Understanding Credit

Understanding Credit

Published: March, 2020

They say your past follows you wherever you go, and this is especially true in financial matters. Your credit history is a measure of how financially responsible you have been. The good news: there is always something you can do to improve your standing.

Why pay attention to your credit history and score? Here's the easy answer: Your history and your three-digit number can determine whether you get a loan, an apartment lease, an insurance policy, certain jobs, and more.

What is a credit report?

A credit report is a record of your credit payment history. It includes:

  • Identifying Information: Examples include name, date of birth, and address.
  • Account history: Examples include account issuer, date opened, credit limit, balance, and payment history.
  • Public records: Examples include bankruptcy records, tax liens, and overdue child support payments (in some states).
  • Inquiries: Inquiries are a record of businesses/lenders that have reviewed your credit history. They remain on your credit report for two years.

Many lenders use your credit report as a resource when deciding to lend you money. In many cases, it is also pulled by businesses when making decisions about offering you employment, accepting your rental agreement, deciding insurance rates, and much more. In addition, it is important to note that your credit score is not included in your credit report. It can be purchased for an additional cost.

You can pull your credit report by using the Internet. You can purchase your credit report at any time by visiting one of the three major credit bureaus - Equifax, TransUnion and Experian. Note that the Fair and Accurate Credit Transaction Act allows you to pull your credit report for free once a year by visiting the website of one of the three major credit bureaus. This means you can pull your report every four months at no cost.

For example:

Julie has learned that she should keep a close eye on her credit report. She knows she can pull her reports from each of the credit bureaus one time per year. She decides to pull her report from Equifax in January, pull it from TransUnion in May, and pull it from Experian in September. From this, Julie is able to view her credit report three times during the year.

When pulling your report, be prepared to give your full name, current and previous addresses, Social Security number, and date of birth.

What is a credit score?

A credit score is a number that reflects the likelihood of you paying back any debt that you owe. Debt can be a variety of things including credit card debt, car and home loans, and even student loans. Your credit score is calculated from your credit history and how you manage your current debt. Lenders reference your credit score to make more efficient decisions on granting credit.

A FICO (Fair Isaac Corporation) score is the best known credit score, and many consider it to be the most accurate. However, there are also three major credit bureaus including Equifax, TransUnion and Experian that calculate and report credit scores. Though each company calculates the score a little differently, on average the range of scores is as follows:

  • Excellent: 900 – 720 (900 is the highest score on average)
  • Good: 719 – 660
  • Fair: 659 – 620
  • Poor/Bad: Under 619 (300 is the lowest score on average)

It is important to note that your credit score is not included in your credit report. It can be purchased for an additional cost.

How do I establish credit?

If you are financially responsible, consider establishing credit while you are young – such as during your 20s. Since the length of your credit history is considered when calculating your credit score, it is important to establish credit as soon as possible. An easy way to start establishing credit is by applying for a credit card.

How do I keep my credit in good standing?

1. Make all monthly payments.Missed payments have the most significant impact on your credit score and should be avoided. Typically, payment history is nearly 35% of your credit score. Many people understand that making payments on time should be a top priority, but they find themselves over extended and unable to make their monthly payments.

Ways to Get on the Path of Not Missing Payments:

  • Create a monthly budget.
  • Avoid making unnecessary purchases.
  • Contact your credit card company and inquire about decreasing your monthly payment.
  • Make the minimum payment. (This is better than missing the payment entirely!)

2. Make all payments on time. Late payments can lower your credit score. Many individuals are able to make the payment but forget to make the payment before the due date.

To Avoid Making Late Payments:

  • Set a monthly reminder.
  • Ask credit card companies and/or banks if they have a monthly reminder email service.
  • Streamline all your monthly bills in order to make it easy to remember.

3. Keep a close eye on your credit report.Make sure there are no errors on your report. Errors have the ability to lower your credit score. If you uncover an error, a dispute should be filed with the credit bureau in order to fix the problem. The dispute should be a written report that includes detailed information and supportive material outlining why there is an error. The credit bureau has 30 days to investigate and correct the problem if they agree it is inaccurate.

4. Avoid closing old lines of credit. Many people believe that in order to improve their credit they should close old or unused lines of credit. In actuality, old lines of credit have the potential to improve your credit score. When lenders view a credit report, they observe the amount of credit the borrower has available and the amount of credit used. This is called the debt-to-available credit ratio. Ultimately, lenders want to see that you have a high amount of credit available but you only use a small portion of it. For example, a borrower might have a line of credit worth $25,000 but only uses $5,000. This would be a debt-to-credit ratio of 20%. Closing an old line of credit decreases the amount of credit available and erases potential good history from the credit report. It is important to know that you should use old lines of credit occasionally and pay it off fully. This helps eliminate the risk that a card issuer will close the account or decrease the line of credit if not used.

Debt / Available Credit = Debt-to-Available Credit Ratio
Debt = $5,000, Available Credit = $25,000
$5,000/$25,000 =.20 x 100 = 20%
(Multiply by 100 to get the ratio in percentage form.)

5. Increase your line of credit cautiously.The lower the debt-to-available credit ratio, the more of a positive impact on your credit score. For example, a borrower might have a line of credit worth $25,000 but only uses $5,000. This would be a debt-to-credit ratio of 20%. You should strive to keep this ratio near 50%, but having it lower than 35% is even better. One way to improve this ratio is by contacting your credit line issuers and inquiring about increasing your line of credit. But beware! Do not do this if this increase in available credit will tempt you to spend more. Also, ask if the request will require them to pull your credit report. If it does, you may want to decline the request since having several creditor inquiries on your credit report can have a negative impact on your score

6. Open new credit lines wisely.A credit line is a new credit card, loan, or any other type of borrowing. New credit lines account for about 10% of how your credit score is calculated and are highly monitored by credit issuers and lenders. Opening many accounts in a small time frame has the potential to lower your score. New lines of credit should be opened wisely – think through the decision and the alternatives first.

7. Savings equals security. Missing your monthly credit card payment has a significant impact on your credit score. One way to insure that you always have the funds to make your monthly payment is to save. Setting aside money every month allows you to create an emergency fund in case any unexpected event occurs.

8. Low balances are important.A credit card balance is the amount of money that is owed to the credit card company. Lenders want to see a low credit card balance after each monthly payment. It is best to fully pay off your credit card balance each month. But if this is not possible, pay as much as you can afford to lower the monthly balance. Try to at least pay more than the minimum payment.

For example: Ben receives his monthly credit card payment. He notices that he has a $1,000 balance on his card, meaning he owes the credit company $1,000. Ben cannot afford to pay the full $1,000, but he knows he can afford to pay more than just the $50 minimum payment. Ben decides to pay $100, which lowers his credit card balance to $900. In the example, the lender finds Ben’s decision to pay $100 versus just the $50 minimum payment favorable because his decision resulted in a lower ending balance for that month. Obtaining a low monthly credit card balance is especially important when applying for a mortgage loan. Here are some ways to help you keep a low monthly credit card balance.

Make it a Priority to Pay Down Debt:

  • Avoid making unnecessary large purchases.
  • Keep card usage low.
  • Make a budget and stick to it.

9. Beware of credit-repair scams.Look out for advertisements or catchy words that grab your attention and give you the hope of being able to quickly improve your credit.

The Red Flags of a Credit-Report Scam: The company makes you pay for the credit service before the service has been performed. Under the Credit Repair Organization Act, a company cannot legally require you to pay until the service is completed.

  • The company does not communicate the steps you can personally take to improve your credit.
  • The company suggests that you do not contact the three major credit bureaus.
  • The company recommends that you create a new credit identity. Creating a new credit identity is illegal and may have severe legal consequences.
  • The company suggests that you dispute all credit report information, not taking into account the accuracy or timeliness of the entries.

10. Take advantage of other resources. Consider visiting the three major credit bureaus’ websites - Equifax, TransUnion and Experian -and visiting www.myFICO.com. In addition, many financial resources such as blogs and articles are available online. Please take caution when reading to make sure the information presented is from a reliable and accurate source.

Information presented in the Financial Advice website is provided for educational purposes only and is not related to Ameris Bank's actual products or services. Ameris Bank makes no representations as to the accuracy, completeness or specific suitability of any information presented. Information provided should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. Ameris Bank recommends you consult a professional for any specific guidance you are seeking.