A credit score is a method for lenders to establish how well a borrower is able to meet their debt obligations. Credit tells a story of the borrowers ability to pay debts on time, and also predicts a borrowers ability to handle debt in the future. Credit is extremely important, and establishing good credit habits early on will make it easier to get approved for a loan in the future.
The 5 C’s of Credit
Credit can be understood through the 5 C’s of Credit: Character, Capacity, Capital, Collateral and Conditions.
- Character: The borrower’s credit reputation based on a credit score and employment verification.
- Capacity: An income-to-debt ratio will determine if the borrower would be able to comfortably pay their loan each month.
- Capital: How much of a down payment is made? The higher this amount, the less likely the borrower will default on their loan.
- Collateral: What other assets does the borrower have in his or her name? This can be used as security for the loan.
- Conditions: The terms of the loan and interest rate.
How Can I Improve my Credit Score?
There are several different actions individuals should take to improve their credit. These common actions are good practices for maintaining a high credit score or for improving a score.
- Pay bills on time: Before spending any money, make sure you pay all of your bills on time and in full, if possible. Create a schedule for when each bill is due so that you do not forget something.
- Spend less than 50% of your credit limit each month: Try not to max out your credit card each month. Show that you are responsible with your money by spending around 30-40% of your limit.
- Establish credit as early as possible: Open a credit card or auto loan to begin developing a credit history. Pay it off in full each month.
- Space out applications for credit: Don’t apply for a bunch of credit cards, a car, and a home mortgage in the same month. Space out your applications as needed.
- Diversify your lines of credit: Do not open six different credit cards. Instead, maybe have one credit card and an auto loan or an auto loan and student loan.
Need more help developing better credit? Feel free to contact GuardHill Financial today. Our experts have years of experience in home financing, and can help you determine when the best time to apply for a loan will be.