Before you can improve your credit you need to learn how Credit works
Working as a personal banker for a few years, I learned that not enough people are well versed in their credit.
I have seen clients with lots of money get turned down for a loan simply because of their credit score. You may be wondering, if they have so much money, why ask for a loan? I thought the same thing when I entered banking.
Turns out, people want to hold onto their cash. They rather use the banks money to make investments and use their credit to pay back a little at a time. They don’t want to have to dish out a large sum of cash. Working in banking, I have learned it’s important to build financial confidence. Managing your credit should be one of those things.
It is better to have great credit and not need it, than to need credit and not have it. But, before you can really improve your credit, you first need to learn how it works.
What Is Credit?
In short, credit is a way that banks rank liability before lending you money. It is a strong indicator of how much a lender can trust you to repay the funds back to them. If you want to go purchase your first car, maybe you don’t have enough cash to buy one right out. So, you apply for a car loan. The bank lends you the money that you need to purchase the car. The bank then charges you interest for lending you that money which is factored into your monthly car note. Your credit is what will dictate a banks approval to your monetary request. If your credit is poor or has never been established, then banks will not lend you money. The reason behind this is because they view lending you money as a risk.
What Are Trade Lines?
A trade line is an active line of credit that reports to your credit report. Examples of trade lines are credit cards, lines of credit, car loans. In order to to establish credit, you should look to get 3 in total to start working with. This is gained slowly. You can do this by applying for 2 credit cards and working them each month. The goal is to pay off your balances at the end of the month when your statement generates. Creating 3 trade lines and proving your are a faithful person to lend money to establishes credit. You can slowly increase your capability to acquire lending from banks.
How Do I Establish Credit?
If you are new to this and have no credit at all established, look into secured credit cards or secured loans. These products require for your to shell out some money upfront. The banks take that money and either hold it as collateral or they keep it for helping you to establish your credit. In my line of work I helped a lot of young people establish their credit from scratch and build it into something strong. I enjoyed this because like I said having credit is important. Helping people start with this type of guidance as of young really made me feel proud to pass on that knowledge. Check with your local banks and inquire about their secured credit options.
What Are Credit Bureaus?
Credit Bureaus are basically information agencies. The 3 main bureaus that are used are TransUnion, Equifax and Experian. These bureaus do not lend money nor do they make any type of decisions on your credit approval odds. The credit bureaus receive information from lenders on how you are utilizing your credit. They can see how serious you are taking the repayment contract that you signed up for. Bureaus then take the information that other institutions are providing to them, and they compile reports. These reports structure your overall credit behaviors making it easier for lenders and yourself to read. On those reports, you will find your score. Scores speaks volumes to future lenders and about your financial habits.
From a personal bankers perspective any score above 700 is where you want to be in order to be considered for approval at a bank.
How Can I Accurately Check My Credit?
My mother has worked in banking all her life. Thankfully I had some guidance on the importance of credit. I knew that it was supposed to be valued and protected, but I had no clue how. It wasn’t until I started working in banking myself, that I began to learn how this actually works. The first step to making improvements, is learning how to find your actual credit report. This is where you should start. You want to review what is on that report and make sure you recognize those accounts.
You can access one free Credit Report each year at no cost and no fees. Simply go to the website and read for yourself. Within a few weeks I received a full spec sheet of my credit history. Another great tool that I picked up working as a personal banker, is the versatility of the Credit Karma application. I downloaded it to my phone and it keeps me informed with all sorts of financial information. This is helpful for me to stay on top of my overall financial health. I have been using it for years.
What Factors Influence My Score The Most?
Payment History: carries the most weight when it comes to your credit score. Banks want their money back when they say, not when we say. If you pay the money back on time then this increases your credit score. On time payment history communicates to other lenders that you are worthy of lending money to and can be trusted. It is something that is earned not given, like all the good things in life. 🙂
Utilization Percentage: This one is another important factor that today in 2020, will impact your credit score heavily. This pertains to revolving credit. Revolving credit means that you can borrow, pay back, and have the ability to borrow again. A perfect example is a credit card. You can purchase something that you do not have money for and slowly pay that back. Once you pay it back, you can go and buy something else that you do not have money for and the cycle repeats itself. Avoid this.
When a bank approves you for a credit card they give you a credit limit. Carrying a balance on your credit card of 30% or more of the limit will cause your credit score to be impacted significantly. Once you pay the balance down it will go back up.
An example would be a $1,000 dollar credit card limit. You want to keep the balance on that card (if you carry one) under $300. Carrying a balance of more than that will bring down your credit score temporarily. But it can be a big jump in the wrong direction. Key takeaway here is don’t buy stuff you don’t need. And don’t carry balances on your credit cards.
Credit History: Credit history refers to your overall track record. Factors such as; how long you have had your credit established, how many payments you have paid on time, and how much money have you paid back are all contributed. It’s basically an overall report card of your financial habits and your effort towards repaying on time.
Credit Mix: is a look at how diverse your lending have been. Factors that are contributed here are; having credit cards, a car loan and having a home loan that has been paid off or in good standing. Having diversification in your lending plays a role in your credit score and overall credit strength.
Carrying Balances
Within my position at the banks, I processed loans. A lot of loans. I processed applications from home equity lines of credit, to car loans, to personal credit cards and business loans. From my experience, the one biggest mistake we make in our financial life is we carry balances. Do NOT carry balances if you do not absolutely need to. Carrying balances on credit cards should be viewed as a problem instead of being viewed as okay. If you do not have the money to pay your credit card when that statement generates in 30 days, then I would hold off on purchasing it.
It is such rigid advice. I know. However, looking back I wish I had learned this a lot sooner. Working within the financial industry is what taught me the importance of credit. Without diving into that world, I don’t think I would have realized things like this on my own. If I did, it would be a little too late in the game. Just remember, carrying balances on your credit cards will drop your credit score if you are over your 30% threshold. The lower your balances, the higher your score will reflect.
Avoid Unnecessary Debt
A vehicle to get from place to place is important. A home to live in and an education are important too. Even borrowing to start up a business could be deemed as necessary. These are all things that could be seen as necessary to owe money towards. They will not only establish and fortify your credit health, they help you get from point A to point B without having to put up all the money upfront. This is especially helpful when you don’t have it but can prove that you can pay it back.
Your credit works for you. It will do so if you learn to value it and take care of it. I have processed applications for clients of mine and they almost always get declined because of unnecessary credit card debt. If you are starting from scratch, you will need some credit at some point. As you grow into your financial future, credit will help you get on your feet. Once you can stand on your own, your goal should be to not owe money to anyone.
Strong credit takes years to build. This is not something you are going to change in one month. Establishing excellent credit is something that requires discipline and it requires years of care. If you already have had your credit for some time but it needs some work, then taking these tips and putting them to work should get you started on turning your credit around sooner than later.
