Lost in the Gray of No Credit

ImageI have had contact this week (it’s only Tuesday) with two different realtors who are working with clients who are struggling to get loans. Their struggles are not due to poor credit, but rather are due to the fact that they have NO credit. We like to break life into clearly defined black and white. While there is good credit and bad credit, the reality is that many people are getting lost in the gray area of no credit.

“My sister told me I should get a credit card because it will help my credit score. Is that true?”

Now there’s a loaded question. And yet one of my students was truly wrestling with the issue. It’s a question many of us may think we know the answer to, and yet most people probably aren’t entirely sure what determines their credit score. For example, did you know that your timeliness in paying your bills only accounts for 35% of your FICO score? Granted, it is the single most influential variable in your score; and yet 35% leaves a lot of room for other factors.

Here is a breakdown of the different variables affecting your credit score:

35% – Paying your bills on time
30% – How much you owe and how much credit you have available
15% – Credit length – how long you have kept your credit and how long they have kept you
10% – New credit applications – why do you suddenly need so much
10% – Mix of credit – how many different types of credit can you manage

In an effort to avoid credit problems, some people will avoid using any credit. Not only does this eliminate their mix of credit, but also means there is little to no reporting of on-time payments, management of available credit, or length of credit history.

Common wisdom tells us that learning the little things first is a crucial step in life. That way, when you make a mistake with a little thing, it doesn’t hurt so badly and hopefully you learn something. Many lenders see credit history the same way. If you haven’t learned credit management with the little things first, they are going to be very cautious handing you a very large line of credit, also know as a mortgage.

The ‘mix of credit’ is the key piece that my student’s sister was aiming for. If you are able to maintain and manage multiple types of credit (credit cards, car loans, mortgages, etc.) you get a higher score. Looking to the future, she knew it is important to begin learning now. But this is where the balancing act comes in.

If you get that credit card to broaden your credit mix and lengthen your history, how are you going to manage it? Will you use every last penny of that “free money”? Will you pay your balance off every month to avoid that dreaded interest? Will you play ostrich and stick your head in the sand when the first bill shows up in your mail? Contrary to popular belief, creditors will not go away if you simply ignore them.

At LSS Center for Financial Resources, we want you to have credit available when you need it. We also understand that managing the little things becomes crucial when you need larger amounts of credit. Just like you aren’t handed your high school textbooks and sent off to earn your diploma on your own, you don’t have to figure out credit on your own.Image

Our counselors can work through your credit report with you to identify strategies for improving your credit score. Looking to buy a home in the near future? Our Pre-Purchase session can address your credit reports as well as help you begin to budget for the expenses of home ownership.

You can check out our services here or call us at 605-330-2700 to schedule an appointment with one of our counselors. Let us help you be ready before those big things in life are on your doorstep.

written by Breck Miller
photos courtesy freedigitalphotos.net

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