People have been borrowing money since the beginning of time, or rather since the introduction of trade and later monetary means. It is difficult to say exactly when lending started demanding interest, but payday loans date back to 2,000 BCE and were mostly utilized by farmers. In ancient times, the borrowed cow was expected to be returned with the offspring and the grain – with part of the crop.
Today everyone relies on credit: private individuals, companies, institutions, and also countries. And even if you do not see the need to use lending opportunities, having adequate credit is vital. Buying a house, growing your business, or continuing education can all become challenging if your credit is less than good. Besides financial fitness, your credit can also determine your ability to rent a car, sign an apartment lease, or landing a job. What is credit, and why is it important to maintain an excellent score? Read on to find out.
What Exactly is Credit?
The banking system largely defines the concept of credit, and issued credit cards are controlled by the Department of Treasury. According to its regulations, by concluding a loan agreement, the bank undertakes to provide the borrower with a certain amount of funds for a specified period and purpose. The borrower can use this money while adhering to the terms of the contract. They are obliged to return the debt with interest and commission within the prescribed repayment timeframe.
The most important condition for the lender to grant a loan is your creditworthiness – the ability to settle your debt in a timely manner. In order to confirm your financial capacity, you, the borrower, must submit documents and information that will allow for the bank’s assessment. The creditor will use your credit history report – your financial resume – to make predictions about your ability to repay further financial obligations. If the bank decides that your creditworthiness is insufficient, you may be required to secure the loan, such as providing a blank promissory note or a pledge on goods, rights, or a mortgage.
What is Credit Scoring?
The credit score is an assessment of credibility in repayment of the loan applicant’s obligation and estimating the repayment probability. Your credit score is expressed on a numerical scale based on the information provided within your credit history report. The three-digit number typically ranges between 300 and 850, and the higher it gets, the better your chances at landing a loan. The calculation of your credit score takes into consideration your payment history, the current debt, and the length of your credit history. A higher score represents your ability to handle various types of credit, pay off your financial obligations within a specified period, or having generally good financial behaviors.
Here’s a typical breakdown of the credit score:
- 300-579 is a poor credit score that needs prompt help
- 580-669 – Fair, also needs a bit of boost
- 670-739 – Good, but there is room for improvement
- 740-799 – Very good, keep it up
- 800-850 – Excellent, you worked hard and long to build the perfect credit score
Different scoring models mean different ways of utilizing data to computerize your three-digit number. Some may use your income, while others do not. For those reasons, you have more than one credit score. Essentially, despite various scoring models, it will impact your credibility by providing vital information to car dealerships, bankers, and other lenders when offering you a loan’s terms.
Why Are Credit Scores So Important?
Why aim higher? Think about it this way: even if you receive a loan with a less than perfect credit score, chances are the terms offered by your creditor are equally less than perfect. You might end up paying twice as much compared to what you initially borrowed, which all relates to the interest rates. When you get better interest rates, you also reduce your monthly payments by a lot! Besides the obvious perks of a great credit score, it might be a lifesaver when times get tough and you find yourself in need of some serious money inflow.
What’s Affecting My Credit Score?
Your payment history is the major player, accounting for 35% of your overall credit score. Needless to say, missing a payment can hurt you by as much as 100 points! In addition, late payments may remain on your credit report for up to seven years! At Pyramid Credit Repair, our biggest priority is making sure you understand the financial behaviors that are impacting your creditworthiness so we can quickly and efficiently work on correcting the damage.
Although making only minimum payments each month does not affect your credit score per se, the credit utilization ratio does. You might be wondering what’s the connection between the two. The credit utilization ratio is the total revolving credit contra the current balance. The lower the ratio, the higher your score! Paying the minimum amount towards your balance each month results in increased debt and credit utilization ratio, which can potentially cause a drop in your credit score. The substantial debt indicates a risk for a prospective new lender, who would prefer to see better credit management before agreeing to lend you money. Whenever possible, try to contribute a little more than your minimum so you can quickly get rid of accumulated debt, avoid paying interest rates, lower your credit utilization, and, consequently, boost your credit score. A good and often implemented approach is to create a micropayment system, where you make smaller but more frequent payments throughout the month.
Can I Hire a Company To Help Me Raise My Credit Score?
Yes! In fact, that is quite common among individuals who have no time and lack patience in dealing with creditors, drafting numerous dispute letters, or possess limited knowledge of the industry. And make no mistake, credit is a highly complex industry. Reputable companies that help you improve your creditworthiness work hard to establish the damage pattern, investigate your credit history report for inaccuracies that are then formally disputed, and follow up every step of the way. You can sleep better knowing your financial affairs are in the right hands.