This article covers the topic of our personal credit rating and credit history. Credit rating plays a very large role in determining eligibility for securing new credit in addition to the terms and options available. As such, it is important to understand what information the credit reporting agencies use in order to come up our credit rating and credit score so that we can do all that we can to ensure our credit score is as always as high as it can be.
Using credit and carrying debt is a normal part of our day to day lives for many of us. Credit offers an element of convenience as well as the ability to purchase goods today that we may not be able to pay for in full. However, we may be able to pay for an item over time and would not mind paying a premium (i.e. interest rate) for the benefit of enjoyment and use of the item today (e.g. house, car, furniture, electronics, etc.). The use of credit though is important to understand as when used responsibly we will start to build and establish a good credit history and credit rating. Conversely however, if credit is misused and if we become delinquent with our credit, our credit history will show an irresponsible use of credit and therefore will be reflected with a poor (i.e. low) credit rating. The goal over time is to demonstrate that we have had access to a reasonable amount of credit, used that credit responsibly over time, and have also paid back the credit as agreed over time.
During the application process for new credit (e.g. credit card, car loan, mortgage), lenders (i.e. banks) will review your credit report and credit score to check how you have managed your debts in the past. The idea here being that how you have used and managed your credit in the past will be a good indication of how you manage your debts in the future. A credit report contains information such as, previous and current trade lines (i.e. accounts), credit limits, credit balances, payments over time, and if payments have been on-time or late.
If you have not had any credit in your own name before, it is recommended to apply for a form of credit so that you can start to establish a good credit history as having no history can be an obstacle in getting and being approved for new credit. You may need to start small and slow with a low limit as a bank may be apprehensive to start you off with a high available limit when you have not had any credit before. So start small, use the credit each month and then also pay it off in full each month. Over time the institution will likely be comfortable with starting to increase your limit slowly. One other important point to note is that if you have a number of credit cards and find that you are not using some, it is recommended to permanently cancel these. Keep about two to three mainstream credit cards that make the most sense (e.g. accepted the most places, provide the best rewards or insurance coverage, have the lowest interest rate). Canceling extra credit cards helps as potential access to too much credit can work against you when looking for new credit, in addition to the risk of lost, theft, and fraud.
If you think you have had a "blip" in your credit history try not worry about it. What you think may have been a "blip", may not have been. However, it is recommended to review your credit report each year just to make sure everything is reporting to it correctly. Examples of potential "blips" that can be hurting your credit score may include: late payments, not making the minimum payment required, going over your limit if even by $1.00, an outstanding collection, etc. If you have a "blip" on your credit report it is highly recommended to correct it as soon as possible as until it is rectified it can severely negatively impact both your credit score and your ability to secure new credit. So, if you have a problem in your credit report you will need to consider how much it is worth to you to fight and or ignore the problem vs. simply fixing it right away (e.g. an outstanding collection you do not want to pay). Also, all information, good and bad, is kept as part of our credit report for seven (7) years before it falls off. As such it is best not to have negative information report to our bureau in the first place but if it does, try to minimize it and resolve it as soon as possible.
One final note is to treat all credit carefully and plan any purchase where you will use credit carefully. Any lending institution will not want total outstanding debt and monthly payment obligations to exceed a specified amount, largely based on household income. So before taking on new credit think out into the future on any other credit you may be needing or want to apply for as taking on credit today could mean you may not be able to be approved down the road for another form of credit (e.g. get a car loan today that may create to large of an monthly obligation to also be approved for the mortgage you want in 3-6 months from now).
Meet and consult with an Accredited Mortgage Professional (AMP) regarding your credit report as we can always be a good resource and starting point to provide the information and help needed.
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