Some people may assume that only wealthy people can have good credit, but the truth is, a good credit score is available to anyone. Good credit is not the result of having a lot of money, it is the result of good financial habits and practices. In fact many people of very modest income have good credit, while many wealthy people have terrible credit.
HOW IS CREDIT CALCULATED?
Your credit score is like a final grade you might receive in school. Just like your grades in school, there are a number of different factors that determine your final grade, such as homework, tests, quizzes and special projects. Some factors, such as a mid-term or final exam, will carry more weight in determining your final grade than a single homework assignment. In fact, you may even be able to miss a few homework assignments and still get an A, if you do well enough in other areas to offset the damage the missed homework might cause.
The same is also true of your credit score. Some factors are more important than others and carry greater weight in determining your final score. For instance, if you have good credit overall, you may be able to make a late payment or two without significantly damaging your credit. If you credit is already poor, however, late payments can have a far greater impact.
Creditors will generally do more than just simply look at your credit score alone to determine your creditworthiness, the same way that colleges and universities will look at more than just your grades to determine if you are a good fit for their school. That being said, if your credit score is too low, creditors may not look any further. If your credit score is lower than they would like but still within an acceptable range, then they will often look at your overall credit file to determine where the lowered score is coming from. Some factors may influence their final decision more than others.
Here are the main factors that impact your credit score:
- Payment history: If you have a good record of paying your bills on time, it will have a significant positive impact on your credit score. If you regularly miss payments or make late payments, however, that can seriously damage your credit score.
- Debt to credit ratio: What creditors are looking for is how responsibly you manage credit. One good habit to have is to not always use all of the credit that is available to you. Conversely, however, if you already have too much available credit, other creditors may be wary of giving you more. A good rule of thumb is to never carry a balance worth more than 30% of your available credit.
- Length of history: Everyone is going to have financial peaks and valleys. It’s fairly easy to pay your bills during peak times when money is plentiful, but what do you do when crisis hits and things get tight? The longer your credit history is, the more of an idea it gives creditors of how you handle credit over the long haul, not just in the short-term when things are good.
- Types of credit: Different types of credit will have a different impact on your credit score. In addition, having a mix of various types of credit will also have an impact on your credit score. For instance, you may have $300,000 in total debt, but if $250,000 of it is a home loan, $30,000 of it is student loans, $19,000 of it is an auto loan and only $1,000 of it is credit card debt, that will generate a much better credit score than having only $100,000 in debt, but $30,000 of it is credit card debt.
- Credit inquiries: When you apply for any type of credit, lenders will request a copy of your credit report. If they extend credit to you, it can take up to 30 days for it to show up on your credit report. Until then, other lenders don’t actually know if the first lender extended credit to you or not. For that reason, if a lender sees that another lender has recently requested a copy of your credit report, they will be less likely to extend you credit.
Having good credit is important for far more than just getting more credit. Your credit score can affect your insurance rates and even your ability to rent an apartment or other housing. Carrying too much debt will not only have a significant impact on your credit, but it can also make you vulnerable to financial collapse. Debt consolidation is one way to help you tackle your finances and get your debt under control. Trout Associates are debt experts that can help you explore a wide range of options to better manage your debt and get your finances back on track. Debt consolidation with Trout Associates can help you make one monthly payment. Not only will this help you avoid missed payments and costly late fees, but it can even help you pay down your debt faster.