Credit scores are a complicated but important part of our adult life, and it's likely that there is more that goes into determining those scores than you think. If you're not careful you could harm yourself in more ways than you're aware of.
What many people don't understand is that a bad credit score affects many aspects of your life. Not only will it make it more difficult for you to get approved for auto financing, home mortgages, and credit cards – but you'll also experience higher interest rates when you are approved. This is because you pose a high risk that you won't pay your bills on time, but what you may not know is that missed or late payments are not the only thing that will affect your scores.
However, before you start thinking about the what, you need to figure out the how, as in how your credit is determined. Each credit bureau; TransUnion, Equifax an Experian, all calculate your scores differently, but the general guidelines are broken down into five different categories:
- 35% payment history
- 30% debt-to-income (DTI) ratio
- 15% length of credit history
- 10% new credit
- 10% type of credit in use (installment, revolving, consumer finance)
Now that you see how your scores are determined it may be easier for you to see that even if you make every payment on time, you may not have the score you think you should.
Avoiding the Most Common Mistakes
So you have made every loan payment on time, and therefore your credit score should be well above the 700 mark, right? Wrong! The following are mistakes that many Americans make throughout their lifetime that they think are helping them, but in reality they are doing just the opposite and creating bad credit scores.
Cancelling Your Old Debts
The longer your credit history the better (well, positive credit history); therefore, when you cancel accounts like an old credit card you could be hurting yourself. If you have gotten into some trouble with credit cards and maxing them out, you may have decided it's just better to pay them off than cancel them, but you can't do that anymore. While it's better to not max your cards out, remember your credit history length makes up about 15% of your score. Cancelling the cards you've had open for years and keeping the ones you've only had for a few months will hurt your overall score. Pay off the new ones and keep the old ones!
Prioritizing your Debt
This is something nearly everyone has done at least once in their lifetime. You get to a point where your bills exceed your income, and you need to make a choice between paying your car payment and paying your credit card bill. The decision is pretty clear – you can't afford to have your car repossessed – so car payment it is. This is something that should be avoided at all costs. Even if you're only paying the minimum payment on your card you should do so every month. You may believe that a late payment won't affect your credit score unless it's 30 days or more late, but the truth is – some companies report payments as late just one day after the due date, even if you don't receive a late fee. Prioritizing your bills is important, but don't neglect any, at least pay the minimum.
Maxing Out Your Cards
Times are tough and there are many people that are in need of money right away so they use their credit cards for almost anything. The problem with this is you end up using all of your available credit. This shows lenders that you may be having financial trouble and they will be less enthused to lend their money to you. This also affects your debt-to-credit ratio. The more available credit you have, the better your score will be. If you have two or three cards and you're in desperate need of something but don't have the cash to buy it; it's best to spread it out over all three cards than to use all your available credit from one card.
Avoiding Credit All Together
It's no secret that credit cards, car loans and any other form of financing can get you into trouble if you don't keep up on them, but avoiding it all together is not good for you either. Eventually you're going to need to get a loan for some reason, like buying a house. If you have no credit history lenders look at it the same way as if you had bad credit. You have nothing to show that you are worthy of a loan or that they can trust you to pay it back. It's best to start with a secured credit card where you are only allotted the amount that you deposit on it, or a small car loan for a used vehicle. Each time you make a payment on-time you will help your score grow. Eventually you can get to a point where you can open more accounts and your score will grow increase even more.
Not Keeping Tabs on your Credit Report
It's not uncommon that lenders, or the credit bureau, will make a mistake on your credit report. If you are one of those people that never checks their credit until they are going to apply for a car loan or home mortgage you get could the shock of a lifetime when you find that your score is much lower than you thought it would be. You are given the privilege of getting one free credit report per credit agency each year. That means you can pull your report every quarter to make sure it is all accurate information and that you are keeping your score where it needs to be.
As We See It
Making every payment on-time and in full is extremely important, but don't let the other factors fall to the weigh-side either. You should always have at least one account open and accurate, and if you want to cancel any accounts then make sure it's a newer one. Your credit scores are important and can affect many aspects of your life; you will get better auto insurance rates and interest rates when you have prime scores. Who doesn't want to save money just because they have favorable scores?
If your credit history is fairly short, but you don't want to take out another credit card, Auto Credit Express can help you. We can help you find an affordable auto loan that can help you build your credit scores and history while also getting you back on the road. Get started today by filling out our car loan application.