How to Use Credit Wisely
How does it work? Each time you pay a bill on time, this action gives you credit experience. The way that this works is that each time you do make a payment on time you will put a good record into a credit file. It is similar to a report card. If you put hard work into your school work, then you will receive a good score. If you don’t put much work into your school work, then the converse is true. This is very similar on how a credit score and record are established.
A credit score is comprised of various forms of credit i.e. installment, revolving, charge, etc. Installment is a form of credit that is established for a specified period of time and it has a definitive end. Generally, an installment loan is paid back with principal, schedule of payments, and interest all combined into one. Revolving is a form of credit that is mostly associated with credit cards. There is no end to this type of credit, as it is based upon a specified credit limit. You as a consumer are allowed to borrow this each month. Revolving usually allows you to pay a minimum payment such as $15 a month on a credit card. You may elect to pay the entire balance on the account to avoid interest. However, if you only pay the minimum amount due, then you will accrue a finance charge based upon the interest rate that is associated with the account. In order to avoid this, you must pay your new balance due for that month by the grace period on the credit card account. Otherwise, you will have interest added to your balance due, which depending upon the interest and balance on the account, can be quite substantial. Charge accounts are normally needed to be paid within a few days or sometimes up to 30 days. There is no extension of payments with charge accounts.
Here is an example from the Fair, Isaac & Company, on how the percentages work:
*FICO SCORE BREAKDOWN:
35% = History of Payments
30% = Amount Owed
15% = Credit History Length
10% = New Credit
10% = Types of Credit in Use
From the FICO Breakdown, you can see that making payments consists of much of the credit score. If you make payments on time, this will allow you to gain a higher credit score, and thus give you a better interest rate on your loans. Although, this breakdown is a good example, it is important to point out that there are literally thousands of ways that credit scores are generated. It could be higher one month, and then another month, be lower. There is no guarantee what your score will be at the time you apply for credit.
Here are some helpful hints on what you can do to make good credit part of your daily experience:
1. Pay bills on time. The longer that you pay your bills on time and continue to maintain your accounts in good shape will consist of 35% of your score. This makes up a good percentage of the credit score, so just making payments can make a difference.
2. Amount that is on your accounts. It is important not to overextend yourself with credit. For example if you have a $500 credit card limit, then you should not use more then 50% of the available credit. This is especially important when you find yourself in need to apply for new credit. Your credit score will be higher if you have enough credit left on your account. Otherwise, creditors, if they see that you have high amounts associated with these balances, will be less likely to extend more credit to you. You have to show that you are responsible and not using credit beyond your means. This will consist of 30% of your credit score by keeping your balance in line.
3. Credit Experience of your oldest account to all your overall accounts. The longer the credit relationship that you have with creditors, the better your score will be. This consists of about 15% of your credit score.
4. New Accounts that you have opened in a short period of time can negatively impact your credit score. You should only apply for credit when you really need it. Otherwise, creditors will look unfavorably on you when considering a loan or any other form of credit. Another area to be concerned about is making too many inquiries. What do we mean by inquiries? An inquiry is each time you apply for credit and a credit report is pulled or used in a credit decision. Too many inquiries, can adversely impact your credit score, and creditors will think that you are looking for credit for the wrong reasons and that you are not handling credit wisely. This will consist of 10% of your credit score.
5. Credit Mix. What do we mean by a credit mix? Credit Mix is the types of various credit that you use altogether i.e. installment, revolving, and charge. The way that you use these different forms of credit and your ability to handle them altogether will consist of about 10% of your credit score.
In summary, it is important for you to make payments on time, use credit only when it is needed, and do not carry high balances on your credit limits. Be sure to read the fine print before signing any documents. A representative should be willing to go over the disclosures in the contract and to make sure that you understand them fully. If you have any questions, or do not understand something, please be sure to ask the professional. This way, you will be on the path to having good credit in the future.
* FICO is a credit formula developed by the Fair, Isaac & Company. For more information, you may visit myFico.
Follow up:
Credit Report
As a consumer, you should check your credit report at least once a year to make sure that the report is correct and accurate.
Equifax, Experian, and TransUnion are the major Credit Reporting Agencies (CRA) that all have information about you from creditors. Each individual credit reporting agency has its own criteria and reporting information. The information that is on an Equifax credit report could be slightly different from a report that is on an Experian credit report. That is why it is advised for you to check your report often, especially when applying for new credit.
You are entitled to a free copy of your credit report, if you have been denied credit, employment, and insurance, in the past sixty (60) days. Other conditions of obtaining your credit report should be directed to the credit agency that furnished the report. Fees are set by each agency and also can be dependent upon where you live. Get a copy of your credit report today. For more information, you may contact one of the agencies listed below:
Equifax
P.O. Box 105873
Atlanta, GA 30348
Telephone Number: (800) 685-1111
Experian
P.O. Box 2002
Allen, TX 75013-2002
Telephone Number: (888) 397-3742
TransUnion
Consumer Relations Center
P.O. Box 1000
Chester, PA 19022
Telephone Number: (800) 888-4213
