WHAT IS CREDIT?
Many young Americans are not taught about credit. We get a credit card in college and go on a spending spree, take out that student loan, and car note. This is called debt and will affect your credit score overall. But overall it depends on the person; if they’re smart with their money and pay their bills on time, it will help. But if they are money spenders, don’t have a plan before taking out a loan or getting a credit card, it will affect you in the future when you want to buy that house.
Credit is your life, it’s your number. Some people take their credit serious, while many of us young Americans don't. A credit score in the United States is a number representing the creditworthiness of a person, basically what are the odds that person will pay their debt or not.
Credit is broken in a FICO (Fair Isaac Corporation) score; this is what banks and other institutions use to make lending decisions. The higher you FICO score the better the interest rate and higher the loan amount. A FICO score is ranged between 300 and 850. The median score for 2012 is 664.
Here is a graph on how each state is doing as of November 30, 2012
HOW IS YOUR SCORE ASSESSED?
-30% Credit utilization (DEBT) - This is the ratio of your current revolving debt, installment debt and open debt revolving debt is when the creditor allows you to pay a minimum balance, you as the borrower have the option to pay the minimum or pay it in full. If you pay the minimum you will have a revolving account. Installment debt is when you have a fixed payment for a fixed period of time. An auto loan is a good example as you’re usually making the same payments for 36, 48, or 60 months. An open debt is the least common type of debt. This is the type of debt that must be paid in full after every month. The American Green Express card is a good example.
-15% Length of credit history- The longer you maintain a good revolving account the more positive it impacts your credit score.
-10% Types of credit (Account diversity) - Do you have an installment, revolving, mortgage, or consumer finance (alternate way of getting credit i.e. Payday loans, rent to own loans, and car title loans).
-10% The search of new credit- A hard credit inquiry, which is when someone applies for credit cards, mortgage, auto loans, and personal loans all at the same time, can affect your credit. It can drop your score by up to five points per inquiry. Each inquiry is recorded in your personal credit report for two years but the effect decreases at the six month or one year mark.
A SOFT INQUIRY
1. When a consumer wants to check their own report
2. Employer screening inquiries
3. Insurance related inquiries
4. Utility related inquiries
THREE CREDIT BUREAUS
A credit bureau or consumer reporting agency is a company that collects various information; once all the information is collected it provides a consumer credit information or a credit report. Every country has its own credit bureau, and they do not report amongst each other. So if you have a perfect credit score in Canada and migrate to the United States and try to apply for credit, you will get denied for lack of credit history.
In the United States the Three major bureaus are Experian (FICO or FICO II), Equifax (BEACON), and Transunion (EMPRICA). You will never have the same score with all three bureaus. They all do the same gather information to ultimately create your credit score, but each bureau works with different regions making them more dominant in certain areas.
ONE THING YOU SHOULD KNOW
In the United States you are allowed to check your credit history once a year. The Fair Credit Reporting Act and its amendments require that any national credit reporting agency provide a free copy of a credit report for any consumer who requests it. A good website I recommend is www.anualcreditreport.com, if you own an IPhone I recommend a great app that I use all the time and it’s called Credit Karma(CREDIT KARMA APP DOWNLOAD)