What Credit Score Get's You Approved For a $20,000 Credit Card?
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How Do You Build a Strong Credit Profile?
Even if you never intend to borrow money, having a strong credit profile will open the door to better opportunities than you can get without it. Here’s how to do it.
Borrow Sparingly And ALWAYS Pay On Time
The three credit bureaus – TransUnion, Equifax, and Experian – use various methods in computing your credit score. Your credit score is the way they reduce your credit profile to a common metric that can be used by various concerned parties, such as lenders, employers, and insurance companies. Services like myFICO, for example, can help you monitor your credit score.
To maximize your credit profile, you should borrow only when necessary. Most need to borrow money to buy a house, a car, and a college education. But even as you borrow for those purchases, be as conservative as you can with the amounts that you borrow. Keep the number of loans outstanding at any one time to a minimum. Avoid entering too many credit arrangements in a relatively short space of time.
Too much credit activity at any one time – too many lines outstanding, too many new loans at once, and too many of the same type of loan – are all viewed as negatives in your credit profile.
Beyond the effect of all of the above on your credit scores, you never want to borrow more money than you can comfortably repay. Late payments, even on small loans, can do a lot of damage to your credit score, particularly if they are recent.
What is “Credit Utilization”?
One of the biggest potential negatives in your credit profile is your credit utilization, which is the percentage of outstanding debt to available credit lines. Generally speaking, credit utilization of 80% or greater harms your credit scores. It’s a measure of how many credit lines you have that are at or near being maxed out.
If you owe $9,000 on a credit card that has a $10,000 credit line available, your utilization is 90% on that loan ($9,000 divided by $10,000), and a percentage that high is viewed as a negative. If you have four credit lines that have utilization rates in excess of 80%, your credit scores will be relatively low, and your ability to borrow will be very limited.
Credit utilization is so important to lenders that some may not extend you a loan even if your credit scores are in the acceptable range. This is because credit utilization is considered one of the best predictors of loan default. An employer may also look at your credit utilization as a negative – they could view it as an indication that you are a financial train wreck waiting to happen, and decide not to hire you as a result.
Are All Loans Equal?
There is a hierarchy of loans in the credit world. This means that a late payment on certain loans will count more heavily than it will on others. In general, the hierarchy works something like this:
Mortgages and home equity lines of credit
Automobile loans and student loans
At the top of the list, mortgages are the best loans to have. Strong payment history on a mortgage will have the most significant positive impact on your credit profile, while a single late payment on it could sink your credit score. At the bottom of the list are medical debts, and the credit repositories generally assign less impact to late payments here because of the nature of the debt.
This hierarchy could even be used to establish a payment priority when money is tight. You pay your mortgage first, your car loan, and/or student loan second, then your credit cards, etc. Any potential for late payments should be reserved for the obligations at the bottom of the hierarchy.
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