Your credit score is a numerical reflection of your credit history. The score is given as a 3-digit number between 300 to 850 and is an indication of how creditworthy you are. You can get both your credit report and credit score from Annual Credit Report.Com.
Generally, a higher credit score increases your credibility to lenders and opens you up to better terms of credit. On the other hand, the lower your credit score, the riskier you appear as a borrower.
More specifically, your credit score impacts your financial future in several ways:
1. Your Credit Score Influences Eligibility for Employment
When employers are vetting prospective employees, a large percentage also run a background check which may include credit checks. Notably, they cannot access your credit score but they can access your credit reports.
Credit reports give details of your borrowing and payment history, which can give a hint of how well you fair in your credit score. Some employers may take this as a reflection of how well you can handle money, your decision-making ability, and your potential to be involved in criminal activity.
Note: According to the Fair Credit Reporting Act, prospective employers are obligated to inform you in writing if a credit check is a requirement in the hiring process and seek your written consent on the same.
2. Your Credit Score Determines your Qualification for a Loan
Whether you require a private, auto, or business loan, a good credit score is paramount. It is the biggest factor in determining whether your loan gets approved, the amount that you receive, and the interest rates of the loan.
Typically, for SBA and term loans, you will need a minimum credit score of 680. Still, business loan providers consider a score of between 640 and 700 as good. For an auto loan, you will require a minimum score of 660.
While it is still possible to get loans with a low credit score, your choices will be limited. Further, the few lenders who are willing to work with you will charge higher rates, significantly raising your monthly payments.
3. Your Score Affects Your Ability to Buy or Rent a House
Just like the case with other lenders, mortgage companies depend on your credit record to determine your eligibility for a mortgage. A good score, such as 760 and above, reflects your ability to honor your payments.
On the other hand, you might not strike a deal with many lenders if your score is 640 and below. If you do, they will impose high-interest rates to cover the risk of delayed payments or defaulting.
When you are looking to rent a house, it is common for some landlords to run credit checks. By so doing, they can only get your credit report and not your credit score. That said, there’s no minimum credit score to qualify you to rent.
However, a landlord may use your payment habits and your current debt to decide if they should approve you to rent or not.
5. Your Credit Score Determines Whether you Get Mortgage Refinancing or Not
Are you looking to lower the interest rate on your current mortgage? You can do that by refinancing. This can also help you get a shorter loan term, reduce your monthly payments, or switch to a fixed-rate mortgage.
To refinance your mortgage, the credit requirements may vary from one lender to another. Nevertheless, you will need a credit score of 620 and over for a conventional mortgage refinance. If you are lucky, you can get refinancing from government programs with a score of 580.
By contrast, if you want to try your luck with private lenders, you may need a credit score of up to 750. In any case, higher credit scores translate to higher chances of loan refinancing approval, better loan terms, and lower interest rates.
Besides your score, you will also need a minimum of 20% property equity and funds to cater for other costs related to refinancing.
The Bottom Line
Many aspects of your financial future are pegged on how you have handled your financial responsibilities in the past. Your credit score is a good indicator of this information. With good credit, you can live more comfortably, access financing when you need it, and avoid extra expenses brought about by a low score.
Helpful Guide to Reading Your Credit Report
Your credit report contains information about your financial history including lines of credit and how you are settling them. It’s advisable to review your credit report at least once a year. This allows you to tell how you fair in the eyes of creditors. It also helps you to come up with ways to fix your report for the better.
That said, understanding the information contained in this report can be difficult, especially for first-timers. To ensure that you don’t miss a thing, here is a guide to reading your credit report.
Credit Report Breakdown
The format of these reports varies depending on the reporting bureau that you get the report from. The information is however similar and is broken down into several fields.
Subscriber or Personal Information- Consumer Demographics
Personal information includes any information that identifies you. Here, you will find your name, address, residence type, geographical code, social security number, current or former employers, date of birth, and telephone numbers.
This field is used to identify you and does not in any way factor in your credit scoring. There could be variations in your name or addresses from different bureau which should not be a cause for concern. You should, however, make sure that each variation (if any) identifies to you and is not a case of identity fraud.
This section contains your accounts and their balances. It’s a summary of bank accounts including current and delinquent accounts as they have been reported by creditors. This snapshot of your finances includes;
- Mortgage accounts
- Credit cards
- Personal loans; car, student, and other loans apart from mortgages
- Collection accounts
- Any other accounts; lines of credit or trades
The accounts’ information captured in this section also touches on the total number of open and closed accounts. Inquiries made on your report for the last two years will also feature as part of the summary.
The credit summary also gives you a quick overview of monthly payments, balances, and past due amounts. The summary will also contain any delinquencies which can be current or previous depending on what your creditor reported.
This forms the biggest chunk of your credit report. Each account is analyzed in the finest detail. This is where you need to concentrate on weeding out any inconsistencies. Each account is broken down into several fields;
- Name of creditor
- Account particulars (number, type, and ownership or responsibility)
- The highest amount ever owed
- Maximum credit approved
- Balance owed
- Past due amount
- Monthly payment
- Available revolving credit
- Dates opened and date reported
- Payment status
Account history also contains remarks to explain special conditions pertaining to the account. Remarks can also be from your creditors indicating delinquencies or simply the standing of the account- Open, Negative, or Closed.
You may find some of the information contained in this section not to be up-to-date. This might include balances on credit cards or loans which you expect to be much lower. The reason behind this is that creditors might have reported the balances long before you had made your monthly installments.
This is one section that should worry you if it’s highly populated. It contains information from public records pertaining to:
- State and court judgments
- Tax liens
- Overdue spousal or child support- depends on specific state
Why should this worry you?
This information stays on your credit reports for 7-10 years. If your credit report is clear on this section then it’s advisable to ensure it stays that way!
Some bureaus will also include your FICO credit scores on the report. This is a 3-figure scoring system that ranges from the lowest, 300 to the highest possible score of 850 points. It determines your creditworthiness in the eyes of creditors. It may also affect your chances of employment or even your rent terms.
This is a list of parties including institutions that have requested your credit report. Your report will include hard and soft inquiries: Hard inquiries are requests made by creditors after you have authorized them when applying for loans or credit cards. Soft inquiries are the ones made by creditors (without your knowledge) for promotional purposes.
Credit reports can be difficult to read, leave alone understanding the entries. The above breakdown should guide you in identifying the important details contained in each section. Pro Tip: Be on the lookout for any inconsistencies that may point to errors originating from your creditors, the reporting bureau, or as a result of fraud. Such errors could be lowering your credit score and should be disputed immediately.
Does Leasing a Car Help Your Credit? Learn More About it Here
A car lease gives you an opportunity to rent a car of your choice for an agreed period. Just like loan repayment, leasing a car requires you to pay monthly installments and is, therefore, a major contributor to your credit history.
So, does leasing a car help build your credit score? The short answer is that, if you make all your payments on time, an auto lease can improve your credit score. Here’s what you need to know about car leases and credit scores:
How Leasing a Car will Help you Build Your Credit Score
While it is not a requirement, most legit car lenders, and dealers, report your payment activity to the three major credit bureaus: Experian, Equifax, and Transunion.
Once your payments are reported, they become part of your payment history which influences 35% of your credit score.
Below, here are some highlights of what you can do to improve your score during the term of your car lease.
Late or defaulted payments reflect negatively on your credit history. This consequently lowers your credit score. To ensure that you can make your payments every month and do it on time, settle for an affordable monthly payment spread out over a longer period as opposed to higher payments over a shorter period.
- Check out your Credit Reports Regularly
To understand your current credit health, check your credit reports regularly. By so doing you will be keeping tabs on your debts and any errors that prospective lenders might see on your report.
More importantly, getting the report is the first step towards disputing errors on your lease terms. In such cases, you can raise a dispute with the company responsible for the inaccuracy in time to ensure that your score is not affected negatively.
Besides your car lease, having varying lines of credit reflects on your ability to manage multiple lines of credit. And although a credit mix accounts for only 10% of your score, it can provide a much-needed boost to your score.
With that in mind, it’s worth noting that a car lease is classified as an installment account. This makes a lease different from revolving accounts such as credit and gas station cards.
- Minimize Credit Card balances
Boosting your score with a car lease would not make sense if you hurt it in other ways. Credit card utilization ratio, or the percentage of the money you are using out of the credit you have available, accounts for 30% of your score.
It is calculated for each of your credit cards and also across all of them. Even as you go for a credit mix, it is paramount to keep your credit utilization ratio at 30% or below.
Keeping old lease accounts open will help your score by increasing the age of your credit, also known as credit history. This accounts for about 10% of your credit score.
Can you Lease a Car with Bad Credit?
Despite the fact that leasing companies mostly consider consumers with good credit, you could improve your odds of getting approved for a lease and get an opportunity to start rebuilding your score. Here’s how:
Make a Down Payment
Making a huge down payment not only shows your commitment to the leasing agreement but it also helps to reduce the overall amount of the lease. This also means lower monthly payments.
Consider a Cosigner
If you are not financially stable, consider asking someone with a positive credit history to co-sign the lease with you. Since both of you share responsibility for the account, it affects both of your credit reports. Good payment history will, therefore, help rebuild your score.
Improve your Debt to Income Ratio
Debt-to-income-ratio is the comparison of how much you owe against how much you earn. A high DTI ratio indicates that you have trouble meeting your debt obligations.
So, before you attempt to get a car lease with bad credit, reduce your DTI. Among the measures, you can employ include getting a second job or clearing credit card debts.
It is apparent that leasing a car can help build your credit score. However, this works hand in hand with your other lines of credit as they together make up your credit report. As such, put all your financial obligations into consideration before you sign a car lease to avoid causing more harm to your score.
Developing an Action Plan to Boost Your Credit
A quick action plan to boost your credit score
Once you have your credit report and your credit score, you will be able to tell where you stand and where many of your problems lie. If you have a poor score, try to see in your credit report what could be causing the problem:
- Do you have too much debt?
- Too many unpaid bills?
- Have you recently faced a major financial upset such as bankruptcy?
- Have you simply not had credit long enough to establish good credit?
- Have you defaulted on a loan, failed to pay taxes, or recently been reported to a collection agency?
The problems that contribute to your credit problems should dictate how you decide to boost your credit score. As you read through this ebook, highlight or jot down those tips that apply to you and from them develop a checklist of things you can do that would help your credit situation improve.
When you seek professional credit counseling or credit help, counselors will generally work with you to help you develop a personalized strategy that expressly addresses your credit problems and financial history. Now, with this ebook, you can develop a similar strategy on your own – in your own time and at your own cost.
When developing your action plan, know where most of your credit score is coming from:
1.Your credit history (accounts for more than a third of your credit score in some cases).
Whether or not you have been a good credit risk in the past is considered the best indicator of how you will react to debt in the future. For this reason, late payment, loan defaults, unpaid taxes, bankruptcies, and other unmet debt responsibilities will count against you the most. You can’t do much about your financial past now, but starting to pay your bills on time – starting today – can help boost your credit score in the future.
2.Your current debts (accounts for approximately a third of your credit score in some cases). If you have lots of current debt, it may indicate that you are stretching yourself financially thin and so will have trouble paying back debts in the future. If you have a lot of money owing right now – and especially if you have borrowed a great deal recently – this fact will bring down your credit score. You can boost your credit score by paying down your debts as far as you can.
3.How long you have had credit (accounts for up to 15% of your credit score in some cases). If you have not had credit accounts for very long, you may not have enough of a history to let lenders know whether you make a good credit risk. Not having had credit for a long time can affect your credit score. You can counter this by keeping your accounts open rather than closing them off as you pay them off.
4.The types of credit you have (accounts for about one-tenth of your credit score, in most cases). Lenders like to see a mix of financial responsibilities that you handle well. Having bills that you pay as well as one or two types of loans can actually improve your credit score. Having at least one credit card that you manage well can also help your credit score.
As you can see, it is possible to only estimate how much a specific area of your credit report affects your credit score. Nevertheless, keeping these five areas in mind and making sure that each is addressed in your personalized plan will go a long way in making sure that your personalized credit repair plan is comprehensive enough to boost your credit effectively.
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