It’s taken me a while to talk about something that many consider Personal Finance 101: credit. At its core, the credit scoring system is a ranking of how much debt you owe and whether you repay it on time. The more you engage in the wealth building method of paying cash, the lower your score can be.
I focus very little on credit because incurring debt is NOT what Money Magnets do.
Because you need a credit score for things like a mortgage, establishing utilities or cell phone services, the subject does require attention. Below are a few more things to know so you can control your credit and not allow it to control you:
a) History of on time payments is the primary driver of your credit score. Even if it’s only the minimum, pay it on or before the due date. And if you know you’re going to be late, contact the creditor and work on a payment plan that keeps your score intact.
b) Every time you request that a company provide an ongoing service - cable, utilities, even insurance - with the agreement that you will repay them at the end of a period, you are using credit. The traditional FICO system does not recognize these services unless you fail to pay, but many lenders (typically small banks and credit unions) are now accepting these non-traditional sources of credit. If you have bills and/or rent an apartment in your name, offer these to lenders when applying for a new mortgage. It’s more legwork but beats setting yourself up by opening new credit cards.
c) The second highest driver of your credit score is history, i.e. how long you’ve had an account with a particular creditor. If you have credit cards that have been open for years, pay them off and keep them open. Go this route only if you have the discipline to not maintain a balance. If you don’t, your honest self-assessment will still lead you to your financial goals; for now, cut up those cards.
If you’re ready to buy a home but have little to no credit, contact your Homeownership Advisor at HomeFree-USA, and check out Vantage Score, a new scoring model some lenders are using to assess your ability to repay without credit cards or student loans. Remember, options always exist and it is our job to present them to you.
And so it is.