Credit 101
By Guest Writer: Chante Coleman
By following these simple steps, you can improve your credit score by 50-100 points within a year like me!!
The Exchange
What many people do not know about credit is that it is an exchange between lender and borrower. The lender is obviously lending money with the expectation of receiving it back in full or by monthly installments with the addition of interest. The borrower is receiving money contingent on exchanging their credit score and report history. The lender will view the potential borrower’s report prior to approval and if approved the lender will report monthly on the status of the installment such as paid or late.
What is credit?
Credit is the ability to purchase an item before payment, based on trust and credit score which is determined by previous credit history that you will pay your debts as promised. Your credit score is based on standard algorithms set by the three credit bureaus which are Equifax, Experian and Transunion. You may find that each of your scores at these different agencies are slightly different, however, this is to be expected because not every lender reports to all three bureaus. Although all three credit reporting agencies are important, the score most frequently checked by potential lenders is the FICO score. Your FICO score is determined based on your Equifax, Experian and Transunion credit reports and are then essentially compiled together. The FICO score may range anywhere from 300-850, and your score is dependent upon multiple variables. These common variables include but are not limited to the length of time you have had each installment, your debt to credit limit ratio, payment history, how many different types of installments you have at once (credit cards, car loans, school loans, etc.) and lastly how many accounts you possess which have gone into collections. Below is the percentage that the previously stated variables affect your credit score.
35% Payment History (Your history is the status of each installment paid on-time or late. Your account is deemed paid when you pay your balance in full or minimum balance within each billing cycle, after thirty days of nonpayment the account will be reported as 30 days late and then 60 and after 90 days your lender may choose to take action against you. A lender may choose to send your account into collections, sue, garnish your wages or if it is a car or home loan they may repossess their property.)
30% Debt to Credit Limit Ratio (For example- you have a $3,000 credit limit on a credit card and you have used $2,600, this would significantly lower your credit score if you do not pay majority of the balance within 30 days of spending. This is because having high limits on revolving accounts demonstrates that you are dependent on credit as a means of payment. A good rule of thumb to stick to with credit cards is to never use more than 30% of each line of credit and always attempt to pay the full balance each month or at least more than the minimum allowed.)
15% Length of Each Installment (To generate a FICO score, you must have at least six months of credit. The longer you have each account the better because the credit reporting agencies get a better idea of how likely you are to pay back on time.)
10% “Hard Inquiries” (A hard inquiry is simply you applying for a line of credit; this may be a credit card, car loan, or home loan. While these inquires will not drop your score lower than 5 to 10 points, they do affect your score for up to six months. The good news is that hard inquiries are charged off your credit report after 24 months.)
10% Different Types of Installments (Different types of installments may include level accounts which are non-variable each month such as a home or a car loan and revolving accounts which are automatically replenished once paid off such as a credit card.)
The bottom line is, credit is a great tool which can help in your future when used responsibly. Stay tuned for future credit blogs.
Please note: This blog is for informational purposes only.