What Is Good Credit?
One of the easiest ways to define what constitutes good credit is to start by examining what is bad credit.
Major Credit Bureaus Store Credit Histories
Credit history is maintained by the three major credit bureaus: TransUnion, Experian and Equifax. There are others, but these dominate the market. For their customers, which range from multinational corporations to family-owned real estate offices, to private individuals, they supply credit information about those persons in their databases. Today, that’s nearly everyone over 18 and many of those younger.
Establishing A Credit History
Anyone who has owned and used a credit card, obtained a car loan, a mortgage or even bought a piece of furniture or a computer on time has generated credit data. The history of payments is maintained essentially forever. Even though anything older than seven years is commonly thought to be expunged, and is less important, it still shows up on the report. Certain legal proceedings will eliminate data, but that’s rare.
Avoid Paying Loans Late
When that data shows a history of late payments, usually divided into 30-day late, 60-day, 90-day, 120-day or longer, it constitutes a bad mark. Having one 30-day late on a small amount isn’t devastating. But a pattern of late payments is a big red flag for those who have to evaluate credit.
Never Default on Loans
Defaults are even worse. When someone, for whatever reason, chooses not to repay a borrowed amount, that fact is recorded. The fact, but not the reason. The only thing that shows up on the report, which therefore is the only thing the reviewers see, is the default amount, date, company but not any mitigating explanation. Those who evaluate whether to grant loans have no choice but to assume the worst: that the person (at least in that instance) was irresponsible.
Though other factors weigh in, these two elements are the most important in considering credit quality. Although the formula is a carefully guarded secret, the equation used to calculate FICO scores weights these two elements heavily. If your FICO score is below 600 you are considered iffy. A score of 520 or below is viewed as very bad or, in the technical jargon, ’sub-prime’. You are a credit risk.
Effects of Bad Credit
If you are a bad credit risk, lenders will often deny your loan application. When they choose to take the risk, they’ll typically require a higher interest rate to compensate. The result is, even if you get the funds, you’ll repay much more over the life of the loan.
Creating Good Credit
But good credit is not merely the absence of undesirable history on a credit report. There are positive aspects as well. Maintaining a perfect record of repayments and never defaulting on a loan is a great beginning. Improve that even further by erasing any mistakes, such as falsely reported late payments.
Go a step beyond and deliberately use your credit card, making a little more than the minimum payment for a few months. You’ll incur some interest, but you’ll look like someone who is both responsible and someone who uses credit. Banks like that. Get a car loan and make regular payments, but pay it off a little early.
The net result when it comes to getting a loan is: good credit history results in better access to funds, with the best possible interest rate.
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