The Keys to Building Strong Financial Endurance
In the physical fitness world, the concept of endurance is broadly defined as the ability to perform a physical activity without getting tired. In the personal finance world, your credit score represents your ability to pay back a loan on time. And like physical endurance, your score can be improved to help you better meet your long-term goals.
Credit scores are divided into five components that hold the approximate weights to your overall score:
Your payment history represents the largest component of your credit score. It provides a historic glimpse into your financial reliability. If you are working on establishing credit, the most powerful thing you can do is to always pay your bills on time. If you are working to improve your financial stamina, consider your payment history similar to the role that cardiovascular endurance plays in building endurance.
The amount of current debt you hold is the second-most important component of your credit score. Improving your physical flexibility will positively affect your overall health, including fewer injuries, less pain, improved posture and much more. Similarly, the amount of debt you hold can be a strain on your efforts to apply for a car, home, or other purchases that require credit worthiness. Your credit report provides an analysis of your credit utilization ratio, which shows the amount of available credit you use each month with revolving credit accounts (credit cards, lines of credit, etc.).
The credit history of an applicant for a loan or credit card will be scrutinized for numerous reasons. For instance, an applicant with a long history of credit can be viewed as less risky when compared to an applicant with a relatively short credit history. Also, your credit history provides the following: average age of accounts, how long accounts have been open, the amount of time that has passed since you've used an account, as well the amount of accounts that you currently have open.
You might receive offers in the mail for credit cards, personal loans, refinancing, and the like. You'll need to take a balanced approach to completing new credit applications. If you apply for too many accounts in a short period of time, you might see dings on your credit report, because each new account is accompanied by a credit inquiry record. A lot of inquiries might point to a strain and might alert potential loans that you are under financial distress. There are soft and hard inquiries, each of which are assigned a different value that will be deducted from your overall credit score - some might not be recorded on your score at all.
A theme that is repeated in personal finance is "diversity"; be it from your investments to your credit score, diversity can serve as a reward. For example, the types of credit you have might have a positive impact on your score. If you have a limited credit mix, it might lower your score.
Just as regular exercise can improve your physical endurance, creating healthy habits like paying on time, keeping balances low, adding a new account if beneficial and monitoring your credit can improve your credit score.
What is a Credit Score? (Consumer Financial Protection Bureau)
Guide to Credit Scores (Equifax, Equifax.com)
FICO Score Education (Fair Isaac Corporation, Ficoscore.com)