The Credit Challenge

So, yesterday I gave you the first 5 reasons why you should begin the process of rebuilding your credit score.  It doesn’t matter what difficulties you’ve had in the past with your credit score, the main thing is that you start now.

So, here are reasons 6-10 (or 1-5 as they are listed here) of why you need to rebuild your credit score now:

1. Be Favored Over Others – if you are looking to get a lease on an apartment, having good credit can give you the advantage over other tenants with less than perfect credit scores.  Believe me when I tell you that the last thing landlords are looking to do is chase down the rental payment every single month as opposed to having it in the mailbox on the first of the month.
2. Get A Green Light On That New Job – many times, new applicants go through background checks and screenings. Part of the background check includes your credit profile and history.  There are many cases that people get turned down for a new position due to bad credit because it is looked at as lack of discipline and responsibility.
3. Achieve The American Dream – one of the biggest reasons that you want to rebuild your credit score is to be in the position to purchase your own home or upgrade to a bigger and better house.  Without a good credit score, your options for home ownership become very limited, and in many cases, non-existent.
4. Good Credit Attracts Better Opportunities – think about it, without good credit, there aren’t very many opportunities that come along for you to make money.  Most people with bad credit don’t have much money put away either.  Opportunities always find the right person who can take advantage of them.  With good credit, people will look for you to offer you opportunities to invest or buy at discounts because you are in the position to take advantage of them.
5. Because You Owe It To Yourself – you owe it to yourself to pay the absolute lowest on everything you borrow.  You owe it to yourself to save and invest the money that you would be spending on higher interest or fees due to a lower credit score.  You owe it to yourself to have the absolute best lifestyle available to those who have control of their credit and finances.

So there you have it, the top 10 reasons to rebuild your credit.  There is much more that a good credit score can do for you, but hopefully these examples were enough for you to realize it that it is critical to your life and your finances to rebuild your credit score.

Many people are on the constant hunt to have a great credit score, or even improve the credit score that they have. Although this is a worthy cause, it is important to start your journey of obtaining excellent credit by understanding the way credit really works.

Once you are familiar with the way the credit report system works, you would be better equipped in how to dramatically increase your score, as well as maintain the high score you have managed to obtain.

So, what is the credit report system and how does it work. Great questions, and I am about to tell you just that.

First of all, your credit score is a number that represents your credit risk based on a number of different factors. These credit scores range from 300 to 850, and the national average is right around 675. The reason this number is so important is because it is a gauge that lending institutions use to determine the likelihood of you paying your debt in a timely fashion.

To get a little more specific, the score that you are given is based on the last 24 months of credit history, and using those historical facts, the credit report system determines the likeliness of you paying your account 30 days past due within the next 90 days. That sounds confusing, but it is really quite simple.

Here’s an example. If you are late on your payment this month, but haven’t been late over the last 24 months, your score will be impacted because the chances of someone having a late payment within the next 90 days is greater than someone who has never been late. However, the impact is far less than someone else who has been late several times within the last 24 months.

You can imagine that the higher your credit score, the lower credit risk you are and the more likely you are to be given credit at low rates. That is absolutely true.

Also, credit scores in the low 600s and below will often have problems obtaining credit, while scores of 720 and above will usually give you access to the best interest rates available. I like to say that once you reach a 720, you are like Noah, where the seas parted before him. Well, lenders will start parting for you!

So let’s also talk about how these credit bureaus arrive at your score. There are three main credit bureaus, Equifax, Transunion, and Experian, and each of them use different methods to arrive at your score.

Most credit bureaus use the FICO system, which comes from its developer Fair Isaac Corporation Company. This is by far the most used software since the Fair Isaac Corporation developed the credit score model used by many in the financial industry and is still considered one of the leaders in the field.

Using the FICO system, the credit bureaus and lenders are quickly able to see patterns in your credit, and then the system will provide them a score based on the finding.

Credit reports are compiled by the credit bureaus, which ultimately use the information from lending institutions and other agencies that provide your credit information to the bureaus. The type of information that is collected and factored into your score include the balance on your accounts, how many accounts you carry, the length of time that you have had established credit, the mixture of credit types, late payments, and credit inquiries.

As you can see, there are many factors that are included to determine your credit scores. There are also some important things to take note of. Your age, sex, and income do not count towards your credit score.

One can never know exactly how the credit scoring model works, however, the more information that you consume regarding credit, the easier it becomes to maintain excellent credit. Knowing this information is critical in not only establishing and managing your credit, but also repairing it.

I recently had someone ask the question, if you take out a new car loan, will your score drop?  That is a great question, and I’m sure you may be wondering this as well.

Here’s what I told him;

“There are a few factors to consider regarding your question.  The simple answer is that your score may drop within the first 45-60 days because it is a new account without any history yet until the first payment gets reported.

Now, the other factor that comes into play is the average age of your credit.  When you open a new account, you immediately give your credit a “younger age,” meaning the credit length becomes more shallow.

Here’s what I mean.

Lets say that you have the following accounts established:
Credit Card 1 - 5 years
Credit Card 2 - 6 years
Mortgage - 4 years
Home Equity Loan - 5 years

Well, the age of your credit is 5 (20 total years divided by 4 accounts) years of established credit, which is the average length of time that you’ve had these accounts.

On the other hand, lets throw in a new account.  Your age drops instantly to 4.2 years.  The more newer accounts that you have, the shorter your credit age is, which can reduce your credit score.

If you have plenty of long term credit history, then it really doesn’t make much of a difference. However, if you don’t, your score may drop considerably.”

Always keep this in mind when going for new credit.  Ask yourself “How many other accounts do I have?”  Will this new loan lower my score?”

Chances are, you may choose to hold off on the new loan and maintain your credit.