Time is your friend and ally when it comes to credit scores. If you are young and just establishing credit, it actually works against you because a large part of your credit score depends on your history of payments. Short history…lower score. The FICO or VantageScore 3.0 system does not start at 850 and decrease depending on your payments to creditors. You start low and increase as time passes. This is why it is helpful to establish credit at a young age, especially if you are a good steward over your credit. Early establishment helps you demonstrate your creditworthiness and is a definite positive. This doesn’t mean at 24 years old that you cannot achieve a excellent score in the 750-850 range. I recently read about a young man who has a credit score of 807. Unfortunately, he did not expound on how he reached such a high score at a young age, but his story gives us an example that it is possible.
I’m reminded of the Rolling Stones song featured in the movie, Fallen, with Denzel Washington, “Time is on my side.” Another way time is on our side is in regard to derogatory or negative items on our credit reports. If, for whatever reason, you have had some credit issues in the past, you are not labeled with them for life. Thank goodness! Collections, judgments, and liens are removed from your credit report all together in seven years. It’s as if it never happened. The typical credit account details the last twenty-four months of activity on your account. As you can see, one late payment will not follow you for years to come. Bankruptcies generally stay on your credit report for up to 10 years. I must say, having derogatory accounts does not necessarily mean that you cannot establish new credit. It just may cost you more in terms of higher interest rates. The closer you come to that 7 year mark, the more likely creditors will be willing to extend you credit. However, you must show a good payment history since your last negative issue. Time is truly on your side.
Unlike credit card accounts, auto and student loans, mortgages, and installment loans, hard inquiries are removed from your credit report within 2 years. I was recently asked a question about inquiries and how long they affect your score. Individual inquiries typically lower your score by just a few points. What creditors are looking for when evaluating inquiries is if you are applying for a lot of credit at one time. If you are, this may indicate that you are having a hard time covering your expenses and may be desperate for credit. In addition, the credit scoring systems are sophistcated enough to recognize if you are applying for a mortgage or an auto loan. The assumption is that you are searching for the best rate and not buying two homes or cars at the same time. When applying, there is approximately a two week period where you can have your credit report checked by several different entities and these inquiries will be counted as 1, not the 4-5 times you actually applied for credit.
Youngsters, establish credit early in your life. The absence of credit is typically treated like having bad credit and is associated with a low credit score. It may not seem fair, but with thirty-five percent of your score based on history alone, creditors have no way to determine if you will pay as agreed upon. Seasoned individuals, not all is lost. Keep making payments on time…every time. Negotiate those “bad debts” to a manageable amount and pay them off over time. Stay tuned…come back for more great reads on how to increase your Credit Swagger.