Good And Bad Credit

What is the real difference between good credit and bad credit?

Doesn’t my credit score tell me how good my credit is?

The answer is yes and no. When placing your credit on a spectrum from good to bad, there are many factors that come into play. Credit score is not the only thing that matters. Your credit score is a grade that you have been given based on your complete credit and finance history, however, most companies that will check your credit are looking at a lot more than your score. To some lenders, your credit score may indicate your risk level for stiffing them on your personal loans repayment, however, many companies take other things into consideration when deciding if you are credit-worthy.

wallet with credit cards

When somebody checks my credit, what are they really looking for?

Depending on who is looking, they will be looking at some or all of the following: credit score, debt-to-income ratio, judgements, collections, late payments, credit inquiries, evictions, length of credit history, and how many revolving accounts you have all join in to determine your credit score and creditworthiness. These are all things that should be in your credit report.

Credit scores range from 300 to 800. The higher your score, the better your credit is. There are 3 credit bureaus that provide reports. Often, a score will be different with each bureau, depending on if your current lenders or debtors report to one bureau or all of them. If you are trying to repair your credit or even become more familiar with how credit works, it is a good idea to get a copy of your credit report from each bureau and compare them. You may notice that you have a significant difference in your score from one company to the next.

As a general rule, if your score is 700 or higher, it is considered excellent. This is where it gets confusing. You can have a 750 credit score and still have creditors that don’t want to lend to you because of other factors.

credit cardOne of the biggest reasons for high score denial is a high income-to-debt ratio. If you have a significant amount of your income going to pay off debts, it is likely that you’ll be hard-pressed to find anybody that will lend you more money. The reason behind denial based on income-to-debt ratio is that, with so much of your money already being spent, the creditors doubt your ability to take on additional financial burden.

Credit inquiries can damage your credit as well. Whenever somebody checks your credit, you get hit with an inquiry on your report. It is very common to have a lot of inquiries when home or car shopping because many car lots and mortgage companies will send your credit application to multiple lenders, hoping to make it easier for you to shop around. Some companies even check your credit automatically every year or even every month to make sure that you can continue paying your debt to them. Generally, inquiries aren’t much of an issue but, if a creditor sees that you have multiple inquiries, such as searching around for a credit card, it can look as if you are spreading yourself too thin.

Many people are unaware of how important their credit is until it’s too late. But the secret is that it’s never too late. If you keep yourself informed on how credit works and what you can do to make it better, it’s only a matter of going through the steps to improve your creditworthiness. Sometimes, it can be a matter of time as well, if you are waiting for an item to fall off of your report, such as a paid collection or judgment, but it is possible and it can be easy to repair broken credit.