Usually, credit report scores can range from 300 to 850 with 850 being the highest that one can achieve. Many things go into this score, and these will be further explained. Unfortunately the question “What Happened to my Credit Rating” is asked over and over again in homes where bad credit gradually creeps up on you, eventually leaving you with no options for emergency purchases. Part of the problem is that consumers are lulled into applying for credit cards on receipt of hundreds of offers in the mail telling them they are pre-approved. They apply and within minutes have a source of spending money! Credit should never be viewed as such. Wisely used credit will form the foundation of a good credit report. This takes about six months from the time you have your first credit approved. With a good report to build on, one can proceed in the future to acquiring major purchases, e.g. home, car, etc.
What is Considered
Types of Credit (10%)
Credit types are revolving accounts, car loans, installment loans, mortgages, and finance companies. Be careful and avoid opening accounts just for the sake of having them.
New Credit Opened (10%)
Recent inquiries (within 12 months) are noted and the reasons for them. Inquiries about mortgage loans or car loans are not generally considered in this category, as it is considered good business to shop around for the best companies and the best rates.
Numerous inquiries might raise eyebrows and cause a lender to wonder what the consumer has in mind if the consumer is trying to establish several new accounts, particularly if cash can be acquired from the companies. A vendor might view too many as high risk for whatever reason.
Credit History Length (15%)
Credit history length includes the length of time one has had a credit history, the length of a particular account and the actual use of those accounts awarded.
Credit Utilization (30%)
I alluded to this in a previous post but want to illustrate what I was talking about: If you have a $5,000 credit limit on a credit card, you must strive to spend less than 30% of that limit or $1500 in this case. The ratio of money spent on all of your balances to money allowed will be combined for an overall percentage. The higher the percentage, the more likely you will be considered at higher risk for making payments on new accounts or loans. A lower percentage indicates that you show restraint in spending and that you are more likely to maintain your credit and pay your bills.
“If you don’t take good care of your credit, then your credit won’t take good care of you.”
― Tyler Gregory
Payment History (35%)
This area covers delinquency. One thing you need to understand for sure is that different companies have their own rules about reporting late payments to credit bureaus. If this is a concern to you, and it should be if you make late payments, you need to ask each of your creditors what their rule is. This might make a difference in who you pay first when you have to make a choice. Other late payment considerations will include the total amount owed on the account, the number of accounts late payments were made for, and how late the payments were made.
Generally, the payment history will include a look at public records which reveal bankruptcies, foreclosures, lawsuits, liens, and wage attachments, with the latter usually made for child support payments. In other words, all monies owed by an individual, regardless of the type will be considered by a credit bureau in coming up with a score.
Never Had a Credit Rating
Some people pride themselves on never charging or borrowing. They only pay cash. That may be a good policy to follow for now but can also set the background for a rude awakening. So, why have a credit rating if you are well able to pay cash? You just might want to buy a nice car or a nicer house to live in and lack the cash. You can’t wait until these things crop up. You have to work at establishing and maintaining credit. In addition, insurance companies use your credit scores to determine your rates, and employers use them to establish reliability.
So, What Comes After an Approval
This covers whether you have approval for the first time or approval following a major credit event, such as a bankrupcy. Remember that approval of one request does not guarantee approval of the next one. If you have a lower score, there are some things you can do to take care of that:
- Get a copy of a credit report free and go over it for errors that you can resolve. Also, you will learn what the problems are that led to your report.
- Pay on time. Consider using automatic payments from your bank account or institute a reminder system. Some payments are more negotiable than others, e.g., your rent (you may have to pay a late fee) and your medical bills fall into this category.
- Reduce your overall debt by making cash payments or by not buying it at all.
- Increase your income, even if it is only with a temporary or part-time second job. Report that income to the credit bureau along with any raises you might have received. Many of us think that when our income increases, we can spend more. Don’t do that. That kind of thinking gets us into serious trouble. Remember, we are talking about improving our credit rating right now.
- Avoid having a bill go into the collection process. Once that happens, and it is actually reported to the credit bureau, it will stay on your credit report for seven years, even if you pay it right away.
- Institute credit card prioritization.
If you have experiences with credit that you would like to share, please do so in the Comments section below.