How Should I Handle My Credit to Prepare for the Future?
When you apply for credit, the lender will undoubtedly check your credit report. The information in your credit history helps lenders decide how much credit and what interest rate you are eligible for. The better your credit history, the more likely you are to qualify for the best credit deals.
Pay Your Bills on Time
Creditors always look for indications that the prospective borrower is a good credit risk: a person who will pay back his or her debts in a timely fashion. Obviously, a history of on-time payments demonstrates that you are just such a person.
But that doesn't mean your credit history must be perfect for you to qualify—few people's are, after all. "Good" credit can include a few minor dings in your report, such as:
- Up to two credit card payments 30 days late.
- One installment payment, such as an auto or student loan payment, 30 days late.
No payments of any kind should be more than 60 days late, and there should be no outstanding public record debts such as judgments or liens.
Keep Your Debt Load Reasonable
One factor any creditor must assess before offering credit is the total debt of the person applying. If a large portion of your income each month is already committed to paying off other debt, the lender will wonder if you may have trouble paying back an additional loan.
As a rule of thumb, financial experts say that non-mortgage debt payments should not exceed 10-15% of your take home pay each month. If your debts are currently too high, consider ways to pay some down before you apply for new credit.
A note about cosigning: If you cosign somebody else's loan, the outstanding amount is considered your debt, even if the individual for whom you cosigned is paying all the bills. Because cosigning means you have promised to pay back the loan if the other party does not, it is considered one of your liabilities. So think carefully before you cosign, even for someone you know will pay the debt; it does impact your credit.
Avoid Unnecessary Inquiries
Whenever you authorize a creditor, employer, or other business to check your credit report, an "inquiry" is added to the report itself—a note that someone has checked your credit. (Checking your own credit report, however, does not lodge an inquiry.) An inquiry usually stays on your credit report for two years.
A lender considering you for a loan will look at the number of inquiries recorded there and when they took place. A large number of inquiries occurring in a short period of time may be interpreted as a sign that you are either:
- Applying for lots of credit because of financial difficulty.
- Overextending yourself by taking on more debt than you can actually repay.
Therefore, it's always a good idea to minimize inquiries into your credit report. If you're shopping around for mortgages, for example, don't let every lender you consider run a credit check. You might have to settle for slightly more approximate estimates on what the lenders can offer you, since they can't verify your credit history. But that's still better than doing all that shopping around only to find that the lender of your choice now perceives you as a less solid credit risk and wants to charge a higher rate.
Eliminate Excess Unused Credit
Just as a high number of inquiries suggests you may be overextending yourself, a lot of available credit means you have the capability to overextend yourself in the future, even if you have not done so in the past.
Although people may perceive having several credit cards with high limits a sign that they have good credit, too much of this good thing can make them seem like a poorer credit risk.
The lender needs to be reasonably sure that you will continue to be able to repay your debt in the future. But if you have thousands of dollars of unused credit available, you might spend it all the month after your loan goes through and suddenly have more debt than you can pay off.
To prevent this concern from arising, you should close unused credit accounts before applying for a large loan, and/or consider having your credit limits reduced. If you do either of these things, make sure to ask the creditors to record that the account was closed or changed at the consumer's request—you don't want anyone to get the impression the bank closed the account because of problems with your payment habits.
To see your free credit report, visit Experian, the preferred credit report provider for AutoTrader.com.
© Experian 2008. All rights reserved