Understanding Your Credit – Loans and Credit Cards
In our first blog post about understanding your credit, we gave you a general overview of why credit matters and how certain decisions impact your credit score. Today, we’re covering loan payments and the facts and myths about credit cards.
The speed at which you pay off your loans has no bearing on your credit.
If you pay off a five-year loan in three years, it won’t do anything to increase your credit standing. It won’t hurt it either.
Your credit is only looking at, ‘were the obligations of this agreement met?’ In this case, yes. It was repaid-in-full, and it took no longer than five years.
Paying something off faster does nothing for your reputation or your score; however, it might come into play if you intend to apply for another loan in the near-future. When you no longer owe anything on the loan you just paid off, that monthly payment is no longer factored into your debt-to-income ratio.
Just be careful. Overpaying can put you in a financially-tight position. That has the potential to do so much more harm than good. You should only pay things off faster when you’re financially positioned to do so.
Don’t shy away from credit cards.
Credit cards got a really bad rap years ago when greedy people in the banking industry charged really high interest rates and hidden fees.
Most credit unions offer very affordable rates on their credit cards, and very few charge extra fees. Any associated fees are required to be disclosed upfront.
When used responsibly, credit cards are actually one of the best ways to build your credit. They’re revolving debt, which means they remain open and active, available to use, even after being paid. Any money that’s available to you on the card is reflected as ‘available credit’ on your credit report.
If you can manage to maintain 70% ‘available credit’, your credit score will increase greatly. Just remember, it’s not about the score…it’s about what makes up the score.
You should always use credit cards responsibly, and we advise learning about how they work before obtaining one.
In our final blog post in this series about understanding your credit, we will cover credit variety, employment history and the patience it takes to build and maintain good credit history. Look for that post in about three weeks.