Know What Affects Your Credit Score

What Affects Your Credit

Now we get to how what you do, will affect your credit score. This is big, because knowing how your credit score will be affected will save you from making the mistakes that will lead to bad credit.

There are several things that can affect your credit rating, and all of them will move your credit up or down, by larger or smaller margins, and it is up to you to know how to use them to your advantage and prevent certain things from becoming a disadvantage to you. This article is meant to provide an overview of what can affect your credit; most of these will be delved into more detail along the way.

Paying Bills

This may be one of the easiest things you can do and one of the hardest it seems for people to follow. When you do not pay your bills, you begin to suffer problems on your credit score after the first 30-day missed payment.

When your bill becomes one, two, or even three months overdue, your credit score can fall as much as 50 to 100 points. That means if you had great credit of 700, your score could fall by 100 points to 600 within about half a year. That is not a good situation to be in, and you have to make sure you will be working hard to get that paid off.

You may think that how much you owe on the bill will affect your credit score more or less, and this is true. If you owe more on a bill, your credit score will be greatly affected, more so than if you owe less.

This shows that you need to keep all your bills up to date as much as you can. If you cannot pay all of your bill, then at least make a minimum payment on it so that you do not incur more penalties.

If your bill goes to a collection agency, then you are going to be struggling even more to get it paid off. You may have a lot of trouble getting things set right and your credit score is going to fall even more as a result.

Once you do pay off your bills, however many are outstanding, then you need to wait a few months at least and continue to make regular, on-time payments before your score will start to improve.

Applying For Credit

Many people do not even realize that every time they go for credit, it affects their credit score. The more you go for credit, the worse your score will get, because it will look as if you are a compulsive borrower. Lenders do not want to give money to someone who borrows a lot of money, because it will seem to them that you borrow for the sake of borrowing, and the more money you borrow, the more your debt to income ratio is going to increase.

It will not cause your credit score to go down a lot, but it will go down enough that it is going to raise a red flag for creditors who are thinking of lending to you. The worst is if you keep applying and getting refused. So, if a creditor can see that you have gone to four car dealerships in an attempt to buy a car, they are probably not going to lend to you, and your credit is going to suffer.

The best thing that you can do is to check your credit with a credit report from Equifax before you ever think about trying to get credit. This means that you will be able to know what your credit is before you apply for it, and that will keep you from getting knocks on your credit score report.

Credit Cards

Everyone seems to have credit cards, but most consider them to be something that is not so good. The reason for this is because credit cards seem to be at the forefront of personal debt. Many feel that they can simply pay later for what they want now, and this pushing away of the bill until later causes problems even further down the road.

Paying your credit cards on time and having the right amount of credit cards will help keep your credit in check and keep you from getting out of control in your debt spiral.

Foreclosure

This can significantly affect your credit score because when you go through foreclosure, your credit can fall by as much as 200 points. Therefore, if you have good credit of 650, you will suddenly have horrible credit of 450. As well, foreclosures will stay on your credit report for seven to 10 years. This means that getting a home in that time period is going to be near impossible for you as a result.

Bankruptcy

If there is anything that can be equated as the nuclear bomb of the credit score, it is bankruptcy. When you go through bankruptcy, all of your debt is wiped clean. However that comes at a very big price. For about seven years, you cannot have any credit, and the bankruptcy will stay on your credit report for as much as 12 years. On top of that, your credit score can fall as much as 250 points. When you go through bankruptcy, you can rebuild your credit, but it takes a long time to make your way back up. Too many people see bankruptcy as the quick-all solution to problems with credit. This is not the case at all. It can have disastrous consequences, and should only be used if there are no other options.

Credit Cards

Credit cards are used by millions of people across the country every single day. They buy lunches, dinners, toys and flowers. For many, they simply cannot live their lives without them, but that dependency leads to problems.

Before moving into how credit cards can affect your credit, and how knowing how to handle credit cards can improve your credit, let's look at some facts and figures from the past few years of credit cards.

First, there are several credit card issuers, but the top 10 credit card issuers control about 88 percent of the total credit card market. Of those, Bank of America is the largest of the credit card issuers.

In terms of the companies that handle the credit cards, Visa is first, with a commanding 54 percent of the market, while MasterCard is second with 29 percent. American Express has 13 percent, and Discover Card has four percent.

For families, the average credit card balance is about $2,200, with about 40 percent of credit card holders paying their balance in full on a monthly basis.

Interested in learning more? Why not take an online Understanding and Managing Your Personal Credit course?

In total, only 40 percent of credit card holders carry a balance of $1,000 or less on their credit card, while 15 percent actually have $10,000 or more on their credit card.

The average consumer has access to about $19,000 on all their credit cards combined, and more than half of all credit card holders use less than 30 percent of their total credit limit, where as one in seven use 80 percent or more.

How Many Cards?

There is a common question among those who have credit cards as to how many credit cards is best to have. There will be those who tell you that having no credit cards is the best because there is no debt. Surprisingly, this is not true!

The truth is that even only having one credit card will not help you. The reason for this comes down to your credit score. Your credit score is not only a basis of how much credit you have, but your willingness to take on credit. Lenders don't want you to borrow to much from them, but they also don't want you to borrow too little from them either. Therefore, the middle ground for you and your credit cards, which will help your credit the most, is to have two to four credit cards.

Owning no credit cards may show you are not experienced with credit or are afraid of having it. This can be bad for lenders because if you are inexperienced with credit, you may not use it properly, and that could lead to defaulting on payments. That being said, if you end up having one credit card, you are semi-experienced, but everything you do on that credit card will have a greater weighting on your credit score. Therefore, if you have a $1,000 limit on that card, and you use $500 of it, then you are using 50 percent of the available credit on your credit card. Many lenders will see this as using too much of your credit card limit, as well as being inexperienced with credit in general.

Now, if you have two credit cards with $1,000 on each and you are using $500 in total for your credit, your credit score will be affected because now you are only using 25 percent of your credit. If you get three or four credit cards, that goes down even more. Having two to four credit cards shows your lenders that you are experienced with credit cards, and that you have been able to get credit from other lenders, which goes a long way to helping you get credit.

If you have more than four credit cards, you will look like a compulsive borrower and lenders will begin to wonder why you have to get another piece of credit, especially if it is a credit card.

Therefore, simply cutting up all your credit cards and cancelling them is not the solution you want when you repair your credit. You can cancel some, but only until you have about two or three. Then, put them away somewhere so you do not spend anything on them until they are completely paid off. That way, you can still have credit on your credit score, but without more debt being added to it. When everything is paid off on the credit cards, you can begin using the cards again, but only sparingly, and only when you absolutely need to.

Minimum Payments

This is an important term you need to understand. Knowing about minimum payments will help your credit greatly because you will be able to keep your credit card from getting out of control, and you won't be hounded by creditors because you are making the minimum payments.

That being said, you should not rely simply on minimum payments, and you should make the effort to pay everything off as soon as you can. However, on those months when things are tight, you can simply choose to make the minimum payment, as long as you make those payments on a regular basis.

Cash Advances

Cash advances are something that those with no experience with credit cards use. These are one of the worst things a person can use because they come with huge amounts of interest. This is not like taking cash out of your bank account. When you make a cash advance by charging it to your credit card, you will end up with huge amounts of interest. These are almost as bad as Pay Day loans. Anyone who is thinking of using cash advances to pay off other cards, or pay off other debts, should think again. This is something that you want to do only if you want to spiral out of control in debt.

Foreclosure

In the latter half of the 2000s, the housing market more or less collapsed. This resulted in record numbers of foreclosures. Millions of people saw their homes foreclosed upon, and despite the horrors of losing your home, that is no means the end of it.

In 2008 alone, Florida, California, and Arizona accounted for 589,000 foreclosure filings. As well, since 2005, the foreclosure rates have been rising steadily, as much as 100 percent to 200 percent each year in places like Florida and California. There are many people who will be going through this problem of recovering after foreclosure, and there will be many more to come.

Foreclosure is something very difficult that an individual goes through. It ruins credit, costs people their homes, and generally results in severe credit hardship for years to come. However, despite that, you can repair your credit after you go through foreclosure.

We will begin this section by understanding what foreclosure is, before moving on to how you can recover from it, if you go through foreclosure.

The foreclosure process begins with a letter from the bank stating that you have missed a mortgage payment. This letter is more of a "heads-up" to let you know of the missed payment. No foreclosure is begun yet, but it is the start of the eventual end result of a foreclosure.

After about two to four months of non-payment, the true foreclosure process will begin. Unless the mortgager is able to work out something with the bank -- and many do -- they will be forced to endure the foreclosure process. This begins with the pre-foreclosure, where the bank attempts to sell the property so they recoup the lost investment on this. However, this does not always work, especially in our current housing market where there are more sellers than buyers.

If no one buys the house, then the foreclosure continues to move forward with a notice at the county office, as well as in the local newspaper, of a foreclosure auction. Here, foreclosure investors will bid on properties that have gone through pre-foreclosure processes because they can often get them much cheaper. It is usually before this point that the mortgager has been forced to leave and the damage to their credit has been done.

If the property does not sell, it is marked down considerably in the hopes someone will take it off the bank so that they can at least bring back a bit of money on the house.

For you, as the person going through the foreclosure process, the damage is done and you need to start thinking about repairing your credit following the disastrous foreclosure process. Naturally, you are going to be renting for awhile, your credit will go down about 200 points. On top of that, whenever someone looks at your credit report for about the next 10 years, they are going to see the red flag of a foreclosure hanging over your head. It is a troubling situation, but you can get out of it on your feet, and here is how.

First, you need to stay positive. You are going to be rebuilding your credit after suffering through a foreclosure, and you have to be ready to be rejected. Not surprisingly, your lenders are going to be wary of giving you money because of your foreclosure, so just stay the course and be positive about it.

Second, begin looking at ways to set financial goals for yourself. This can be creating a budget or working towards some goal of having a certain amount of money saved by the time you are out of the foreclosure cloud.

Third, you need to start creating an emergency fund. This is something that will help you save up money over a long course of time, possibly to satisfy a goal from the second step. You should have at least three months of your current expenses saved up before you think about seeking any new credit, and having this fund will protect you in case something happens that could damage your ability to stay strong financially.

Fourth, know your credit report. Creditors are going to look at this so you need to know where your credit is before you start rebuilding it. You should find out what your credit score is about once per year and you should look for any errors that may be on it. As well, find the blemishes on your record so you can find ways to fix them. When you settle open balances, and fix any problems, you can begin to repair your credit after a foreclosure.

Fifth, you need to maintain your credit after you go through a foreclosure, so get credit cards. Credit cards will re-establish your payment history and show creditors that even though you went through a foreclosure a few years ago, you can still handle your payments. You should also consider getting a secured credit card, since this is much easier than an unsecured one, because you are using your own money to create the balance.

Sixth, you should get credit counseling. When you get credit counseling, you will learn how to work with your credit and how to be successful with it. This will help you in the long run, because you will learn how to manage your credit properly when you start picking it up again a few years after you have gone through the entire foreclosure problem.

Lastly, understand that it takes time to recover from foreclosure. Your credit score has just survived a direct hit and it is going to take time for you to recover from that. Be patient, and just continue to work hard to maintain your credit perfectly. As each year goes by, your credit score will improve and you will be able to move on from the difficulty of having gone through a foreclosure.

You also need to be aware of scams and some lending practices that will try and take advantage of your situation of poor credit from foreclosure. Do not fall into these, and do your research. Typically, the rebuilding stage will take at least 24 months.