Many people do not understand the importance of their credit score and therefore have no comprehension of the impact their actions can have on their scores.  A credit score is a numerical value used to represent the creditworthiness of an individual.  Simply put, are you someone that is trustworthy enough to loan money to? Can you be trusted to repay what you owe?

Creditworthiness is crucial when you are making some of the more significant purchases in your life. I recall a mentor saying, “you do not buy a house with money, you buy it with credit”.  Houses, cars, and other major purchases often require securing loans. The better your credit, the more likely you are to receive the loan you need in order to make a major purchase. The better your credit, the more likely you are to receive a loan with lower interest rates which in turn saves you tens of thousands of dollars in the long run.

There are three reporting agencies that evaluate and determine one’s credit score: Experian, Equifax, and TransUnion.  These agencies primarily use 5 factors to determine your credit score.

 

Here are some tips on how to improve your credit score:

  1. Payment History
    • Always be consistent in paying your monthly bills. Set reminders or use auto pay. Missing payments tells the agencies that you are sometimes irresponsible and untrustworthy.
  2. Current Debt
    • Being in debt in America is normal, but being overwhelmed in debt is not. Limit the amount you borrow or owe.
  3. Length of your credit history
    • Having a good history of credit gives agencies more confidence in you as your past predicts your future. Lenders have more trust in someone with a 10 year track record vs an individual with 2 years of history, which puts young people at a disadvantage. Start as young as you can.  For example, I took out a bank loan in college, my only intention being to repay the loan in order to start building my credit.
  4. Variation in the types of credit you have
    • Along with history, the agencies like to see variation. If you have shown that you are responsible with bank loans, students loans, credit cards, rent/mortgage, and other types of credit, they take this to reflect positively on your creditworthiness.
  5. Frequency of Credit Applications
    • If you constantly have credit inquiries, the agencies determine you are always in a pattern of debt and therefore are less likely to repay what you already owe, this decreases your score. Keep your credit inquiries low! For example, while looking for a new apartment, I printed out a copy of my most recent credit report to give to the landlords, rather than having each one run their own inquiry on my credit.

It is never too early to start building, or too late to start repairing your credit score!

THE CLEVER AFRICAN: INVEST IN YOU
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