Understanding Your Credit History

Understanding Your Credit History

Understanding Your Credit History

When a bank lends money to clients, it takes the risk that the loan may be unrecoverable. Although mortgages and other major loans require some form of collateral, credit cards are distributed without this reassurance. To compensate, banks and other lending agencies use credit scores to evaluate the risk of lending to an individual. Your credit score rates your financial health relative to other loan applicants and is crucial for anything from securing a loan for a house to applying for another credit card.

What are credit scores?

Credit scores are three-digit numbers that reflect your financial responsibility and your likelihood of repaying a loan. Credit inquiries, open loans, open revolving accounts, closed accounts, public records, and collections accounts are all used to determine your credit score. The score also heavily weights your past financial decisions. For example, a closed account will stay on your credit record for as long as seven years.

Generally, credit scores are displayed on a scale of 350 to 900. Although several companies produce credit scores, scores in the 700 range are considered good, while scores in the 800 range and above are excellent. A credit score is in the 600s is acceptable, but you should take steps to restore your credit if it falls below 600.

Why are credit scores important?

Although this three-digit number attached to your name may feel remote, it can impact your daily life in surprising ways. The larger the loan you are applying for, the more your credit score will matter in the application process. Customers with higher credit scores have a much better chance of qualifying for low-interest loans that can help them save money on each payment. In some cases, a landlord or potential employer will ask you to submit a credit check before you are allowed to rent an apartment or are hired for a position.

How can you build your score?  

There are three important factors that build your credit score: diversity of loans, paying bills on time, and avoiding excessive debt.

First, you should aim to establish a healthy portfolio of diverse loans and revolving accounts. If you have only credit cards or only loans, your score won’t be as robust. However, when establishing your credit as a college student or young adult, it can be difficult securing a loan. To avoid being stuck in this catch-22, you have several options: request to be added onto a parent’s account, take out a federal student loan (which doesn’t ask for a credit check), apply for a secured credit card, or lend money to yourself via a credit builder loan.  

However, before you take out a single loan, you’ll have to make sure you can reasonably pay them off. If the goal of taking out a loan is building your credit score, it will have the opposite effect if you can’t make each monthly payment. Approximately 35 percent of your credit score reflects your payment history. Paying bills on time, and over a long period of time, is one of the best methods for building your score.

Building your credit score is a delicate balance: you’ll need to take out loans, but only ones you can pay off. Next, you’ll need to avoid excessive debt while taking on more debt. Sounds crazy, right? In principle, the debt ratio means that you shouldn’t take out a loan just to for the sake of your score. Instead, incorporate credit-building strategies into the loans you would already be taking out, such as for a mortgage or another credit card.

Finally, the last factor you should consider is the amount of time involved in building a score. Unfortunately, this process won’t happen overnight, which means that a high credit score will take time and dedication. Try to keep accounts open for as long as possible. Payments made over a long period of time will also help your score improve.

Is it possible to fix bad credit?  

Since getting new credit is depending on your responsibility with previous credit, damaging your score can be difficult, but not impossible, to recover from. First, you’ll need to determine what caused the damage to your score. Failing to pay bills on time, carrying excessive debt, or filing for bankruptcy can cause your score to significantly drop.

It will take your credit score several years of good management to recover from serious financial struggles such as bankruptcy, tax liens, or court judgments. If your score has taken a hit from missed payments or overwhelming debt, it will take at least one to two years to build your score back to its original amount. You’ll have to essentially start over with diversifying your account, paying bills on time, and avoiding significant debt.

For personalized banking assistance and financial advice, give our expert team a call at (843) 549-2265. We look forward to helping you build the best possible credit score!

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