Your credit score is like an enigma. You know you’ve got three different scores – or you should, anyway. The problem is that very few of us know how those scores work together, why our scores go up and down, and what our scores mean in the grand scheme of life. While everyone would prefer you to believe your credit score is of the utmost importance, a poor score may not be as detrimental as the banks would like you to believe. Here are 5 things you probably don’t know about your credit score (because no one wanted you to know).
30 Days of Magic
Your creditors report to the credit bureaus when you make late payments – true. The reality of the situation, however, is that most won’t waste their time reporting you unless you are over 30 days past due. Go ahead, breathe a sigh of relief. Approximately 35% of the total score is impacted by debts that are late. Keep yourself within that margin of error and you’ll see less of an impact.
Know Your Debt to Income Ratio
Your credit rating is impacted not only by late payments but by your overall debt to income ratio. Let’s say, for example, you make $50,000 per year. If you owed $25,000 in credit card debt you’d have a 50% ratio – and your ratio is actually higher once you weigh in on other payments you owe – like mortgages and car payments. Keep your debt to income ratio as low as possible and your lenders will love you.
Your Score Can Change Drastically in Very Little Time
A senior lender once told a story about a business owner with a low credit score. Two weeks later that business owner had increased his score by more than 150 points. Baffled, the lender ran the report again and came up with the same number she had received previously, despite the paper the business owner had showing the higher score. She had several different departments run the scores and ended up with three very different numbers. They were all run by different people but they all came from the same place. Why the difference? Because your lender has the ability to customize the criteria he uses to determine your credit score. Combine that with the fact that three different credit agencies can interpret the same information differently and you’ve got a real recipe for disaster.
Cash Only Isn’t a Good Idea
Many will tell you to simply ditch your credit cards and loans and live a cash only lifestyle. This sounds great in theory, but there are areas in your life where you simply can’t live without credit. Besides, no one is perfect and planning for emergencies can be harsh. If you don’t have enough cash on hand, how will you pay for a quick tire repair or for something that goes wrong in your home? Besides, creditors find that no credit equals bad credit, so if you need credit in the future and don’t have any to start with, you’ll have a very difficult time getting a loan.
Teens Should Learn about Credit
Woah! Never thought you’d hear this one, right? Teenagers aren’t necessarily prepared for the world of money, but the sooner you teach them about using credit responsibly the greater your odds of preventing a credit disaster in college or later in life. Consider letting your teen have a low-limit card from a department store. They’ll begin to build their credit scores early and will be less likely to destroy them later.
It doesn’t matter if you’re looking to obtain a bad credit loan, a home mortgage, or a credit card. Your credit score will play a huge role in your bank’s decision. Keep these things in mind as you apply for financial aid and be prepared to fight for your rights as a credit holder. You’ll find the outcome to be worth your time.
Celina Tern is a writer and works in recruitment business, staffing and she highly recommends Modis IT Staffing agency for businesses looking to hire new IT staff.