- HoneyHat

The benefits and pitfalls of credit history

Credit can be both a blessing and a curse. Good credit scores indicate that you make timely payments and don’t have any past-due debt. Bad credit means that you are behind on payments or have unpaid balances.

A low credit score can make it difficult to get loans using traditional methods. Credit invisible is considered risky because lenders will use your credit score as a way to assess whether you can repay the loan.

These are just a few ways credit can be helpful or detrimental to your everyday life.

Good credit

Credit cards approved quickly

A good credit score means you have a greater chance of getting approved for credit cards. A good credit score, when combined with a steady income and timely repayments of debt, significantly lowers the likelihood of creditors rejecting you.
Higher insurance premiums

A favorable credit score can lower your insurance risk score in some states. This means that applicants with good credit have a higher chance of receiving lower premiums than those with less.
Lower interest rates

Your credit score is often a direct factor in the interest rates you pay for borrowed money. A high credit score will usually allow you to qualify for the highest interest rates.

Bad Credit

It is difficult to rent or buy property

Poor credit scores indicate inability to make timely payments. Low credit scores can make it difficult to find affordable housing, whether you are looking to rent or buy property.
Higher mortgage fees

Low credit scores make it difficult to get a mortgage. However, if you are approved, the mortgage rate will likely be much higher to offset your default risk.
There are fewer career opportunities

Some jobs in financial services or management require a credit check as part of the screening process.

There are many ways to improve your credit score

Three national credit bureaus exist in the United States: Experian Equifax and TransUnion. They collect credit ratings from people and share them with financial institutions and lenders when necessary.

FICO Score is the most commonly used algorithm to determine credit score. Credit bureaus monitor the following methods that can help you improve your credit score over time.

Credit Cards

You can get a credit card with low credit even if you have poor credit. This card requires a deposit from the issuer and has low credit limits. It can help you build credit if you pay on time and the issuer reports to the credit bureaus.

Another way to increase your credit score is to become an authorized user of another card. This allows you to use the card under your name and the timely payments can increase your chances of getting a credit card.

Credit cards can help you improve your credit score and offer additional perks such as travel points or cash-back shopping. Make sure that the primary cardholder has a good credit score and pays their bills on time.

Multiple credit cards can balance your credit utilization ratio. However, you should not open them all at once. Your credit utilization ratio is how much you owe relative to the available credit.

Spreading charges across multiple cards, even if the ratio is lower than 10%, can help to keep the rate below 30%.

How can you make a personal budget?

Lending

Credit builder loans can be used by anyone, from credit novices to those with poor credit histories. The loan amount is placed on hold until it is paid off. This allows for savings and credit to be built, and it is low-risk for lenders.

It can be difficult to get approval for student loans, mortgages, auto loans, and other unsecured loans with poor credit. This can be overcome by having a cosigner with good credit. Lenders will look at the credit history of the other person instead of yours.

Building credit is often easier with loans because your monthly payments are usually the same each month and they can be automated. Diversifying your credit can help lenders get a better picture of your financial health.

You can diversify your borrowings by combining revolving credit accounts and installment loans. This will help lenders to see you as a more attractive prospect.

Learn more about student loans

Pay your bills

Your credit score is often affected by timely payments, but utility bills are not. Utility bills are not reported to credit bureaus, and they do not affect your credit history. However, they can end up in collections which could impact your credit score.

The 35% of your credit score that is tracked by credit bureaus is debt repayment. This includes loans, credit cards and other forms of borrowing. Because payment history is so important, missing even one payment can have a profound impact on your credit score.

Although it is ideal, you don’t have to pay the entire amount each month. The lender will not report you late if you pay the minimum amount. You can mark the date on your calendar, or use an app that reminds you to pay your bill on your computer or phone.

Building Credit Resources

Online resources can help you learn more about responsible credit creation and improve your financial health. These resources provide valuable information on consumer finance and money management.

Consumer Financial Protection Bureau – The CFPB regulates financial products and services to protect consumer interests and oversee them. This website contains educational resources about a range of financial topics such as understanding credit and saving for retirement.
Take Care America This non-profit financial counseling agency offers detailed information on credit building. Individuals interested in credit repair can also get free credit counseling from Take Charge America.
Consolidated Credit : Consolidated Credit is one of the oldest credit counseling agencies in the U.S. It offers financial literacy resources, including budgeting, saving money, managing debt, building credit, and other topics. The online form allows you to submit questions and it has a team of financial coaches who can answer your questions.
Credit.org : Credit.org is a financial education and debt relief platform. Credit.org provides free personal credit coaching and other useful tools for credit building and management.

What does it mean to build credit in accounting?

Accounting terms define credit as an increase in liability and decrease in assets or increase in revenue.

An accounting professional must be familiar with the following concepts: GAAP, equity, estate planning and accruals. Bookkeeping and bookkeeping are also important concepts.

Featured image: Worawee Meepian/iStock/Getty Images Plus

Building Credit was first published on Accounting.com.