Credit Score Ratings
OK, so let me begin by saying this: I am not a Mortgage Broker and do not intend to become one, so take this article at face value and always speak to a qualified lender before making any decisions.
There, now that we have that piece out of the way, I want to talk to you about credit score ratings.
Credit is really something that should be taught in schools. It’s the “heartbeat” of our economic system in the U.S. and probably the world.
We all know credit as borrowing money now, and paying it back later with interest. This is fundamentally true. However many people have no idea what really makes their credit rating “bad” or “good”. There’s a lot of companies out there profiting from simply telling you the 3 credit score rankings, but they don’t explain how to get better credit, and be able to qualify for more borrowing amount.
Here’s a tip for you: If you don’t have any credit cards, car loans, student loans, or other borrowed credit accounts – go out and get a couple today!!
Wait a minute, did I just tell you to go borrow money you don’t have??!? Absolutely not. The idea behind lending people money is that the money gets paid back. So never, ever over-extend your means. Although, people do this everyday. Hell – I have even done it in the past.
The reason I’m telling you to go out and get a credit card today is because the longer you have credit card accounts open, and have paid them off timely, the better your credit score is going to be.
See, credit is really more like
“your ability and history of paying people back for debts you’ve taken out.”
In other words, just like an employer will look at your work and education history to determine what job they should hire you for, Mortgage companies and other lending institutions will look to your credit score to find out what kind of borrower you are.
This is essential if you’re getting ready to buy your first home.
You will probably fall into one of these categories:
- No or very little Credit History
- Lots of Credit History, but rarely pay on time
- Some Credit History, but rarely pay on time
- Some Credit History, and regularly pay on time
- Lots of Credit History, and regularly pay on time
The first 3 categories are not places you want to be. Lenders want you to have a track record of paying back loans, so they know you’ll continue paying back your next loan they give you.
Some people think having credit cards and loans out in their name is bad – but it’s only a bad thing if you don’t make your payments on time, or take out too many lines of credit too quickly.
In fact, banks and investors like to see a few different accounts in your name and verify that you are capable of paying back those loans in a timely fashion. Why else would they want to lend to you?
The last 2 categories from above are the best. Notice the common theme “and regularly pay on time.” That’s what they’re looking for.
So I suggest taking out one or two credit cards and only charging a tank of gas once a month on the card, and pay it back before interest is charged to you. That way you’ll only be making about $30-50 in payments, and it’s money you probably have in your checking or savings account already.
Resist the temptation to make big purchases just because you have a few thousand dollars in credit available to you. Lenders also look at your debt-to-limit ratios to see if you’re maxing out multiple cards. Keep your running balance low in comparison to your limit, and watch your credit score rise with ease.
There are other ways to establish better credit scores, but most importantly there are a million different ways to make your credit rating plummet. These are pretty obvious to most people, so remember that there is no substitution for simply paying your loans back quickly. It says to potential lenders “I’m safe, give me money.”
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Comments
[...] a concise article on what is a credit score, how to change it, and why you need it. Go to his First Time Homebuyer Blog to read it. Categories : Misc Real [...]
Great post, I always wondered about maintaining a good credit score without maintaining debt each month. This post explains how to manage a good credit score yet be able to be responsible with money.
I must say that the post is very much informative. I liked the place where you told that “credit” should be taught in school and it is the heartbeat of our U.S economy.
Credit worthiness is very important, if you have a very good credit history, rest assured that in future time you can will still be granted with a loan. Avoid making any default when you are making a loan. Any way, if you’re looking to shore up your debt, there are different personal loans to consider. Secured personal loans, and unsecured personal loans – the difference is that unsecured loans usually carry a higher interest rate and are not backed by collateral, but the danger in secured is that you will lose your collateral if you default. Still, if everything goes well, it would be worth getting personal loans to repair your credit
That certainly is a really good article. It certinly covers a lot of aspects usually spoken by finance advisers. keep up the good work. Cheers
Thank you for the excellent article. I wish you would consider posting and commenting ,Your presence is sorely missed.
Going out and getting a couple card to help build up a person’s credit is a great idea. Having no credit can be just as bed as having bad credit.
But as you mentioned, it is important that you be vigilant and not over-extend yourself or go outside of your monthly budget.
Personally, I would recommend that a person go out and get a secured or pre-paid card. That way, you will not go over your limit and you will still be building up your score.
I use my credit card a few times a month even though I don’t need to. It helps show that I did have credit and that I pay off my credit cards on time.
I totally agree with the statement that the credit card should be taught in schools. There is an unawareness about credit cards which causes so many problems
Unawareness can cause a lot of problems. It applies in here as well. Sometimes people use credit cards as a habit which is not good for their health at all. I totally agree with you point of view
The problem with credit cards is that majority of society have no proper knowledge of it. They misuse it and get disjointed in the end so better we have more articles like this.
Credit cards are really a huge problem when it does get out of hand. You keep digging a deeper hole with credit cards. personally I don’t like to use them.
Awesome article. Credit cards can really be a life saver but if you lose track of spending you can end up in deep trouble.
Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, employers, landlords, and government departments employ the same techniques.
Credit score ratings are a fine thing for banks and companies. Credit score ratings give them a tool to check each person if he is worth of getting a credit.
So often, if a client is a few points away from the magic number of 620 in this market, we will have them pull consumer credit and not use it. It will at times raise their score 10 points. Really helps the client if we’re that close.
You’re so right. The many horror stories out there have made many people scared of credit – period. But whether you’re buying a car, a home alot through a land auction or if you’re applying for a job – it’s in your best interest to have some stable credit history.
Great post Steve! This is so true! Even if you have a credit card open that you don’t use – leave it open because it helps show that you have a 0 balance and can pay off a credit card! Credit is more important now than ever!