Over the course of your life and when creating your business, you will hear the word “credit” a lot in reference to purchasing items and how much you can borrow.
It is one of the main factors in deciding how much and how quickly you can expand your business, and it is of fundamental importance.
So let’s see what credit is, why it is necessary and, perhaps most importantly, how to get it.
Experian, one of the top three credit reporting agencies in the United States, defines it as “borrowed money that you can use to buy goods and services when you need them.
He obtains it from a lender, to which he agrees to return the amount loaned together with the applicable financial charges, within a specified period.
In other words, credit is money in the bank that can be turned into money in your pocket.
It comes from credit cards, payment agreements with vendors or service providers, and from banks and lenders.
Generally speaking, the better your credit score, the greater your ability to obtain loans and the cheaper the costs.
The credit score is based on your credit report, which has information such as your income.
how long you have been living at your current address and working in the same job.
- the funds you have in the bank and the way you have handled loans previously.
- In the United States, the top three companies that compile credit reports are Experian, Equifax, and TransUnion.
- Each has its own formula for calculating credit scores.
- But they all gather information and data from a variety of sources and providers.
- The Equity Credit Reporting Law regulates the type of information they use and to whom they can communicate it.
Your credit report has a lot of data and analyzing it thoroughly would be laborious for a bank or lender.
That’s why it’s summed up in your credit score.
A three-digit number that is generated by compiling and weighing the data in your credit report.
Each lender uses different benchmarks to decide the type of loan to grant you and the amount.
Although there are many credit scoring models, the most widely used is the FICO model.
According to the company’s website, 90% of US financial institutions use FICO scores when making credit decisions.
So what does the FICO score take into account? The most important piece of the puzzle is your payment history (35%), followed by how much you owe (30%), how long you’ve had a credit history (15%), how many new loans you’ve gotten (10%), and types of credit you have used (10%).
The need for Credit History?
Unless you have several thousand dollars under the mattress, you will most likely need a loan to make any major purchase.
On a personal level, that could mean a car or a house. For a business, it could be equipment or a building. Without credit, it will be more difficult for you to make a large purchase.
Companies that lend money do their best to make sure they get it back.
And sadly, being a great person is not a sufficient guarantee that they are at financial risk for you.
They need to look at your record to see how you have handled money previously.
For many lenders, credit history is the most important factor in deciding whether to grant you a loan and the amount.
- But that is not all. People with good credit records are also considered trustworthy in other areas.
- Employers and landlords often check your credit information as part of the selection and decision-making process.
- By law, you are entitled to receive a free copy of your credit report from the three main agencies once a year.
- To do this, you can visit the central credit reporting website established for this purpose or you can call toll free 1-877-322-8228.
You can request reports from all three agencies simultaneously or one at a time.
To track your credit score, consider requesting a report every four months from all companies.
That should give you a good annual picture of your credit situation.
You also have the right to receive a free copy of your report if your credit card or loan application is denied.
Get Good Credit History
You understand, having a good record is of fundamental importance. So how does it achieve?
Starting to establish credit can seem difficult because, as we have already seen, you have to have it to borrow money or to get a credit card. However, there are ways to start.
- Establish that you are a trustworthy payer – This can be as simple as having a series of canceled checks or receipts for rent or utilities. It is helpful if the apartment and accounts are in your name.
- Get and use a guaranteed credit card – With this type of card, you can only spend the equivalent of the cash you have in a linked account that you have given as collateral. Prompt compliance with card payments demonstrates responsible behavior. This is one of the most popular ways to establish credit history, and some institutions offer an unsecured card after only a year of using a guaranteed card.
- Get a credit card with a low spending limit – Make a small expense every month and pay it right away.
- Open checking and savings accounts – For lenders, these accounts are an indicator of financial stability.
Can Credit Score Be Improved?
Always pay all your bills on time. Even a delay of a few days can greatly affect your credit score.
Consider setting up automatic payments from your checking account to always pay on time. You can choose to pay the minimum monthly fee, the entire balance due, or a fixed amount each month.
Do not exceed your credit limit. Better yet, try to keep the balance due to less than 50% of your credit limit. To have a favorable score, 30% is even better. And the ideal is 10% or less.
Do not overreach. Don’t stop making any payments.
Failing to pay a car or mortgage payment on your home damages your credit score more than failing to pay a card. However, always try to make the minimum payment.
Call the company and ask. Sometimes lenders delete information out of goodwill, especially if you have been a good customer for a while.
Your credit score is calculated, in part, by comparing how much you owe and how much credit is available to you.
A card with no debit balance helps you with this calculation. Also, having accounts for a long time, whether they are active or not, makes a good impression.
This reduces the average age of your accounts and is a negative thing.
One of the factors in your credit score is how many of your cards have a debit balance. Instead of spreading your purchases across multiple cards, focus on one, preferably the one with the lowest interest rate. Finish paying the cards with low balances so that they stop being a hindrance.
Having and paying off an installment loan (one that is repaid regularly over a specified period, such as a microloan or mortgage) increases your credit score.
Stick to payments and stay up to date. Old problems don’t weigh as much like their most recent history. So the more you keep a good track record, the higher your score will be.
as it can affect your credit information for a long time. Take good care of your social security number, your credit card numbers, and your bank account information.
If someone fraudulently gets a credit card in your name and then fails to pay, the delinquent account will appear as if it were you on your credit report.
Correcting and deleting this bad background can take a considerable amount of time and effort.
Track your score by taking advantage of the annual credit reports. you are entitled to receive for free, and confirm that they have no incorrect information that could harm you.
Find an Error in My Credit Report?
Under the Credit Reporting Equity Act, the credit reporting agency must correct any incorrect information in your file.
To rectify the error, you must contact them and explain what you think is wrong. You can do this in writing, by phone, or online.
What kind of problems could I find? Question any account that is not yours or that you have not opened, and any late payments that you have made on time.
If you filed for bankruptcy, after ten years, that information must be erased. Other negative credit information must be removed after seven years.
The credit reporting agency must investigate (generally within 30 days) and send any pertinent information you give them to the creditor who provided the information.
Once the questioning has been filed, the creditor should investigate and report the results to the credit reporting agency.
If the information is indeed incorrect, the creditor must notify the three national credit reporting agencies so that they can correct their files.
When the investigation is complete, you will receive the results in writing.
If you continue to question something after the investigation. you may request that a report of the questioning be included in your file and in future reports.
Give credit to who deserves it
As you can see, you are in control of your credit. Set your record wisely and protect it carefully.
Good credit will be a great help when creating your business. The bad record, on the other hand, will create complications and higher costs.