Is Good Credit Essential to Prosperity?
Credit history is what allows businesses like lenders and credit card companies to manage their risks. It is a metric that they use to evaluate how trustworthy an individual is with their finances. It helps companies decide which people are the most likely to pay them back and which have a poor history of this. Without being able to look at a borrower’s credit history, financial institutions wouldn’t be able to lend money or operate profitably. A good credit history is basically a written recommendation that can be used to borrow money, rent an apartment, or apply for employment. A good score isn’t essential, but it will make financial situations easier and will also save you money in lower interest rates.
What Can Lead to a Bad Credit Score?
Bad credit results mainly from a poor payment history. Defaulting on bills or making late payments for things like credit cards, auto loans, or mortgage can contribute to this history. Currently bills like rent or mobile phone payments do not affect your credit, unless they are sent to a collection agency. This may change in the future as some alternative credit scoring models factor other types of bills into your overall score. Things like bankruptcy or loan defaults are considered particularly bad and will cause your score to drop the most. These can affect your history for 7 – 10 years and make it more difficult for you to receive any type of loan or new credit. Carrying a balance on your credit card is another problem that looks very bad to lenders. Bad credit can be expensive because it will cost you money due to higher interest rates and higher auto insurance premiums.
Can a Poor Credit Score Be Fixed?
If you do have a poor score, it is not permanent. Credit scores can improve fairly quickly if the right steps are taken. Any outstanding credit card balances should be paid off if possible. Credit card debt is one of the most expensive types of debt which averages around 10% – 20% interest. Paying off this debt first, will help to reduce your debt load and will also have a positive effect on your credit. 30% of your FICO score is made up from your credit to debt ratio. This means that you should only charge 1/3 of your available credit each month, then pay off your balance. For example, if you have $10,000 of available credit you should charge no more than $3000 each month. The $10,000 of credit would include all of your credit cards and credit lines.
Another way to improve a score would be to check your report and see if there are any errors. It can be very common to find mistakes on a credit report. Some are serious enough to cause your score to drop. You can order all 3 bureau reports for free at annualcreditreport.com. This can be done at no charge, one time per year. The Fair Credit Reporting Act allows all U.S. citizens access to their credit data one time per year. Annual Credit Report is one of the few places that allows access without the use of a credit card.
Once you have your reports from Experian, Equifax, and Transunion, make sure that all of the information is accurate. If you do find a mistake, you can send a dispute letter to the bureau with the inaccuracy. This letter should contain a copy of the report with the error circled. Your letter should clearly state why you feel that the information is not accurate. It should also include copies of documents that would prove your side of the case and help you show that it is indeed an error. Once this letter is sent, it can take around 30 days for the bureau to follow up with the company that filed the inaccurate information and make the proper corrections.
It is possible to get by with poor credit, but it can affect your life in many ways. Things like borrowing money, getting approved for low interest credit cards, and even being hired for a job can be affected by poor credit. It will also make your life more expensive with higher interest rates and insurance premiums. A bad score can be fixed with some work. It is even possible to recover from serious financial difficulties like bankruptcy. Some individuals have been able to achieve a good score after bankruptcy in as little as 2-3 years. In spite of the fact that it is stuck on your report for 7 to 10 years.
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{ 12 comments… read them below or add one }
Great tips. Understanding your credit score is important to saving money in the future as well. While young people are at a disadvantage because length of credit plays a role, it is important to start building up that credit as soon as possible.
I myself have suffered from a poor credit score and let me tell you it sucks. The good thing is that it isn’t permanent like you mentioned. I have been working hard at improving it the last few years and it has been getting better. Sure takes a while though.
That’s good to know. I haven’t had much problem with poor credit personally and hope I can avoid it.
One of my favorite stories was this man who had his identity stolen. An illegal alien used his social security number to obtain a line of credit. After discovering what was going on the man did nothing. The illegal alien was actually making all payments on time thus improving the victims credit score.
That sounds so risky. I would report the problem right away since the guy can screw up your credit at any time. If (s)he uses the SSC to work, it’s another matter. That’s free SSC contribution.
We should all aim to have good credit. However, I think good credit is only “essential for prosperity” if you choose to build your prosperity off of debt.
I think we all need good credit these days because even employers are using it. If you don’t have any debt, then your credit should be at least OK. I think it’s still smart to keep a credit card or two active and pay it off every month to help the credit rating.
My parents have long followed the Dave Ramsey model that you simply don’t need a credit score, since you should not accumulate any debt. This is an admirable goal, but I also think that for convenience it is important to have an excellent credit score to utilize credit wisely, to improve your wealth and assets.
I agree. Most small businesses need some kind of credit right? It would be great to not have any debt, but most of the time you need credit to run a business. Now that employers are looking at credit rating, it is even more important to have good credit.
I’m not too worried about my credit score because I don’t borrow money anymore. I think eventually my score will go down to zero. My businesses don’t use credit either but that does make it a lot harder to do business. I do check my credit report regularly though.
I never knew my credit score until we applied for the mortgage- I didn’t even know that if you check your credit score too often you’ll get dinged either.
Definitely lots to learn about credit scores!
Yeah, they want to know why you are checking your credit. Probably plan to borrow more, hahaha.
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