Credit Reports & Scores Advice & Articles
It can be smart to take out a bank loan or charge credit card debt. Here’s why: U.S. lenders rely on a credit report to decide whether to loan you money, to determine the interest rate they will charge you and, even, to establish your automobile or home insurance premium. If you have no track record demonstrating that you repay your debts, you may not qualify for a loan.
Credit reports are developed by one or more of three credit bureaus: Equifax, Experian and TransUnion. Each bureau sums up your credit history into a single three-digit number, known as your credit score. Most people’s scores range from 300 to 850. Generally, scores below 620 are viewed as risky, while those over 750 are excellent.
The following information is used to calculate your credit score:
Your past payment history. Whether it’s credit cards, bank loans or your telephone bill, your creditors are happiest when you make regular payments -- even if they are minimum payments -- on all your debts. A single missed payment can lower your score. Bankruptcies, collections, judgments, defaults, liens, foreclosures, or repossessions, will lower your credit score.
Current debts. The less money you owe, the better. Your debt ratio -- the percentage of your paycheck that you spend repaying debt -- should be no more than 40 percent of your take-home income. If you and your partner take home $5,000 per month, for example, potential creditors prefer that your debt repayments, including your mortgage payments, be no higher than $2,000 per month.
Length of your credit history. Creditors prefer you to have a long and consistent track record of repaying loans.
The number of new credit accounts you’ve opened or applied for. Every application for credit shows up on your credit report, telling lenders that you may be taking on new
The types of credit you have. Creditors look more favorably on some types of credit than others. They’d prefer you to have a mortgage secured by your home, for example, than longstanding credit card debt.
Loans that appeal to creditors:
A mortgage can look good to potential creditors, as long as you’ve kept up your payments. As an added bonus, the interest on mortgage payments may be tax-deductible up to the first million dollars (though you should consult a tax advisor about your particular situation). And, hopefully, real estate is an asset that will appreciate in value.
Automobile loans will not harm your credit rating provided you shop around for a reasonable interest rate. But it pays to keep in mind that a car is an asset that tends to depreciate in value the minute you drive it off the lot.
Bank loans won’t hurt your credit rating as long as you repay them regularly and on time. If you borrow to pay for your education, it’s assumed you’ll get the money back in the form of a better salary.
Credit cards can be a good thing in the eyes of creditors, as long as you make regular payments and don’t apply for many new cards within a short period of time. But creditors don’t like to see you carrying a credit card balance of more than 80 percent of your available limit. In other words, if your total credit card limit is $10,000, your total credit card debt should be well below $8,000.
A debt consolidation loan could be a good signal to creditors -- as long as it’s a one-time event, demonstrating that you’re serious about getting yourself out of debt. You may be able to get a debt consolidation loan at a lower interest rate than your current lenders are charging, which would also lower your monthly debt payments.