According to a NerdWallet survey conducted by Harris Poll, most Americans don’t understand how common actions can affect their credit scores. This can have a seriously negative impact on their financial situation. Here are a few tips on building your credit — a smart money habit.
Building (and maintaining) a solid credit background can strengthen your negotiating power, enhance your career opportunities, and even affect your dating life.
Let’s start with a basic definition: Credit is your ability to borrow money and make purchases under an agreement that requires you to pay back the entire amount at a particular time. Usually, an interest charge is tacked onto the loan, meaning you have to pay back more than the amount borrowed.
There are two important aspects to consider: your credit report and your credit score. The credit report is a detailed summary of your personal credit history. It lists everything that potential lenders can review when making a decision about entering into a financial contract with you. Your credit score has a numerical value based on an algorithm. The algorithm analyzes your borrowing/credit utilization and repayment patterns (in the credit report) and measures your reliability as a borrower.
The three most widely known consumer agencies provide credit reports: Experian, Equifax, and TransUnion. Each report includes identifying information about you and a detailed list of your current and past financial obligations. The information that appears on the credit report depends on whether or not the creditor has reported it to the corresponding agency. Reports include the dates that accounts were opened, loan amounts, current balances, and payment history, including late payments or defaults. How’s your credit report? Do you know?
Astonishingly, roughly one-third of Americans have never checked their credit reports, according to a survey conducted by TransUnion. Many individuals are also unaware that you can obtain a free copy of your credit report every 12 months from all three credit bureaus by visiting AnnualCreditReport.com, a site authorized by the Federal Government.
To determine whether or not you are a good risk as a borrower, lenders rely on your credit score as calculated by firms like VantageScore and FICO. Scores are based on information in your credit report; for example, FICO rates your credit based on five factors; payment history (35%); amounts owed (30%); length of credit history (15%); new credit accounts (10%); and mix of credit (10%). Your score can be negatively impacted by the number of credit inquires, so think twice about impulsively opening a store card to get a discount. Credit inquiries count (against you)!
The big lessons here are to prove you’re a good borrower by using the credit that’s available to you without going overboard. Make your payments on time, every time, and keep your balances at zero or a low amount.
Credit and Identity Monitoring
When you sign up for credit monitoring, you can usually track activity on your credit report at any of the three bureaus mentioned. According to the Federal Trade Commission’s website, credit monitoring typically alerts you when:
- a company checks your credit history
- your personal information changes
- a new loan or credit card account is requested using your name
- your credit limits change
- a creditor or debt collector says your payment is late
- public records show a legal judgment against you or you’ve filed for bankruptcy
Comparison shop for credit monitoring, as the services provided will vary from company to company. Keep in mind that if the service is only monitoring your report at one of the three bureaus, you can’t be sure what’s happening at the other two.
Credit monitoring is not the same as identity monitoring, which alerts you when your personal information (bank account, SSN, driver’s license, passport, etc.) is used in an irregular way. Identity monitoring lets you know if your information is paired with a court or arrest record, change of address, check cashing request, or other unusual activities.
Why is it important to be a good borrower? When it comes to applying for things you buy on credit (like a car or a home), the lender wants to know that you will not default (refuse or be unable to pay back) on your loan. Also, potential employers, insurance companies, and landlords may use credit to determine whether you are a good candidate for business.
Getting personal for a moment, your romantic interests are also likely interested in your credit score as an indicator of financial stability. A recent survey from Bankrate found that nearly 40% of adults believe that knowing someone’s credit would affect their willingness to date the person.
5 Quick Credit Tips
- Get your free credit report and credit score.
- Make a budget and live within it. Become disciplined at determining your “wants” versus your “needs”.
- Diversify credit inquiries to reduce the number of “hits.” It may help to apply for different types of credit such as an auto loan, card account, or mobile phone contract.
- Don’t abuse credit, even if a company has extended you a high limit. Spend no more than 20% of your available credit.
- Pay your debts beforetheir due dates. Remember that late fees and interest charges can add up quickly. Try not to carry high balances from month to month.