Do you understand your credit profile? If you want to be more responsible with how you manage your finances, you have to make sure that you understand this. Most people will just look at their income VS expenses, and their savings VS spending habits. This is not enough. You need to monitor your credit report as well.
Why? Because apparently, a lot of people are still unaware of their credit standing. In 2019, a survey was conducted and it revealed that 23% of Millennials don’t know what their credit score is.
Ignoring your credit score is one of the most common financial mistakes that you will make. You have to always be aware of your credit records. The primary reason is to help ensure that your finances are in good condition. This record will help you check if you are going overboard when it comes to the use of credit.
But beyond that, you also need to check your credit profile every now and then to make sure you are not a victim of identity theft. You need to constantly monitor your credit report to check if there are entries there that you do not recognize. Because it’s either the creditors or lenders made a mistake or your information was compromised somewhere. Someone has your information and they are using it to open credit accounts. And since that is in your name, you will be left to pay for it.
There are other reasons why you need to be cautious of your credit profile. So it’s best for you to really get to know this profile better so you can manage your finances better.
Factors that can impact your credit profile
If you really want to understand your credit record, you need to know the factors that can affect it. These effects will manifest in your credit score. These scores measure the credit risk of a borrower. The higher the score, the more you are considered a low-risk borrower.
So the goal is to make sure you have a high credit score. There are a lot of credit score models – the most popular is the FICO score. But most of them refer to the same factors to calculate credit scores.
This is the one that usually has the highest influence on your credit profile. It’s not surprising since it’s important for creditors and lenders that you pay them back. So if you have a payment history of not paying your dues on time or you don’t meet the minimum payment reorder, that will reflect badly on your credit score. Any delinquent account will bring your credit score down.
To make sure this will have a positive effect on your finances, you have to stick to the terms of your repayment. Pay your dues on time and make sure it’s at least the minimum required amount.
Credit utilization ratio
Another factor that will affect your credit profile is your credit utilization ratio. This is the relationship between your credit limit and the balance that you still have to pay off. The closer the values between the two, the higher the credit utilization ratio. That means a limit of $10,000 and a balance of $5,000 makes your ratio 50%. The more you borrow, the higher the balance. It will make this figure increase. When that happens, it will have a more negative effect on your credit score.
To improve your credit utilization ratio, you need to keep it low. The ideal ratio is 30%. So with the example credit limit provided, your balance should never go beyond $3,000. Unless you have paid it off, do not borrow more.
Length of your credit history
The longer the credit history, the more positive the influence will be. That means you should keep longer credit accounts to keep your credit score high. Let’s assume that you have 3 credit cards, A (7 years), B (5 years), and C (2 years). Your credit history started with your first use of credit. That means you already have 7 years worth of credit history. If you close credit card A, your credit history will only be 5 years. That will affect your credit score negatively – although it won’t be as much as the first two.
This refers to the type of debts that you owe. If you have 3 credit cards, that is just equivalent to revolving debts. You need to borrow a non-revolving debt and make sure it shows on your credit history. Variety is good for your credit score. So having both credit card debt and a mortgage is good – as long as you can meet your monthly payment obligations.
Credit card applications
Opening too many credit accounts one after another is not a good idea. You will have a hard time managing credit properly. But it will also have a negative effect on your credit score. Every time you apply for a new loan or credit account, the creditor will make a hard inquiry on your credit profile. One is usually okay. But if you have several hard inquiries, this will have a negative effect on your credit score. So make sure you schedule it properly. Otherwise, it will reflect badly on your credit profile.
Importance of a credit profile
Whether you like to use credit or not, it doesn’t matter. Society has made your credit profile an important requirement.
It’s a good thing that in 2019, consumers have hit a record high when it came to the average credit score – 703. But with the things happening around us, there’s a high chance that this record will go down. So to motivate you to take care of your credit score, here are three specific areas that will require you to have a good credit reputation.
Approval of new credit
This is probably the most obvious one. Your credit score is a measurement of your risk as a borrower. Naturally, creditors and lenders will use this to determine if they will approve your credit application or not. Most likely, a high credit score will lead to loan approval. Not only that, but you will also benefit from low-interest rates and more flexible terms.
Can affect where you live
Your credit profile will also affect where you live. There are landlords that are very particular with the credit records of their tenants. A bad credit score could mean a person has trouble managing their debts and finances. They wouldn’t want to have to deal with a tenant that may not pay their rent. So this is something that you should also consider when you are monitoring your credit score.
Credit checks for employment
Finally, some employers will look at your credit profile before they hire you. While there is a law that prohibits employers from discriminating based on the credit score alone, employers will still consider this. So if you really want to put your best foot forward, make sure you take care of your credit reputation.