If you are in debt, there is no doubt that you have received some kind of notification about the state of your credit score. For some people, this notification can serve as a wakeup call about their financial health, especially if they are not accustomed to reviewing their credit reports on a regular basis. While your credit report is not something you have to monitor every day, checking in on it every few weeks can significantly help your financial situation overall.
Understand Your Credit History
Your credit report affects the terms of every loan and credit card for which you apply, and your history of successfully paying off loans, negotiating settlements, and taking out new loans makes up a significant portion of this report. When you take the time and focus on reviewing your credit reports every few weeks, you may get a better understanding of what companies you have accounts with, what your spending limits are, and how much you currently owe. You can also see how many payments you have made in the past and for what amounts so that you can adjust your payments in the future and perhaps put more than the minimum payment on your highest credit cards or loans to pay them off faster.
See How Little Changes Can Add Up Over Time
To really reach a point where you are understanding your credit reports, you have to understand how every little financial decision you make impacts your situation as a whole. Regularly reviewing your spending habits can help you see exactly how making monthly minimum payments impacts your score versus paying off the balance in full each month, how opening a new credit card impacts your score versus sticking with the few you already have, and even how neglecting outstanding balances over time shows up on your credit report.
By learning the cause and effect relationship between all of your financial actions and your credit score, you can find out exactly what you need to do to avoid overwhelming debt and create the financial future you’ve always dreamed of.
Detect Problems Before They Get Worse
One of the biggest benefits of regularly reviewing your credit reports is that you are able to see any potential issues before they have the chance to get worse. Credit reports regularly update and include information about every single one of your credit accounts, so you can stay on top of all your financial obligations in one place. In fact, the report is kind of a one-stop-shop for all of your personal financial questions and goals. If you look at your report through an app for your credit card or another lender, it may even tell you exactly what to work on to improve your score.
Another great benefit that many people do not realize at first is that your credit report shows you when people inquire about your credit score. When potential lenders complete “hard checks,” they are taking a thorough look at your credit report. Too many of these hard checks a year can actually lower your score, which is why monitoring the number is so important. When people have their personal information stolen, however, they may find that they suddenly receive multiple hard checks from companies they have never even applied to borrow from. If this or any other issue appears on your report, you can usually call the specific creditors with the issues and have them resolved so your credit score can be fixed as quickly as possible.
Determine Smaller, More Achievable Goals
While understanding exactly what goes into your credit report is an essential part of your finances, that is only part of the process. Your report serves as a base for you to build upon. By actively reviewing it, you will begin to notice what your current situation is like, find out exactly what changes will benefit your situation over time, and watch in real time as your credit report improves. Let’s say that, upon the first few glances of your report, for example, you notice that you have opened several new accounts within the past year and that you have a history of paying your bills late every month. You can make it a goal to seek out fewer lines of credit and to negotiate with your creditors to determine a payment due date that fits your paycheck schedule.
It is easy to say you want to increase your credit score, but the only way to do so is by making changes that count. Finding the little things within your report that are making a huge impact on your financial situation is always the way to go so that you can set up a future that works with you, not against you, and that you can continue to learn and grow from.
If your debt has gotten out of control, you do have options. Liberty Debt Relief is here to help. We excel at saving people money by getting them out of debt through settlement. Contact us to find out exactly where we can help.
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Whether you are applying for a new house or apartment, a loan at the bank or a department store credit card, one of the first things a creditor will ask for is your credit score. For many people, understanding credit scores can seem pretty daunting, especially when they do not know how the scoring system works or why it is so important. Luckily, the financial system behind it all is not that complicated, and Liberty Debt Relief is here to help you navigate your score.
What is a Credit Score, Exactly?
To really get a grasp on how important credit is as a whole, it is first important to understand what a credit score actually is. Essentially, a credit score is a simple indicator of your financial reliability used by potential lenders. The score considers five primary factors: Your payment history, credit length, credit utilization, new credit accounts, and the breakdown of your types of credit. Each category has a different weight on your score, which will be broken down below, and is provided on a scale of 300 to 850, the latter being the best score possible.
The better your score, the better financial deals you will get in regards to loan amounts and interest rates. It is important to note that, when you request a new loan or card from a lender, they may complete a hard check of your credit report before granting you a line of credit or loan. Each of these checks goes on your report and too many within a 12-month period can actually lower your score. That’s why it’s important to carefully determine whether or not you need the new loan or card or if you just want it.
Your Payment History
When considering how a credit score is calculated, your payment history takes the lead. Accounting for 35 percent of the total score, your payment history is comprised of various information, including past bankruptcies, settlements, liens and delinquencies, the amount of money you still owe on accounts, and how often you make payments on time versus late, among others.
For FICO — the company that most lenders rely on for tabulating creditworthiness — your history of paying back debts is a large indicator of how well you will handle similar situations in the future. Any and all types of financial loans, including but not limited to mortgages, student loans, credit cards, and personal loans from the prior 10 years, will be included within this subscore. To increase this part of your credit score, make your payments in full and on time and work to make sure you pay off outstanding balances as quickly as possible.
How Long Your Credit History Is
Knowing how long you have held each of your accounts is a vital part of understanding your credit score because the length of your credit history makes up 15 percent of your total score. Generally speaking, people who have held accounts with lenders the longest also have higher credit scores. This is because they have had more time to pay off outstanding debt, remain reliable consumers, and overall gain more financial experience.
For this part of your score, FICO looks at your overall credit history to find out the age of it in its entirety, the age of your newest line of credit, and the average length of all your credit accounts that you have currently and in the past. They also look at how often you use existing accounts.
How you Utilize Your Credit
When most people think of how a credit score is calculated, they automatically think of their purchases. Credit utilization actually accounts for 30 percent of your total score. It essentially tells borrowers how much money you have borrowed and how frequently you borrow it. This category demonstrates to potential lenders how risky you are for their business, and it is why you should typically keep what you owe under 50 percent of your available credit.
For example, people who max out their credit cards every month may suffer from a lower credit score because constantly exhausting funds gives the impression that you cannot afford your lifestyle with your income as it is. Using $2,990 of your $3,000 credit card limit one month, however, does not necessarily mean your credit score will automatically drop, but doing so month after month with no attempts to pay off the outstanding balance may.
New Forms of Credit
An important note to understand about your credit score is that not every financial move has such a heavy effect. New credit, for instance, makes up just 10 percent of your total score. When looking at your credit report, one of the things lenders look for is your most recent financial additions. They want to see any new financial loans you have taken on, how much they are for, and how close together you opened them.
Someone who has recently opened two new credit cards, one personal loan, and one department store card may come off as much riskier than someone who has only opened one additional account in the past two years. This is because a sudden burst in credit accounts gives the impression that you were in dire needs of funds, which can be a red flag. Lenders are more likely to work with people who only borrow money as needed, rather than as wanted.
The Kinds of Credit You Have in Your Portfolio
The other small fraction of how a credit score is calculated is the portfolio diversity itself. FICO designates 10 percent of your credit score to the types of financial lines you have established over the years. While having one of every single kind of financial account in the world is not necessary, having a healthy mix of loans, credit cards, and department store accounts can help you demonstrate that you are reliable on all points of the spectrum. It also makes you seem more desirable to all kinds of financial lenders that you may want to work with in the future.
Get Back on Track with a Settlement
Thoroughly understanding and seeking to improve your credit can be challenging for many people in difficult financial situations. Contact debt consultants at Liberty Debt Relief today to find out what your specific credit report means for your future and how you can improve your score in the most efficient way possible.
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