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Credit 101 – What You Need to Know

Credit isn’t just about getting a loan for a car or a home – it can also affect your ability to get a job. According to Consumer Affairs reporter Mark Huffman, debt has become the American way.

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People see spending as a patriotic duty to help the country recover from the Great Recession, as a way to express freedom and a way to prove independence.  But before you go whipping out a credit card for the sake of the country, consider Credit 101: What You Need to Know.

Types of Credit

Credit basically falls into one of two categories – Secured Credit or Unsecured Credit. Secured Credit is a loan that is given in exchange for collateral and creditworthiness. Auto loans, mortgages, and pawns are all types of secured loans. Typically, the interest rates for secured loans are lower than for unsecured loans. Unsecured loans are loans given based on your credit history and future predictions. These include credit cards, signature, and personal loans.

Credit Score

Your credit score is a reflection of up to 5 factors, according to My FICO. But not all factors are weighted equally. Payments owed weight 35%, amounts owed comprise 30%, length of credit history rates 15%, new credit is 10% and types of credit used are the final 10%.

Payment history looks at whether you’ve paid previous and current accounts on time.

The amount owed is the total of the debts you owe. Having multiple credit accounts with balances does not necessarily mean you’ll have a low credit score.

Length of credit history refers to how long you have had credit accounts established, the age of the oldest and newest accounts along with the average age of accounts, and how long it has been since you used these accounts.

The mix of credit accounts you have open is your types of credit in use. This can include credit cards, retail credit, mortgages, and installment loans such as auto or signature loans.

Finally, new credit is the amount of new credit you’re asking for or taking on. Requesting multiple credit accounts at once – such as activating a few new credit cards – is negative for your credit score, especially if you don’t have a long credit history already established.

Living Within Your Means

One of the hardest things to do these days is to live within your means. People earning minimum wage don’t earn a living wage and come up with other ways to provide for their families. Many consider a home with a picket fence a sign of achieving the American Dream and borrow more than they can afford simply because they can. Credit.com states that the average American has more than $3,700 in credit card debt. Household debt is 67% of the GDP (Washington Post).

Credit Counseling

If you’re in debt over your head, consider credit counseling, either on its own or as a precursor to Chapter 7 or 13 Bankruptcy. That’s right. To file for consumer bankruptcy under Chapter 7 or Chapter 13, you have to receive credit counseling from an approved nonprofit credit counseling agency within the 180-day period before you file. If you’re considering bankruptcy, be sure to contact a reputable attorney that specializes in bankruptcy and other financial matters.

How did Credit Scores work?

If you wish to get a home mortgage, there are actually a lot of factors that need to take into consideration to determine the mortgage rate. One of the main factors is your credit score.

Credit Score Calculation

A credit score is actually calculated by using the FICO which is a company that means Fair Isaac and Co, who put together the formula to determine your credit score. If you get 700s as your credit score rating then you’re in a really good position. And if you have a bad credit score and want to improve to the 700s, this means you shouldn’t delay your bill payment but need to always pay your bills on time. Besides, you need to eradicate all negative things in your credit rating report to improve your credit score. By gradually doing such practice, you will finally reach the highest credit score that you want.

Negative things on your credit report can be things like late payments, defaulting, or bills that you didn’t pay off. The first action that you need to take is you need to get rid of all these negative things at once so you can improve your credit score and you do not need to worry about negatives anymore. One action you could consider putting in action is to make sure you pay off all your bills each month on time. For your credit card usage, as long as you do not max out your credit card and pay them off in full every month, this indicates you’re actually in a better position compared to many people.

In case the negatives that you have in your credit rating report are not your fault or actually, you are not aware of their existent then you may face trouble to get rid of them. What can be considered as the best step for you to take if the negative is not yours is to write a dispute and send it out to the corresponding agency? You have to make sure that you send the dispute letter via certified mail to the consumer report agency where you are disputing on that specific negative. You should expect to receive a reply in writing from them regarding your dispute in about a month.

If you are sure that you do not have any late payment or something that was caused you for the negative, then you will not able to have it removed by a dispute letter. What you only can do for this is just wait for the negative to get off by itself. After a period of 7 years, the negative-going to be totally removed from your credit report. That’s actually not the worst of it. Nevertheless, in case you ever been facing bankruptcy then you will expect such bankruptcy information is going to remain in your credit report for 10 years.

Wishing To Get A Low Credit Score Mortgage

It is very unlikely you are going to grant for a loan even you are wishing you can get approved with a low credit score mortgage. With a home loan, you’ll expect to get a check on your credit report. You will only get your mortgage application approved with average to high credit scores.

If you’re indebted currently, you should now seriously come out with a plan on how to reduce your debt and get rid of it altogether. Besides, your term & condition of your mortgage is a factor when calculating your interest rate. In case you just get a short term loan then normally you’ll need to pay just a smaller rate of interest since the mortgage term is shorter. If you’re applying for a loan and you are renting a house, then the rate of interest will be higher compare to those who own the house for living. However, if you wish to live in your house for just a couple of months and then rent it out, you can save some money. You got to make sure your mortgage lender to let you know all the hidden costs and fees that you may overlook. All these fees are going to add to your total cost of the loan.

Therefore, you need to keep your credit utilization ratio low for you to obtain a better credit score. It can be a good idea for having your free credit score check. You can always have your free credit score online. By doing so, you can rest assured that the credit report that you see is always up to date and is accurate if you carry out the report checking practice regularly.

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