CREDIT! The magic word with the magic touch! The subject of credit and the impact credit has on the lives of numerous people around the world is a fascinating tale to tell. From business needs, to personal finances, paying for that mortgage or renting that accessory, credit is a vital cog in the ever-spinning wheel of finance. But what exactly are the nuances of credit? How do credit scores and credit reports affect my finance? Do I have good credit, or do I have bad credit? How can I increase my credit score or clean up inaccuracies? How? How? How?! Well, I think it’s high time we found out, don’t you?
MUCH ADO ABOUT CREDIT!
Before we delve into the intricacies of fixing credit and getting rid of inaccuracies on credit reports, let’s take a journey through credit country. First off, what exactly IS Credit? Credit is the trust that allows one party (a creditor) to provide money or resources to another party (the ‘creditee’) wherein the second party does not immediately pay the first party but guarantees to either pay back or return those resources (or other materials of equal value) at a later date. For example, let’s say you want to buy a car but don’t currently have the money to get that car. You could approach a creditor like a bank or a lending establishment and obtain credit in the form of money which you could use to buy that car, and consequently agree on a stipulated date in the future at which the money would be fully reimbursed. Credit must be tracked. I mean, you can’t be allowed to keep on getting credit without some sort of history that shows your credit utilizing activities; which brings us to the consequent concepts of credit: Credit Reports, Credit Scores and the indomitable Credit bureaus.
A Credit Report is a record or a history of a borrower’s consistent payment of debts. It is a record of the borrower’s credit history from several sources including (but not restricted to) banks, credit card companies, collection agencies, lending establishments and governments. The credit report is typically populated by credit scores. A credit score is a numerical expression based on the analysis of a person’s credit files, to represent the credit worthiness (a valuation performed by lenders that determines the possibility that a borrower may default [default in finance is a failure to meet the legal obligations or conditions of a loan] on his debt obligations) of an individual. What this jargon translates to is, a credit score functions as a sort of rating that reflects the possibility or probability of you paying your debts. Lenders like banks would look at your credit files and calculate your credit score, which would give them an idea of the risk associated with lending you a certain sum of money (a good credit score gives them a guarantee that you’ll pay back while a poor credit score would wave a red flag). The credit scores on your credit files are usually sourced by Credit Bureaus, which are companies that collect and maintain individual credit information (like repayment history, amount of available credit, amount of credit in use, outstanding debt, tax liens, bankruptcy, foreclosure, etcetera) and sell them to lenders, creditors and consumers in the form of a credit report. In the United States for instance, there are lots of credit bureaus, but consumers are most familiar with the brazen three: Equifax, Experian and TransUnion. Big credit companies like these not only compile and report consumer credit information, but they also provide solutions to help businesses and consumers make better decisions regarding their credit.
Phew! That was quite a journey but stay with us here. All you must remember in the vast forest of credit lingo are: Credit, Credit Reports, Credit Scores and Credit Bureaus. A fundamental understanding of these can play important roles in shaping your credit to how you want it to be and where you want it to be. Moving on, let’s understand the difference between Good and Bad credit and how these can help you ascend the jagged financial ladder.
GOOD CREDIT VS BAD CREDIT!
Your Credit Score. A three-digit number that has the power to potentially set the tone for your financial obligations. It could decide if you’ll pay that mortgage or get that car or foot that impending bill. Knowing your actual credit score can sometime be a complex process. There are hundreds of different types of credit scores available and this somewhat complicates the entire process of credit ratings. However, the two most popular are the FICO score and the Vantage score. Overall, credit scores generally range from a value of 300 to a value of 850. The higher your score, the more likely it is that you will be approved for loans and other types of credits (and at the best rates). Generally, the scores are summed up in this format:
- 750 or better: Excellent Credit Score. You should get the best credit cards, loans and mortgages (although no guarantees exist).
- 700-749: Good Credit Score. You should get most credit cards, loans and mortgages, although you may not qualify for the crème de la crème of offers.
- 650-659: Fair Credit Score. You might get average interest rates and some loans. Your credit limits (maximum amount of credit that a creditor will extend to you) will not be very high.
- 600-649: Poor Credit Score: You have a chance (although minuscule) to be accepted for credit cards, loans and mortgages, but they may have higher interest rates meaning you’ll have to pay WAY more than you borrowed.
- Below 600: Whew mate! You’re more likely to be totally rejected for most, if not all, credit cards, loans and mortgages that are available.
BOOSTING CREDIT SCORES!
Maintaining good credit can make it exponentially easier to get loans from creditors, which translates to improved financial equanimity and exceeding control in emergency situations. Bad credit on the other hand can be a draw, which may drastically smear the quality of life of the individual. It is important to ensure that credit scores are kept at their optimal capacities, which begs the question, ‘How can I boost my credit score?’
- Maintain Open, Active Accounts.
Maintaining an open account is one way in which you can boost your credit scores. A credit score is a measure of your credit history which entails your experience in handling credit accounts on previous occasions. If you don’t have any credit accounts or if the accounts you have are closed or delinquent, then your credit score plummets and you get negative points off your overall credit score. Adding good accounts to your credit report is an extremely important factor in increasing your credit score. This may sometimes mean starting over with a secured credit card.
- Avoid prolonged debt by paying on time.
One of the biggest factors affecting your credit scores is defaulting (a.k.a debt). Your payment history on your Credit report is a record that shows how consistent you are at paying off your debts. The timelier and more consistent you are when it comes to meeting debts that you owe, the better your credit score will be. However, if you make it a habit to default in payment or fail to pay your debts on time, your credit score will begin to dwindle and ultimately you will become a black sheep to lenders.
- Understand your Credit Utilization Ratio.
The Credit Utilization ratio (sounds technical, I know), is a number or rather a percentage that is tied to your credit score calculations. It is calculated by adding all your credit card balances at any given point in time and dividing that by your total credit limit (which is the maximum balance you’re allowed to have on your card at a given time) and then multiplying by 100. For instance, if you have a credit card balance of about $4000 each month and your total credit limit across all your cards is $10,000, then your credit utilization ratio is 40%. The best credit utilization is 0% which would mean that you’re not using any of your available credit, but you must if you want to use credit right? The ideal credit utilization ratio hovers around 25-30 percent. That would mean using less than 25-30 percent of the total credit available. Anything above 30% could cause your credit score to drop which would concurrently lower your chances at maintaining good credit. To put things in perspective, this means on a credit card with a $2,000 limit, you would need to keep your balance below $600 to maintain or even improve your credit scores.
- Ensure that your Credit Limits are accurately reported.
The ratio of your credit card debt to the limit on those credit cards is a factor that could put a dent in your credit card scores. If your credit card limits aren’t reported accurately, it can look like you’ve exhausted your credit card capacity or maxed out your credit card. It is possible to dispute inaccurate credit card limits with the credit bureau or inform your creditor and inquire as to why your credit limit was inaccurately reported.
- Diversify your Credit.
Diverse credits can make difference between a good credit score and a poor credit score. Having a diverse mix of credits basically means that you have several different types of credit lines open and current. For instance, one credit account for mortgage, another for auto loan, another for a personal loan and so on. Many people believe that they need to pay off their credit cards before they buy something that they need. Although it is important to keep credit balances low, it is healthy to carry balances on several credit cards. Having numerous revolving credits with low balances will always bolster your credit score if you pay attention to your debt ratios on each card and monitor your allocated credit limits. Most advisers recommend that you have one loan for every 3 to 5 cards. You should also spread out your credit card debt among multiple cards rather than carrying only one or two cards.
REMOVING INACCURATE ITEMS FROM YOUR CREDIT REPORT!
Error is a part of human capacity, but when these errors pose cataclysmic risks to your financial prowess, then we have a problem. Inaccuracies on credit reports can blacklist you in the eyes of creditors and lenders. Fortunately, as a result of the Fair Credit Reporting Act, it is often easy to clean your own credit reports. You can remove inaccuracies from your credit reports by adhering to three main pointers:
The first step to take in cleaning up your credit report is to know exactly what to report. For this, you need to obtain your credit report from all the major credit bureaus- TransUnion, Equifax and Experian. It is worthy to note that the information on each report may vary because not all creditors report to every bureau. You may receive a free report from the bureaus once a year or visit their websites/informational contact to request.
- Know what can be removed.
It is important to know what can be removed from your credit file. Credit bureaus are obligated to include information regarding your credit history and debt as long as it is correct and timely. However, inaccurate information such as non-existent accounts, judgment for a lawsuit you never participated in, inclusion of debt that you have already paid for or non-existent credit cards can be reported and expelled from your record.
Also, duplicate information such as multiple displays of accounts, or multiple representations of your name may display more debt on your credit report than is the case. Reporting scenarios like this will do a great deal in boosting your credit scores.
- Dispute inaccuracies.
After the errors have been spotted, they can be appropriately tendered via disputes to the bureaus. When tendering disputes to the bureaus, it is necessary to provide personal identification and description of what is wrong as well as documents that would support your claims (such as copies of cashed cheques that confirmed you paid a debt). After your case has been tendered, you will be required to wait a period of 30 days or less to give the bureau time to investigate the matter. During this time, a dispute notation will show on your report. When the bureau finishes its investigation and asserts your claims, you will be given a written report covering what they found as well as an updated copy of your credit report.
The amazing world of credit! Good credit can mean the difference between financial stability and purchasing mayhem. Understanding the consequences of good credit vs poor credit can make all the difference in the long run. It is important to always avoid credit score killing tactics and ensure that you consistently monitor your credit habits to foster your reputation with the lenders; and if you have bad credit, try everything in your power to make sure you fix it because you never know how powerful your credit is until there’s a dent in it. If for some reason you can’t fix your credit yourself because your too busy and just don’t have the time; I know a great company that can help you improve your scores and put you on the road map to financial freedom. Give A Good Name Credit Solutions and Tax Service a call at 1-877-861-2393 or book your free consultation with them at: https://bit.ly/2BO1BlC.
About the Author
Jenella J. Brown is currently the CEO and a FCRA Board Certified Credit Consultant at A Good Name Credit Solutions & Tax Service, LLC. At A Good Name Credit Solutions, she specializes in raising credit scores, income taxes, tax resolutions, and helping business owners establish excellent business credit scores and then leverage those scores to access cash and credit for their businesses.
Ms. Brown is the author of the book “A Good Name Credit Solutions” which can be purchased on amazon. The book is a personal guide designed to give the reader a step-by-step process of understanding how the credit system works and how to restore their own credit. For more information on credit restoration; visit the website at: www.agoodnamecredit.us for a FREE consultation.