. Those scores inform your lender, employer, insurance agent, landlord or whomever you have permitted to access your credit report about your debt payment history, types of loans you’ve had, and if there are any past or outstanding judgements against you. It also allows them to see your current and previous home addresses and where you have been getting your financing.

Credit scores range from 300 – 850. A good credit score is anything above 700 and an excellent credit score is 800 or above. The majority of the credit scores in the United States range between 600-750 according to Experian’s website. The good news is that your credit score, high or low, is all within your control. You can build or rebuild your credit and increase your FICO scores, but there’s no shortcut. The best way to start is by paying all of your bills on time-every time. Other factors that you should pay attention to include; types of debt (secured vs unsecure), the length of time the debt has been established (the longer the better), the total amount of debt, and credit utilization (the relationship between your credit balance and the total amount of credit available).

It is possible to have errors on your report or to have someone else’s information reported as yours by mistake. So, it’s important that you use resources like annualcreditreport.com to review your credit report. If you find an error, rest assured and do not despair, there’s a resolution process with the first step being to notify the credit reporting bureaus.

Applying for credit should be a deliberate decision, because too many inquiries in a short period of time can have a detrimental impact on your score. Lenders use your credit scores to determine the probability of being repaid, and if your payments will be made on time, as agreed. Lenders are looking for customers who make payments consistently. They do not want have to repossess collateral as this is a costly and time intensive process. Receiving a loan can be a mutually beneficial relationship to all involved, especially when you as the borrower are well informed and acting responsibly.

Source: Andrew Davidson, First National Bank- Artesia

Image source: Micheile Henderson on Unsplash 

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