For many individuals, the whole concept of having credit and establishing a credit score can be confusing. Several factors impact credit history and credit scores. For people without great credit, it can be a hassle trying to navigate through complicated information related to the world of credit.
Fortunately, it’s easy to break down the basics of credit scores, credit reports, and why credit history matters.
Credit History
The first step in understanding credit scores is to understand the relationship between credit history and credit scores. It’s important to note that a credit score is based on two components: your credit history and your credit score. Your credit history includes everything you’ve done with your credit over the years, while your credit score is based on all the information contained in your credit report.
Credit history and a person’s financial health behavior impact their rating, which ultimately determines how they will be treated by lenders. A person’s credit score is determined by the rating that the major credit reporting agencies assign to a person. Credit history refers to the account histories of an individual’s loan payments over time and his or her payment behavior in terms of timely payments, missed payments, late payments, or other financial delinquencies over time. In other words, it’s how an individual has paid back his or her debts over time.
Individuals who have a good credit history are considered to be creditworthy. This means that they have a high probability of paying their obligations on time and maintaining good payment behavior in the future. They also have lower risks of defaulting on their loans and being declared as a bad debt by lender. A good credit history is essential for individuals who want to obtain secured credit card, mortgage loans, auto loans, personal loans, and other types of loans.
What is a Credit Score?
A credit score is a 3-digit number that’s assigned to a person’s credit report. It represents the determined creditworthiness of the individual based on their financial history. It relies on the information listed within the individual’s credit report as well as findings by the three main credit bureaus.
Credit scores fit into several groups: poor, fair, good, and excellent. Depending on how high a person’s score is, their credit group may qualify (or deny) them for future financial benefits. Good and excellent credit scores result in more approvals and better rates. Fair and poor credit scores frequently get denied or have high interest rates.
How Does a Credit Score Work?
Three main major credit bureaus are in charge of determining credit scores. TransUnion, Equifax, and Experian bureaus may come up with varying scores for one individual. However, the scores are relatively consistent.
An individual’s credit score differs due to the different scoring formulas each bureau uses.
When a person applies for a line of credit, he or she is approved or denied based on their current credit score. If he or she is trying to establish credit for the first time, it’s wise to seek a beginner’s credit card with a low credit limit for the best chance of approval.
The credit bureau calculates scores
based on an individual’s current level of debt and payment history. The number of open credit accounts, frequency of credit applications, and length of history affect scores as well.
The more reliable the payment schedule and the longer the credit history, the higher the score. This is unless there are several negative accounts in an individual’s credit history.
How To Improve Your Credit Score
To
improve a low credit score, individuals should take the following steps to start repairing credit:
- Pay bills without being late. Even a single late payment can drop an individual’s credit score by a few points, so it’s important to be on time with bill payment. You can create a management plan for the monthly payment to pay your loan on time, such as the monthly mortgage payment.
- Keep a low balances. If individuals have revolving credit records (like a credit card), it’s important to keep the balances (credit card balances) low or pay them off completely each month.
- Use credit-improving programs. There are several apps and tools designed to improve credit scores. By using tools like Experian Boost, individuals can improve their scores by paying for utilities on time.
- Don’t apply for credit lines too often. Opening a new line of credit usually requires a hard inquiry on your credit report. This can drop scores by a few points, so it’s important to only apply for credit lines as needed.
- Check your credit report for inaccurate information. Though credit reporting agency are generally accurate, mistakes can occur. Should an individual find inaccurate information on a credit report, it should be immediately applied for personal credit report disputes.
For Individuals with NO Credit
There are solutions available for individuals who have low scores due to having little or no established credit.
By applying for a small line of credit for beginners and making on-time payments, individuals can work on building credit. Try seeking a credit card that’s designed for people who are trying to build their credit scores for the first time. Most credit companies have these card types available.
By keeping a decent credit score, individuals can qualify for great rates, so they’re not overpaying for necessary items. Paying bills on time and monitoring your credit report can benefit you in the long-term and help you get approved for larger credit lines in the future.
The Disadvantages of Having a Bad Credit Score
There are several disadvantages to having a bad credit score.
Not being able to obtain a loan or other financial benefits from banks and other lenders. Though there are programs designed for individuals with low credit scores, the only way to get approved for these are through a hard inquiry on your credit report.
Being charged higher interest rates when applying for a personal loan or line of credit limit. This is especially true if you have poor credit and have used revolving accounts in the past. There are programs designed to help with this, but they can take time to complete.
Being denied the purchase of certain products or services, like houses. Having poor credit may mean that you’re unable to purchase certain items like cars or homes without having great financial means behind you, like enough money saved. Even some medical procedures require financial means in order to qualify for the procedure, so this can be an issue as well.
What Is a Credit Report?
A person’s credit report is the history of their financial accounts. It includes everything from loans, lines of credit, mortgages, and credit cards. This is what determines an individual’s credit score.
The amount of information on a person’s annual credit report depends on how many accounts they have and how long they’ve had them. The more accounts a person has and the longer they’ve them, the more information there will be on their report. The length of time can vary from less than one year to more than 10 years depending on the person’s situation.
People who apply for new lines of credit (like a loan or line of credit) are usually required to have their credit reports pulled for this purpose. A hard inquiry may appear on an individual’s report if it is necessary to get approval for a new line of credit. A hard inquiry means that the bank used one or more pieces of information from your report in order to determine whether you are qualified for a loan or line of credit.
The Bottom Line
Credit scores are important to credit-conscious individuals. They can make the difference between a new credit card and a hard inquiry, a lower interest rate and a higher interest rate, or even approval for an apartment rental.
Individuals with poor credit history may be denied new credit lines, higher rates on existing accounts, or may have trouble getting auto loans or home loans. By improving their credit history and scores, individuals can build a better financial future with better financial decisions. You can also find a professional who can help you to make credit decisions with confidence and get education on credit reporting.
When an individual has achieved a credit score that is above or near 700, an array of financial benefits can await them. People with
on insurance, mortgages, and future lines of credit.
High credit scores mean that financial institutions deem a person as trustworthy and reliable with credit. That said, these individuals are usually granted much fairer interest rates so that repayment is more affordable.
When an individual has suddenly improved their credit score a great deal, it’s a good idea to seek better rates when it comes to services they already use. This may include a better life or car insurance rate or lower interest rates for credit card installment loans. If the individual seeks to refinance their home, it may be a significant benefit that results in much lower mortgage payments.
By keeping a decent credit score, individuals can qualify for great rates, so they’re not overpaying for necessary items. Paying bills on time and monitoring your credit report can benefit you in the long-term and help you get approved for larger credit lines in the future.
There are several disadvantages to having a bad credit score.
Not being able to obtain a loan or other financial benefits from banks and other lenders. Though there are programs designed for individuals with low credit scores, the only way to get approved for these are through a hard inquiry on your credit report.
Being charged higher interest rates when applying for a personal loan or line of credit limit. This is especially true if you have poor credit and have used revolving accounts in the past. There are programs designed to help with this, but they can take time to complete.
Being denied the purchase of certain products or services, like houses. Having poor credit may mean that you’re unable to purchase certain items like cars or homes without having great financial means behind you, like enough money saved. Even some medical procedures require financial means in order to qualify for the procedure, so this can be an issue as well.
A person’s credit report is the history of their financial accounts. It includes everything from loans, lines of credit, mortgages, and credit cards. This is what determines an individual’s credit score.
The amount of information on a person’s annual credit report depends on how many accounts they have and how long they’ve had them. The more accounts a person has and the longer they’ve them, the more information there will be on their report. The length of time can vary from less than one year to more than 10 years depending on the person’s situation.
People who apply for new lines of credit (like a loan or line of credit) are usually required to have their credit reports pulled for this purpose. A hard inquiry may appear on an individual’s report if it is necessary to get approval for a new line of credit. A hard inquiry means that the bank used one or more pieces of information from your report in order to determine whether you are qualified for a loan or line of credit.
Credit scores are important to credit-conscious individuals. They can make the difference between a new credit card and a hard inquiry, a lower interest rate and a higher interest rate, or even approval for an apartment rental.
Individuals with poor credit history may be denied new credit lines, higher rates on existing accounts, or may have trouble getting auto loans or home loans. By improving their credit history and scores, individuals can build a better financial future with better financial decisions. You can also find a professional who can help you to make credit decisions with confidence and get education on credit reporting.
