The importance of having a good credit score is to start building positive credit early in life. Young people face lots of temptations nowadays. Fancy gadgets, cool games, trips, sports, and so on and so forth are getting the younger generation to open their wallets and spend, spend, and spend. It is very easy to accumulate a large amount of debt on top of the inevitable student loans. More often than not, they find themselves unable to pay the bills, ruin their credit, and do not know how to dig themselves out of the financial mess. The end result of all this is pay higher interest rates when applying for a loan or even face rejection.
A credit score is an important number that determines whether a loan or a credit card application will be approved. Furthermore, it determines the interest rate of the loan or the credit card. The most common FICO score is between 300 and 850. The higher the score, the better the credit approval rate and the lower the interest rate.
Actions one can take to get a better credit score or maintain a high score are:
- Pay bills on time, even just by paying the minimum amount due.
- Keep balances low. The rule of thumb is 20%. If all of the credit limit on the credit cards combined is $10,000, keep the total carrying balances below $2,000. This is also called, Credit Utilization.
- Do not ignore the student loan payments.
Understanding the credit report is important. Here are some common misconceptions about the credit report:
- Delinquent accounts stay on your credit report for 7 years:
This is true, but the tricky part is not to reactivate the 7-year clock.
An account becomes “delinquent” if it has gone past due, and stays on the credit report for up to seven years from the date the account was declared delinquent. To illustrate, if a credit card company declares a late payment on December 10, 2015, this delinquent account may stay on the credit report until December 10, 2023.
Paying off a delinquent debt isn’t likely to increase the credit score in the short term. Most credit card companies are still using the old credit score model, which focuses the fact that delinquency has occurred.
Once a delinquent debt has passed the seven-year mark, be careful when paying it off. This is because the delinquent debt should have fallen off the credit report completely. Any new activity, including a partial payment, can reactivate the account and the clock.Certain delinquent accounts can stay on the credit card for up to 10 years. They are Chapters 7, 11, 12, and 13 bankruptcies.
Unpaid tax liens and unpaid federal student loans can stay on the credit report indefinitely.
- Checking credit score will lower the score
When a bank or financial institution checks the credit score, it is called an inquiry. There are two types of inquiries: hard inquiries and soft inquiries. Only the hard inquiries can lower the score by a few points each time.
A hard inquiry is usually initiated by you for a loan application, credit card application. A hard inquiry could remain on the credit report for two years, but only affect the score for one year. Too many hard inquiries can alarm the creditors as they see them as a sign of increased credit risk.
A soft inquiry does not affect the score at all.