The short answer is—more than you think! Read on to find out the many factors that can have a positive or negative effect on your credit.
The most important thing you can do to improve your credit score
FACT: Your payment record accounts for 35% of your credit score.
FACT: Most credit card issuers raise interest rates when a consumer pays late.
FACT: The late fee for many credit cards is up to a whopping $49.
The most important thing you can do to improve your credit score is to pay all of your bills on time. This is the factor that bears the most weight on your credit rating. If your credit has been negatively affected by late payments, you need to reverse the situation by making every payment on time going forward. Got a bad memory? If you’ve been late with payments in the past, know this: almost every creditor—including utility companies, phone companies, and insurance companies—has a Web site where you can view your account, sign up for free e-mail reminders that your payment due date is approaching, and pay your bill—even on the day it’s due (generally for a fee, which is better than being late).
Why good credit is so crucial to your financial well-being
Your credit is connected to so many parts of your life. For example, when you lease an apartment, apply for a job, are considered for a promotion, deal with utility companies, shop for insurance rates, or apply for new credit, your credit is often evaluated as part of these processes. The better your credit, the better off you’ll be when potential employers, companies and financial institutions are making their decisions.
The four C’s of credit: creditworthiness, collateral, capacity and capital
Lenders focus on four general areas when evaluating credit application. We call them “The four C’s of credit.”
Creditworthiness: Creditors and other lenders use a combination of qualities to determine your degree of creditworthiness. These include owning your own home, living in your home for several years (even if you are renting), having only a few credit cards that are always paid on time, having a low debt-to-income ratio, not having recently applied for other credit, not being at the limit on other credit cards, and having no liens on your home or bankruptcy filings.
Collateral: this is the property you own and pledge to secure the repayment of a loan. It doesn’t affect your credit score, but it is important for that particular loan. If you don’t repay the loan as agreed, the creditor can seize your property. Loans secured with collateral are known as secured loans. Loans and other credit that do not require the pledge of collateral are called unsecured credit.
Capacity: Capacity refers to the income that you have available to make repayment. Indications of strong financial capacity include holding the same job for several years, having a steady income, and having few other debt payments.
Capital: Capital is a measure of your financial net worth. Questions about assets (like home ownership, savings accounts) and liabilities (like credit limits and balances due on present credit accounts) reveal whether your net worth is sufficient to warrant the granting of credit.
Visit www.inCharge.org for more information.
