If you have ever taken out a bank loan, which many of us have, you will inevitably have your credit score pulled to determine the cost of the loan. A person’s credit score is more than just a loan-worthiness score; it is how the financial community views the likelihood you will repay your debt!

“A person’s credit score is more than just a loan-worthiness score!”

You might say it is a window to a person’s financial character and reputation. Because of this, a credit score may also be pulled by a landlord to evaluate whether they will lease a property to a renter, and credit scores might even be pulled by an employer as they evaluate a job applicant because of this character aspect of the score.

Why a good credit score is essential

A good credit score can make it easier to get a job, buy a house or a car, rent property, obtain credit cards, and more. These important life goals are met with the greatest ease and the lowest cost with a good score. A poor credit score will throw up obstacles of cost and accessibility for these same things.

There are three major Credit Bureaus that lenders use: Experian, Equifax, and TransUnion. Scores can range between 300 (poor) to 850 (excellent). How they evaluate your score and how you can improve it is based on the following criteria:

BILLS: Do you pay your bills on time?

Paying your bills on time is the single largest thing you can do to improve and maintain a healthy credit score.

• Up to 35-40% of your credit score is weighted on your payment history.
• Being a month late for just one account can lower a score by almost 100 points, and it can take several months to over a year of paying bills on time to recover.
• A life event that prevents all bills from being paid for a month can lower a score by almost 200 points, and it can take years of paying all bills on time to recover from this.

At the end of the day, a lender is most concerned about you paying your bills in a timely fashion.

AMOUNT: How much credit to you have—and how do you use it?

How much credit do you have available, and how do you use it?

• If you have credit cards or lines of credit that are maxed out or close to the limit, this can impact 25-30% of your score.
• It is important to keep your credit usage below 30% of your credit limit.
• Adding more credit cards to increase your credit limit will not improve your score if you are near your limit. It may even harm your score.
• Increasing the balance on an existing credit card that is low in usage can raise a score. Adding credit responsibly is beneficial, but adding more because you are maxed out will harm your credit score.

HISTORY: How old is your credit?

How long you’ve had credit can amount to 15% of your credit score.

• Canceling an old credit card that you no longer use can hurt your score if you’ve had it for a long time.
• The longer you have established credit, the less risky you are perceived to be by the credit bureaus. Having lines of credit with a long history of usage is beneficial.

TYPES: How diverse is your credit?

How many different types of credit do you have? 10% of your credit score is based on the types of credit you have.

• Having a mix of different loans and lines of credit can help your score.
• For example, a person applying for a mortgage will be in better shape if they have both an installment loan (e.g., auto loan) and a revolving line of credit (e.g., credit card).
• A mix of installment and revolving credit will positively impact your score.

HARD INQUIRIES: How often do you have hard inquiries?

Multiple credit inquiries in a short period of time can impact 10% of your score. There are two types of inquiries:

• Soft inquiries do not affect your score and include background checks, preapprovals, and when you order your own credit score.
• Hard inquiries happen when you apply for additional credit, including credit cards, mortgages, and other loans. These inquiries raise questions about whether the ability to pay existing credit will be impacted by the new credit being applied for.

 

OTHER RISKS: Multiple credit cards, many balance transfers, errors, or unpaid accounts!

• Balance transfers and having too many credit cards can damage a credit score.
• If you find incorrect information on your credit report, contact the credit agencies in writing to dispute it. Credit repair companies can help with this process.
• Harmful credit information stays on your record for years:
  • Collections, student loan defaults, and unpaid judgments: 7 years.
  • Bankruptcies: 10 years.
  • Criminal convictions: Forever.

Your credit score reflects your financial health. Growth is possible—and support is available!

Your credit score goes a long way towards your ability to buy a house, an automobile, and finance other large purchases at lower costs. Your character and general financial health are reflected in this score, so it is important to maintain a good to exceptional rating. Having a good financial advisor can help you navigate the best way to manage your debt and credit. For more information on how we can help you please visit us at www.f5fp.com, or schedule a free consultation.

Would You Like More Support?

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• Do you have a well-defined Investment Policy Strategy that is used to drive your investments in support of a comprehensive financial plan?

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