Leading off
Credit scores have become prominent in today’s age of lending and applying for loans. Individuals are given a score which represents the probability that he or she will repay the loan amount. Credit scores have made it easier for banks, lenders and credit card companies to extend credit for consumers, but also can restrain individuals from being approved for loans.
These credit score numbers have a big impact on a consumers’ financial journey; it is important to stay on top of all outstanding debt and financial obligations to avoid bad credit reports. Credit bureaus hold the cards and command certain loan rates based on consumer credit reports. It can be a costly and a time consuming hassle to get bad credit reports removed from your credit profile, so it is important to avoid the pitfalls early.
What is a credit score?
A persons’ credit score is an aggregated rating from credit bureaus based on past financial obligations and repayment of those obligations. Credit scores are a number to represent the likelihood of a person to pay back a debt to a lender. Knowing your FICO Scores helps you apply for loans with confidence and avoid surprises.
The three major credit bureaus are Experian, TransUnion and Equifax reports. Each credit bureau generates a number based on different credit data points of a consumers financial profile.
FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
Build your score early
It’s important to start building your credit score early. Getting a basic credit card with a controlled spending limit is a great starting point. To begin building your FICO credit score, you’ll need to maintain a bank account for a minimum of 6 months. It is important to maintain the expenses, keeping your balance low at first to make sure you can pay them off the following month to avoid any interest rate charges.
Avoiding the pitfalls
Losing control of your spending with a credit card is dangerous and one of the early pitfalls of consumers. Instead of carry physical cash dollars, a plastic card represents a consumers buying power with credit cards. It’s quick and easy to spend when you do not see the physical dollars leaving your pocket. However, with a lack of proper tracking, it is easy to overspend and rack up a credit card bill too big to repay. Failing to pay credit card bills on time can result in +17-25% interest rates tacked onto the principal amount and can drag down credit scores dramatically.
How to choose credit cards?
Building your credit score does not mean you sign-up for credit card promotions from your favorite stores. It means to choose one credit card to open that offers good reward programs and low annual fees. One card is sufficient for a beginner building their credit. Instead of opening up multiple cards, it is better to request a credit limit increase from your credit card company. This keeps all of your spending in one place and forces you to practice good spending habits before being granted a higher spending limit.
I prefer to get a credit card with travel or cash back rewards. Those offer relevant rewards that I can use to my benefit in the future. Travel rewards are a nice surprise when shopping for flights and realizing your reward points can pay for your entire flight. I have flown from New York to Florida, California and Texas this year with no out of pocket costs. I am not encouraging you to start swiping your credit cards in hope of winning a free flight. I am using my credit card company’s reward program to my advantage by spending with that card for specific expenses that I know I can repay the following month; collecting travel reward points along the way that I will redeem in the future.
Leverage your score
Although credit scores can be a scary thought for some consumers, there are ways to use your credit score to your advantage. Finding the ability to leverage your credit score in order to get approved for a mortgage or even get discounts on insurance policies or car payments simply by having a strong credit score is a common practice. Your credit reputation matters and can work in your benefit.
Banks do not want to extend loans out to people who have bad credit scores. Bad credit scores might indicate that an individual has questionable flags about their past financial obligations and are less likely to repay future debts. Having a good credit score will give banks, lenders or credit card companies more confidence in your ability to pay back any loans and maintain consistent payments.
Do not put off paying off debt or obligations, it will come back to haunt you in the future. Maintaining a healthy credit score is not difficult but takes time and diligent budgeting.
Please do not interpret any of this content as direct recommendations or investment advice about how to trade stocks. Feel free to reach out to get put into contact with a Certified Financial Planner to learn more about investing and how to get started.
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