Friday, April 9, 2021

What affects my credit score?

 If you are into sports at all, your credit score is very similar to an athlete's stats.  If you look up any athlete you can see how many rebounds, assists, field goals, steals they got and missed in a season or even in a particular game.  Your credit score behaves the same way about how you manage your debt.  Banks look at your credit score as a trust worthiness level and will decide to grant you credit, how much that credit will cost you as well as how much credit you can afford.  This is determined by a number of things, here is a list of things that are looked for when choosing a credit MVP.

1. Do you pay your bills on time?

The number one action that can impact your credit is simply paying your bills on time.  Some of these bills will report to your credit bureaus and some will only report if you do not pay them.  For example if you pay your internet bill on time, it will not show up on your credit report, but if you do not pay it, it will show up as a derogatory mark on your credit.  But a credit card payment will show up on your report and will show you in good standing.  The more on time payments you make the higher your score climbs. 

2. Can you afford it?

The second most important thing banks and lending institutions look at is your debt-to-income ratio.  This ratio shows how much income you make versus how much you are borrowing.  For example if you make $2000 per month, asking for a loan that will cost $700 per month will not be approved.  Banks use your gross income (income before tax) to calculate how much money you make.  Then they figure that you will have other bills such as rent or mortgage, insurance, food and utilities. Giving you a loan with a payment that is near 35% of your income will be very difficult for you to afford, so they will not grant you that loan.  The amount that they will grant you will depend on what type of loan you are applying for. A mortgage payment will get a higher debt-to-income ratio than an auto loan, and an auto-loan will get a higher ratio than a line of credit.  That is because a house and car are considered necessary items for a person to be able to live and make money.  In short, the more money you make the more you can potentially qualify to borrow.

3. The mix of account types you have will be critical to your score.

As you are just starting out, you will have what is called a "thin file" meaning you do not have much credit, a small credit card or two and that's about it.  As time goes on you may add some higher limit cards, maybe an auto loan and hopefully a mortgage.  The bigger the mix of different types of credit with good payment history the more you are able to show that you are credit worthy and your score goes up.

4. They say history always repeats itself.

The banks believe this to be true too!  If you have a longer history of paying accounts well over time, then it is probably safe to say that you will be able to pay a new line of credit with ease too.  At the same time, if you have not been paying your accounts that you have very well, then the bank asks why would you pay a new loan well?  Chances are you will not, if you could not afford or manage the stuff you have now, getting new credit will be very hard and/or very expensive.  The nice thing is that since it is all looked at as history, the older a derogatory mark is the less of an impact it has on your score with time.

5. Presence of derogatory marks on your report.

If you have a history that is clean it will show the bank that you are both responsible with your money and trust worthy.  But if you have a few blemishes on your report, that will not only drop your score but will make it more difficult to obtain new credit.

6. Maxed out

Maxing out your credit cards and loans will increase your credit utilization ratio. This ratio shows how much of the credit you have available to you versus how much you have already used. Let's say you have a credit card that gives you a $1000 spending limit, and you have already used $850 of that.  Your credit utilization ratio on that card will be 85%.  The reason this is important is because banks like to loan money to people who do not need the loan, generally speaking this is because they can easily pay the loan off.  Just think if your buddy that makes $10,000 per month and has never needed your help before, has an emergency and asks you to borrow $100, you may be inclined to loan them the $100 because you know they make enough money to pay you back.  But if a buddy who borrows money from you every week and only makes $1000 a month asks your for that same $100 you might think twice!  Keeping your credit utilization ratio low by not "maxing out" the cards will help you keep your score higher.

If you keep these things in mind, you will be sure to be a credit MVP!

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