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What types of credit are there?
Before we get into that, there's one critical thing you need to know. DO NOT under any circumstances hire a 'credit repair company.' You can fix your credit yourself for free, and you can do so much faster and these so-called credit repair companies can. I don't care how good their offer sounds, do not pay money to anyone for this; it's a total waste of time and your hard-earned money.
Whether your building credit for the first time or repairing your credit after a significant life event a basic understanding of how credit works is essential. You need to know what type of accounts exist, as well as how they both help, and hurt you. Especially when you're preparing for a mortgage having this information is vital.
So, let's jump right in:
Installment loans are things like car payments and signature loans. They have a fixed amount due each month for a fixed term. The credit bureaus rate you on installment loans based on your payment history. The longer you pay this monthly payment on time, the better the credit bureaus like it and improve your score accordingly.
Revolving debts are your credit cards. With revolving debt you are rated on TWO different things..., payment history and credit utilization. Ontime credit card payments build up your positive payment history and will improve your score.
The percentage of your credit limit you are using also comes into play. The higher your balance is compared to your credit limit, the lower your score goes. For instance, if you have a $1000 credit limit and you keep your balance at around $900 or so your score will suffer. You are ‘utilizing' all of your available credit and are hence considered risky. As a general rule, if you can keep your credit card balances at 30% or less than your available limit, you'll see the benefits in your credit scores. It's important to keep using your credit cards, but going forward work to keep your revolving balances as low as possible.
Collections are accounts you haven't paid, and the original creditor has sold your debt to a collection company. Collection companies are VERY aggressive and are going to harass you for years on end wanting their money. What's most damaging about collection companies though is how they report your debt. Collection companies submit your $100 medical bill every month as if it were a brand-new account. Because of this practice, plenty of people who should have a 700 credit score instead have credit scores in the 500 range thanks to one or two listed medical collections.
Credit depth is also significant. Having a mix of credit types is incredibly helpful. If you only have one credit card you're not going to obtain the high score your looking for very quickly. But, if you have a couple of them along with various installment accounts your credit profile will build super-fast with on-time payments. Even if the accounts are secured, that's perfectly okay.
Rental history doesn't get reported to the credit bureaus, but, it is an essential piece of your overall credit profile. If you have limited credit, or, have been rebuilding your credit profile, it can be particularly helpful when it's time to get a mortgage. The reason for this is that rent is your housing, the most significant expense that you have. It is not only the most significant expense in your budget, but, it's also for your current home. In the eyes of an underwriter, limited credit and past credit bumps are easy to ignore if one shows a solid history of taking proper care of their rent payment.
Now that you know about the different types of credit and how they work for you, the last thing you need to know is regarding Late Payments. It is not uncommon for ones credit score to drop by 200 points after a late payment. When you're building or re-building your credit profile, one missed payment will set you back six months or more. Recent late payments are the number one killer of credit scores, so it's critical that you pay all of your bills on time! I hope this information was helpful! Feel free to contact me if you have any questions; I'm happy to help!
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