Good credit, bad credit, credit scores, credit reports…in the consumer world, it can all be a bit confusing. In the financial world, the idea of credit pretty much drives all the decisions a financial institution makes about a person.
Credit: What Is It?
According to mortgage loan officer Todd Hummel, mortgage loan officer, NMLS ID 747940, Fleetwood Bank, when talking about “credit,” what is usually being discussed is a person’s credit history, including the compilation of how that person borrowed from others, the promises made to repay what was borrowed, and the repayment – how that person kept those promises, for better or worse.
The record of that history is contained in a person’s credit report, Todd explains. There are three major credit bureaus – Equifax, Experian and TransUnion – that produce these reports, and lenders use all three.
“Each bureau has a mathematical formula that boils that history down into a 3-digit score: the credit score,” he says.
But why does it even matter?
Uses for Good Credit
The primary reason for a good credit history is that this history typically gives someone advance purchasing power for something like goods or services that they haven’t been able to save the money to buy outright, such as a house or a car.
Todd says other uses include acquiring goods or services that cannot be bought, such as renting an apartment or obtaining insurance.
“Yet another, often overlooked, reason for good credit is often to even get an offer of employment,” he adds. “Since a good credit history is often considered a measure of one’s character, there are employers who require (or are required by law) that their employees have a good credit history to be hired or to maintain employment.”
Benefits of Good Credit
While it goes without saying that having good credit would be beneficial in many ways, just being able to buy something large, like a home or a car, makes a big difference in people’s lives.
A person is often able to get lower rates and more favorable terms with good credit, Todd says. This might include lower interest rates on a loan or credit card, or even better insurance offers.
Credit Factors: Good and Bad
While having good credit is the goal in doing well in the financial world, sometimes good credit eludes us.
Some examples of what may negatively impact a person’s credit score are: missed monthly payments, collections – even medical collections, and high credit card balances.
“Think of the credit score as an ‘I can handle my debt’ score,” Todd says. “If one can have the availability to instantly borrow but not take full advantage of that, it shows that one can handle debt well.”
Conversely, if one uses up all, or most, of that available credit, it sends up warning flags to other lenders that trouble may be on the horizon. As a rule of thumb, Todd recommends to never use up more than 20 percent of your available credit limit.
“If you go over 20 percent, you can expect to see your credit score go down,” he says.
On the flipside, two examples of what may positively affect a person’s credit are: consistent on-time payments and keeping credit card balances to less than 10 percent of the credit limit.
Ways to Improve Credit
Todd says to make sure everything is current, and never, ever, miss a payment.
“Just remember that what’s done in the past is the past,” he continues. “Make sure it’s made right and go on from where you are. Credit is not necessarily pass/fail, rather think of it as a grade that can improve over time.”
And reducing credit card balances to less than 10 percent of the card’s available balance often has a huge positive impact on improving a person’s credit history.
