Credit 101: The Rest of the Story…

On June 23, I posted the first half of an entry on personal credit and credit scores.  Here is the second half of that entry.


Never take your personal credit for granted.  Even if you pay your bills on time or don’t borrow money, it is in your best interest to keep track of your credit report to make sure you don’t get surprised by identity thieves or by incorrectly reported information.  The sooner you identify issues, the sooner they can be fixed.

Only hard inquiries affect your credit score.  There are two types of inquiries of your credit report.  Hard inquiries are credit searches completed when you apply for a loan.  Soft inquiries include things like pre-screened offers by credit card companies and inquiries by you, the consumer.  In other words, monitoring your own credit will not hurt your credit score.

Payments on a home or business loan can be significantly affected by your credit score.  For example, First National Bank of Pandora offers a 30 year fixed rate home loan.  The best posted rate today was 4.625%.  Depending on your personal credit score and several other factors, the rate may be higher than this best rate.  For the sake of comparison, imagine a $100,000 loan for 30 years at 4.625% and an identical loan at 6.00%.  Over 30 years you could save approximately $30,748 if your credit score justifies the lower rate. 

Quantity in your credit history is not as important as quality.  You do not need to have a lot of credit to build a good credit score.  Managing the credit you have—regardless of quantity—will eventually lead to good credit.

Research your options before you commit to a banking product or service.  Advertised rates and promotions at financial institutions often target customers with the highest credit scores.  If your credit score needs improvement, make sure you are getting a rate and terms you can live with.  This is where knowing and trusting your banker makes all the difference.  If you know who you’re dealing with and can trust him or her, you should be able to count on getting a quality product at a competitive and fair price.

Stay away from unfamiliar companies that over promise and advertise deals that are too good to be true.  Just like many other industries, if a deal sounds too good to be true, it probably is.

Time heals all wounds.  Even though information may remain on your credit report for a significant period of time (up to 7-10 years depending on the type of account), negative information will not permanently hurt your credit score.  The more time that passes from a negative event or late payment, the smaller the impact on your credit score.  Even a bankruptcy or a tax lien will disappear after a certain number of years.  The key is to keeping making progress and avoid repeating mistakes made in the past.

Understand that banks are not the only companies that use credit scores and your credit history to evaluate you.  Insurance companies use an insurance bureau score based on information found in your credit report to help them determine your risk as an insured.  Many employers also use credit reports and credit data to identify red flags for potential employees.

Verify that the debts you do have are showing up on your credit report.  There are companies that make loans that do not report to the credit bureaus.  In this case, even if you borrow money and make payments on time you will not get credit for it.  If you’re trying to build or rebuild your credit, make sure your credit report is accurately reflecting the progress you’re making.

Watch your due dates.  Late payments will not show up on your credit report until your account is 30 days past due.  However, if you are past due at all, a creditor may charge a late fee, increase your rate, or assess some other sort of penalty.  Make sure you understand the terms of each of your debts.

eXpect (sorry, this was the best I could do) to make loan payments if you co-sign a loan for someone.  Banks will often lend money to borrowers who may not fit normal lending guidelines as long as a qualified co-signer also agrees to be obligated on the loan.  Not only will the bank expect you to make payments if the primary borrowers falls behind, but the late payments will also show up on your credit report as a missed payment by you.

Young people should start to think about credit before they need to use it.  It is never too early to start learning about credit.  If young people understand the ins and outs of credit before they need a loan, it will be much easier to make smart decisions and build good credit once a loan becomes necessary.

Zeroes on a credit report are almost always a positive sign.  It either means you have paid a loan off or you have a $0 balance on a credit card or line of credit.  In any case, aiming for Zero is not a bad strategy in the world of managing your credit and improving your credit score.

Hopefully, these two entries on credit have been informative and at least a little entertaining.  Feel free to respond or comment with any questions you may have. 



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