The Complete Guide To Credit In 2020

If you have ever applied for a car loan or a new credit card, you probably already know that they are usually only granted after a review of your credit scores and history available from the credit bureaus. While they don’t directly influence the decision your lender will make, they serve as a knowledge base of “creditworthiness” for credit card issuers and other lending businesses. Your credit score is a number that falls between 300 and 850. A high score indicates a good credit history and the ability to pay off existing and future loans. Lower scores, on the other hand, indicates low creditworthiness and the likelihood that you will either struggle to pay off your debt or not pay it off at all. This is the reason why people with lower credit scores are typically charged higher interest rates to offset payment risks.  

In the United States, FICO scores and Vantage scores are the most commonly used scores by major credit agencies to evaluate creditworthiness. Your credit level or credit quality, as some lenders may refer to it, is divided into four categories – excellent, good, fair/average, or poor. 

  • Anything above 720 – excellent 
  • 690 to 720 – good 
  • Between 630 and 690 – fair or average
  • FICO score under 630 – poor credit score

The importance and impact of credit scores

It is easy to overlook the significance of credit scores if you don’t fully understand them. As we already concluded, access to a financial product depends on your credit score. Higher scores bring different benefits and show the full impact of your score. People with bad credit and lower numbers won’t always be rejected, but they will likely have to pay higher fees than those with a credit report in good standing. 

Apart from being an indication of your financial situation, credit scores can determine your future as well. Individuals with lower scores don’t have access to better deals when it comes to interest rates. Their default risk is higher, so interest rates are adjusted accordingly. On a 30-year fixed mortgage contract, this would make a huge difference in the amount of paid interest. For example, consumers with a FICO score of 760-850 would pay $1,087 monthly for a $250,000 mortgage loan. For the same amount, consumers with a score between 620 and 639 would end up with a monthly payment of $1,319. Overextended periods of time, higher credit scores save hundreds and even thousands of dollars.

Credit card companies often reserve platinum cards for highest-scoring customers. Interest rates on those cards will depend on credit scores but there are also numerous benefits associated with platinum cards. Platinum cardholders can expect to see more rewards points, travel, and dining perks, purchase protection and access to discounted or free emergency services. Similar evaluation processes are in place for an auto loan or mortgages. Higher score holders may be able to negotiate better loan terms. Banks may reject loan requests based on low credit scores and may force people to make a larger deposit before getting approved or approve a smaller loan amount than the borrower originally requested.

A good credit score makes the difference in a wide range of ways. It’s easier to get approval to rent a house, apartment, car, or buy a new expensive cell phone or get a contract with no security deposit. Higher credit scores can also get the holder access to better car insurance rates. You can think of it as your financial performance rating that companies use for decision making. Every time you make a big financial decision, it will most likely depend on your credit. Your overall personal credit performance will determine the quality and terms of service. You likely already realize that your personal score isn’t constant. It changes based on a variety of factors including your credit balance to credit limit ratio each month, payment history, and every time a lender sends a hard request, so regular credit monitoring is advised.

Vantage Score Model

The VantageScore model was introduced in 2006 by the three major credit reporting bureaus – Experian, Equifax, and TransUnion. Just like FICO, this model is used by many lenders countrywide and it uses similar data. The latest VantageScore 3.0 model uses the same scoring range as FICO, from 300 to 850. Anything above 660 is considered good, and scores above 780 are considered excellent.

The most important credit score factors

Information used to determine a credit score depends on the scoring model, but the score generally depends on specific elements of your credit history, such as:

  • Payment history for loans and credit cards, along with any other late payment
  • Credit utilization
  • Age, type, and number of credit accounts
  • Total debt
  • Public records such as bankruptcy
  • The number of newly opened accounts
  • The total number of your credit report inquiries

Factors specific to FICO scores:

  • Payment history
  • Late payments
  • Total debt and amounts owed
  • Length of credit history
  • Credit mix
  • VantageScore factors
  •  Age and type of credit and credit utilization rate
  • Total balances and debt
  • Recent credit behavior and inquiries

Each of these factors has different levels of influence, so it is essential to understand all of them individually. If you have any questions or want to learn more, you’re always welcome to call us at +1 (833) 331-HERO (4376) or drop us a note at support@consumeraffinity.com

Payment History

Credit scores highly value your payment history, and you can look at it as a track record of your general financial behavior. Being unable to pay card debt will penalize your score, but you can also get a boost for responsibly handling debt. If your history contains a lot of negative information, lenders may consider you as a person who faces difficulty meeting their debt obligations. This doesn’t only refer to credit card debt but bad credit in general. Access to many card rewards and other benefits may and will be limited for those with bad payment history in their credit reports.

Late Payments

Paying bills on time may not be an option for some people. During a financial crisis or natural disaster people working for minimum wage, tips or that don’t have personal savings may struggle to acquire the funds necessary to meet their obligations. Whatever the case may be, late payments will almost always have a negative impact on your credit score. Depending on how late you are with a payment, the effect can be dramatically different. A “slow pay” or delinquency is considered after a payment is late greater than 30 days, 60, 90, or 120 days. A payment that is only 30 days late can drop a score by anywhere from 80-110 points. Payments made greater than 120 days late, frequent or multiple delinquencies (slow pays), or bankruptcy have great consequences to a person’s credit score. Late payments remain on a credit file for seven years and then drop off. 

To avoid late payments, you need to avoid acquiring more debt than you can handle. Make sure that you don’t pay less than the minimum payment or that will count as a late payment. There’s another reason to pay more than just the minimum payment each month. The more you pay down your debt, the quicker you’ll be out of debt. Also, if you do make a late payment, you’ll need to pay off everything that you would’ve paid for each month you’re late in order to get current again. 

Credit Mix

Another significant component category in your credit score is the complete overview of your debt burden and a mix of accounts. The mix is affected by how much is revolving debt (credit card) vs non-revolving debt (home and auto loans). How much you owe in total, how many different types of loans you have, and any other indicators from your debt/credit profile are taken into consideration. The credit mix is an indicator used by lenders to understand how you handle different types of debt. 

In this particular case, your debt burden is considered in relation to your payment history and other factors like the type of debt. This means that your total amount of debt might not hurt your score as much if it’s mostly non-revolving debt. It can serve as an indication that you are able to handle a new debt easily if you historically manage revolving debt well. 

Credit utilization

Whether you got your card from American Express or you own a Visa credit card, the fact remains that both of those have a credit limit on them. How much of that limit you utilize determines your utilization score and has a great impact on your overall credit score.

Take this ratio into consideration if you decide to cancel an existing credit card. If the card has no monthly fees tied to you, you can hold on to it as it shows up as a positive indicator within the utilization factor. The fact that you aren’t utilizing the allowed credit amount shows up as a positive aspect within the scoring system. Lenders use this factor to determine how well you handle your available credit and whether you are requesting loans to pay off existing debt. Using up to 30% of your available limit is considered as positive behavior by FICO standards. Higher than that and you can expect your score to drop. 

The total length of your credit history

Your overall score takes into account the total length of your credit history. This includes the number of accounts under your name, how long have they been active, and the average amount across all of those accounts. Having a longer track record provides lending companies with more data and information about your level of creditworthiness. The longer your credit history demonstrates your willingness and ability to effectively handle debt loads (or not as the case may be), and plays a key role in the decision on whether to grant you a loan or new credit card account.

Types of credit

Using different financial products such as debit cards, credit cards, student loans, and mortgages can be seen as a positive behavior. Having broader exposure to various financial products is a helpful indicator that a consumer can manage them properly. 

Different types of credit require different levels of responsibility, so lenders may choose to reject those who have a narrow exposure history. The length of your credit history and exposure to various types of credit are a clear indicator of how a consumer may behave in the future. That is why lending companies value this aspect when considering a credit request.

Hard and soft inquiries

When requesting your information from the credit bureau, lenders make what is considered a hard inquiry. Mortgages, auto loans, and student loans usually require communication with many different lenders, and this is why all searches that occur within 14 to 45 days of one another are registered as a single request. All inquiries take 30 days to have an effect on your total score so you can be fairly evaluated while rate shopping. If you applied for a credit card, an automobile loan, and a mortgage within a short period of time, each would count as a hard inquiry and therefore have the effect of lowering your credit score. However, if you were shopping for a better rate and applied for three or four different car loans with different lenders, that would count as one inquiry because you were obviously shopping rates. 

In the case where you request your own credit information for personal use or as part of an employment process, all requests are considered as soft inquiries and aren’t recorded in your file.

You can view all of these factors and see which ones have the greatest impact on Split®.

Factors that are not taken into consideration

Your ethnicity, nationality, religion, sex, and marital status cannot be taken into consideration when determining your credit score. Considering any of these facts in the process of credit scoring is prohibited by US law and regulated by the Consumer Credit Protection Act.

Additionally, these factors are also not considered: 

  • Your age
  • Your salary, job title, employer, occupation, or employment history
  • The interest rate charged on a particular credit card or other accounts
  • Items reported as child/family support obligations
  • Any information not found in your credit report

How to improve your credit score

By taking all of this information into consideration, and having a clear overview of your financial situation, you can start making some changes that will have a positive impact in the long run. 

If you want access to better rates, fees, and rewards, you need to pay attention to your credit history. Since lenders take all of this information from your credit file, bad debt management can lead to all sorts of complications during the approval process.

Timely payments on your current debt show a positive indication in your credit report. Try to keep track of all of your monthly payments and don’t miss even the smallest ones.

Less hard inquiries result in a better score. If you are applying for a lot of new financial products in a short period, lenders may see this as negative behavior. They prefer financially responsible and stable clients, so rejection is to be expected if other lending companies have already rejected you.

Carefully evaluate inactive and potentially unnecessary accounts. As we already mentioned, you should carefully use credit. High credit to limit ratios have an impact on your credit score. Don’t close credit accounts without having some idea of the impact it might have on your credit. If you close a credit card account you’ve had for 10 years, your score may drop if you’ve had few other cards for as long.

Split®Credit monitoring provides constant updates on your current situation. Cybercrime is predicted to cost $6+ trillion in 2021, and credit monitoring can protect consumers and their finances. By using solutions like Split, consumers are constantly updated on the status of their credit score and credit history. Constant email updates can provide insight into the smallest changes and serve as a warning signal in case of a data breach. ID theft has become a rising concern in the US, and while the number of victims is getting lower, the amount of funds stolen is following an uptrend. Securing personal information has fallen on the shoulders of consumers because enterprises are constantly at risk of a data breach or cyber attack.

Protect your finances and identity with credit monitoring

Every minute, 4,087 data records are lost or stolen. Enterprises showed a constant inability to protect user data, and consumers are redirecting their trust to solutions like Split. With the evolution of technology, cybersecurity has to be taken to a professional level. Consumer Affinity provides identity theft insurance with an aggregate limit of liability up to $1M, fully assisted identity, and wallet restoration services. 

With access to curated and custom content, you have a chance to educate yourself on some of the most critical cyber threats that we face today. By better understanding phishing, privacy scams, and other methods, you can learn more about the best practices for identity protection.

What happens if you don’t have a credit score?

Consumers that don’t have enough credit history may not have a credit score at all. This is known as “no-file” or “thin-file”. No-file means that the particular consumer has not built any credit history yet. Thin-file means that the consumer has few, if any, credit cards, loans, or another credit history. Depending on your age, you can establish credit in several ways.

You must have a cosigner or prove in some other way that you are financially capable of paying back any credit that is extended if you are under 21. A parent co-signing a credit card can be a great way of establishing a positive credit history if the credit is used responsibly.

People older than 21 can ask their credit union or bank to get them started with an account that has a smaller limit. Owning a secured credit card is also a great way to start building credit. With good account management and enough time, you should be able to establish a positive credit score.

Consumer Affinity’s Split® Credit Monitoring solution cannot monitor your credit if you have either a thin or no credit file.

Conclusion

It is easy to conclude that credit scores are much more than just numbers that determine the outcome of your credit request. Having a good credit score is essential for every big financial decision in your life. Car loans and mortgages can become a burden if you don’t have access to better deals with lower interest rates and fees. Over longer periods of time, consumers with better FICO scores will save more money and have access to more financial assets in general. This can make a significant impact on your lifestyle and financial situation.

It is worth remembering that lenders take your score seriously, so having a responsible approach will positively influence your FICO ratings. Organize your monthly payments and try not to miss them if you plan to get better deals on your new requests. A positive credit history establishes trust with lenders and opens up access to even better financial products. Minimizing new credit requests is also advisable.

Lastly, cybersecurity shouldn’t be taken lightly. While identity theft won’t have a long term impact on your score, the short-term consequences can be stressful and damaging. Your overall score can take a temporary hit, so any new credit requests might not be approved until the issue is resolved. It can take weeks or months before your identity, funds, and the overall score is restored. With credit monitoring, you can have a 24/7 overview of your credit information and the ability to react timely when needed. If new accounts and inquiries are made under your name, instant notifications can help you freeze everything and prevent any further damage. For more information on identity protection and cybersecurity, feel free to visit our Community today!

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