What is credit?
Credit is the reputation for repaying debts on time. The better your credit, the more likely you are to get a loan, have a credit card, rent a house or apartment, or get a job.
How does my credit affect me?
Lenders make the decision about whether or not to give you a loan and how much they will charge for it. In addition, the lender will look at more than just your credit score — job history, income, savings, and the type of loan you want — before making a final decision.
What affects your credit score
- Payment history – A record of late payments on your current and past credit accounts will lower your score.
- Public records – Matters of public record such as bankruptcies, judgments, and collection items will lower your score.
- Amount owed – Owing too much will lower your score, especially if you’re approaching your total credit limit.
- Length of credit history – In general, a longer credit history is better.
- New accounts – Opening multiple new accounts in a short period of time may lower your score.
- Inquiries – Whenever someone else gets your credit report — a lender, landlord, or insurer, for example — an inquiry is recorded on your credit report. A large number of recent inquiries may lower your score.
- Accounts in use – The presence of too many open accounts can lower your score, whether you’re using the accounts or not.
What do lenders look for?
To determine if an applicant is a good credit risk, most lenders use a scoring system. Applicants receive points for factors such as type of occupation, length of employment, annual income, and how often the applicant has been late on paying their bills.
If you are deep in debt and are applying for more credit, a lender may consider you to be over -extended and deny your application, believing you may not be able to handle additional payments based on your income and existing obligations.
Managing your credit score
A high credit score can give you a wider array of financial options and lower interest rates. Even if you already have a good score, there’s always room for improvement by carefully managing your credit.
Keep in mind, however, that your credit score is based on your history of borrowing and repaying money, so there’s no way to instantly change it.
- Try to keep your account balances as low as possible. High outstanding debt will lower your score.
- Correct any incorrect information that might appear on your credit report.
- Don’t open new credit cards that you don’t need just to increase your available credit. This approach could backfire and actually lower your score.