Credit: How you get scored by banks
What is Credit? If you’re just graduating high school or maybe even college you’ve probably gained some familiarity with credit cards but the concept of credit may have alluded you. By no fault of your own I might add, the system simply is not designed to teach you about the importance of credit or any other financial concept for that matter. That’s why I will, here in this article you’ll find a brief overview and rundown of what you need to know about credit in order to take control of your financial future.
First thing’s first. What is a credit score? it is a number assigned to you to tell lenders (like banks and credit card companies) how trustworthy you are when it comes to money and how much they should be willing to lend to you.
But how is your credit score calculated? This is a tough question because different places will calculate it differently. Which is why you will a different credit score if you use Credit Karma then you will if you use Experian. The general consensus is that it involves some combination of the following factors
- Hard inquiries — A hard credit inquiry will happen anytime you apply for a new loan or a new line of credit. The Credit companies view this as a bad thing because you are looking for money which to them means you don’t have money right now. So while 1 or 2 hard inquiries will not hurt your score much a lot of them, particularly in a short period of time, will bring down your score much more. Generally you can do 1–3 a year without it being too bad for your credit, if you are applying to get new credit cards with the sign on bonus, but anymore then that should be avoided if you want to keep a high score.
- Account mix — Whenever creditors look at your accounts they want to see a mixture of different types of loans to know that you can handle paying off your debts on multiple accounts at once rather than just one at a time. This means that having 1 credit card, 1 home loan, and 1 auto loan would look more favorable than having 3 credit cards and no other loans. This is just a small factor that goes into your credit score calculation but keep in mind it does affect the score.
- Credit history — One of the more important factors in determining your credit is how long you have had your lines of credit. For instance someone who has had a home loan for 12 years is going to be a more reliable person to loan money to then someone who has no credit history and is just now getting their first loan or credit card.
- Credit utilization — This factor measures how much of your credit you need to use and is helpful to creditors to determine how much you rely on loan/credit card money. They look at what percentage of your total credit you use (on average) compared to your total spending limit. For example if you have a credit card with a $10,000 spending limit how much of that will you use on any given month? If you only use $1,000 then it looks like you are not as reliant on your credit card as if you used $9,000 or more. Generally for this category you want to keep your credit accounts under 30% utilization, so if you have a 10k limit try to keep your outstanding balance under 3k.
- Payment history — One of the most important factors in determining your credit score is how long you have been able to responsibly use your credit. This includes late or missed payments and any credit defaults or delinquencies with debts being turned over to collections. Generally this is built slowly and over time simply by making your credit card or loan bill payments on time and in full every month.
At this point you should have a better understanding of how your credit score is calculated and some idea of what you can do to improve it as well as what to avoid if you want to be able to get favorable lines of credit in the future.
If you want to learn more then checkout this video breakdown from Tiktok https://www.tiktok.com/@xanderfinance/video/7098023444905807146?is_from_webapp=1&sender_device=pc&web_id=6940420922764838405