Learn About the Value of a Good Credit Score
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 borrower’s ability to pay debts on time and also predicts a borrower’s ability to handle debt in the future. Credit is extremely important, and establishing a good credit score and 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 that proves how faithful a borrower has been in paying off past debts.
- Capacity: A borrower’s ability to pay back a loan. This is determined based on an income-to-debt ratio that shows how much cash a borrower has available to pay back their loan each month.
- Capital: Refers to how much of a down payment is made. Typically, the higher the down payment, the less likely the borrower will default on their loan.
- Collateral: Additional asset(s) the borrower has in his or her name that is 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 and maintain a good credit 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 to develop and maintain a good credit score? Feel free to contact us 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.