It's true... Credit makes the financial world go 'round. The strength of your credit history is what determines if you qualify for a credit card, a home mortgage or a car loan and at what interest rate.
Have you always paid your credit card balance on time? Have you ever defaulted on a loan? It's all part of your credit history.
While it's possible to pay cash for all expenses, it's hard to build enough cash reserves to pay for important milestones like a college education, car or home. Keep reading to learn more about healthy ways to build and nurture your credit.
Credit bureaus will open a legitimate credit file in your name when a bank, credit card company or other lender reports that you've had an active credit account for at least six months. All borrowers, not just first-timers, are encouraged to check their credit reports at least once a year and scan them for errors.
Mistakes can damage your credit score for years -- up to seven years for negative information like late loan payments and 10 years for a serious default like bankruptcy. If you find a mistake, contact the credit reporting agencies immediately.
Checking and savings account information isn't included on a credit report, but lenders will request it for most loan and credit card applications. Lenders like to know that you have a few years of experience handling your own money and making regular withdrawals and deposits. They also like knowing that you have a steady income.
Since credit reports only track money that you've borrowed, they don't include information about whether you pay your utility bills and monthly rent on time. Likewise, bill payment histories are not used to calculate the most popular credit score -- the three-digit number known as your FICO score.
What most people don't know is that the FICO score isn't the only credit score available to potential borrowers. Some alternative credit scoring models incorporate bill payment histories as one of the main criteria for creditworthiness.
The people behind FICO -- the Fair Isaac Credit Services -- recently introduced the FICO Expansion Score, which culls financial data from "alternative data sources" like rent payments and utility checks to determine creditworthiness. There's even a company called Payment Reporting Builds Credit (PRBC) that allows you to self-report payments like rent, rent-to-own purchases and utilities. PRBC might not yet have the clout of the big three credit bureaus, but a solid report from PRBC might be enough to get your foot in the door with a lender. Of course, to earn a good grade from PRBC, you'll have to pay your bills on time religiously.
Get into the habit of paying a bill as soon as it shows up in the mail, or consider setting up online accounts to pay all of your bills electronically. A secured credit card is a wonderful way to get your feet wet in the world of credit. Regular credit cards are called "unsecured," because there's no collateral backing up the line of credit.
With an unsecured credit card, the bank allows you to borrow up to your credit limit without any guarantee that the money will be repaid. The cool thing about secured credit cards is that you can use them as training wheels for an unsecured card.
Most secured credit lenders, credit unions, are excellent choices -- will let you graduate to an unsecured credit card after 12 to 18 months on a secured account. Above all, make sure that the secured lender reports to all three major credit bureaus. That's the only way you'll build a healthy credit history.
Some credit experts warn against collecting a bunch of retailer credit cards just to cash in on in-store discounts, particularly around the holidays. Every time you apply for a new card, the lender pulls your credit report. Several hits on your credit report in a short period of time will lower your credit score.
Once again, pay them all on time, and make sure that the card reports to all three credit bureaus. There are other credit card traps that can affect your credit score. Try not to carry a balance higher than 30 percent of your credit limit. FICO frowns on borrowers who have a high debt-to-credit ratio. It's also better to stick with one credit card rather than constantly trading in for a card with a lower interest rate.
Fifteen percent of your credit score is based on the length of time you've maintained a credit account. Loans are a different kind of credit than credit cards. A loan is what's known as installment credit, since you pay back the loan, with interest, in set monthly installments.
A mortgage or a car loan is a good example of installment credit. If you want to make one of these major purchases someday, it's a good idea to show lenders that you have some positive experience with installment credit.
If you have a good, steady job... keep it. If you apply for a mortgage, salary history is one of the most important considerations that lenders will make. Usually, you'll be asked to supply income tax records for the past two years and current pay stubs as proof of your earnings.
Lastly, avoid bankruptcy at all costs; it's the credit equivalent of poison. Bankruptcies will mar your credit report for 10 years.
Above all, do your best not to cross paths with the law. Criminal convictions stay on your credit report forever (yes, forever). Even arrests that don't lead to convictions will appear on your credit report for seven years. Be good to yourself, be good to others, be good to your credit health and you will walk along the path to financial freedom in your own time.
It's a lot easier than it sounds but, I know you can get there. With my help, you can get there a lot quicker. Call me to answer any questions you might have about securing a home loan for your family.
Sergio Lebrija
Evolve Bank & Trust
602.618.7683 Cell
NMLS# 252088
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