Your credit profile is one of your most important assets and probably your only intellectual property asset.Each one of us has credit history profile data kept by each of the three major credit reporting bureaus.
Those companies started accumulating this vital information about your borrowing and other behaviour the first time you applied for a credit card, education loan, or car loan.
They have this information because you allowed your lender to provide it to the bureaus each time you applied for credit.
Credit Can Be An Asset or Liability to You
You want those bureaus to have your information so that you can build a positive credit report for yourself by paying bills on time and conforming to the loan terms. Of course, if you pay bills late or not at all, what would have been an asset turns into a liability for you.
Your credit profile stays with you for your whole life and will impact many aspects of your life in positive or negative ways. Note: if your credit profile is a liability based on your past payment and credit history, you can improve it so it becomes an asset – but it usually takes many years of hard work.
Unknown to many, not only will your profile affect the interest rates you pay on all of your loans and borrowing, but it can impact the cost of your car and health insurance premiums, whether or not you can rent a particular apartment, and sometimes whether you are qualified for a specific job. That’s right, insurance and job opportunities can be impacted by your credit profile, but not in every state due to some state laws.
The way that most companies analyse your credit is by something called your credit score. The next time you apply for credit that company will do a credit inquiry, which will pull your payment and borrowing history from the credit bureaus, run it through third-party predictive model software, and assign a score to you based on the model.
The model software tries to predict your future borrowing and repayment characteristics based on your past history and millions of other individuals’ profiles and payment history. The score will allow the creditor to determine your borrowing capacity, or the interest rate you will pay on loans, or if you are qualified for a job or can rent an apartment.
Most of your important financial transactions in life are governed by your credit score and the difference between good credit and bad credit can cost you dearly over a lifetime, which is why you always want to protect your credit profile.
Protecting Your Profile
To protect your profile, you always need to pay bills on time and in accordance with the terms of the credit. This includes cell phone and cable TV bills – don’t forget them just because you move.
You also need to be careful to not overextend your borrowing – that means don’t buy things on credit when the monthly payments will be unaffordable. Don’t overindulge. If you already have gotten yourself into a debt trap, cut expenses and pay off your bills as soon as possible.
You also must make sure you comply with any lease terms so you avoid eviction marks on your profile. And always carry the proper car and rental or homeowners insurance to reduce liability and the potential for a legal judgment against you. Lastly, don’t borrow up to your borrowing limits even if you can comfortably afford the bills.
Basically, live within your means. This will ensure that you get the best borrowing terms on loans and leases that you contract upon during your life. As an added benefit to living within your means, if you lose your job or salary drops, you will be in better financial shape to handle that disruption to your income.
Keep aware of your current profile. You are entitled to a free copy of your credit report from each of the tree bureaus once per year. Go to annualcreditreport.com to get one, which won’t give you a credit score, just the report.
But this way you can see what data they have on you and if there are any errant marks or questionable items. If there are, get on the phone and try to get them corrected. It will take time, but if you don’t get them corrected you will pay the price in higher interest rates or other issues down the road.
Credit Already a Liability
If you’ve damaged your credit profile, you can repair it. Get advice from a reputable non-profit credit counseling agency on how you can get your credit “house” in order. Many real estate mortgage lenders can also pull your credit report, with your permission, and advise you on how to improve your credit score. Be careful about private companies promising quick fix credit score services – many are not reputable and will take your money but not do much for you.
Note: There is no quick fix for negative credit remarks on your profile that are accurate, like late payments or non-payments. Only time and hard work will improve your score.
As you can see, your credit report is really one of your most important assets. It stays with you for your entire life and even if you do not realise it, you will be paying the financial price in life for having bad credit. So get a copy of your report and work hard to protect and improve your profile so that the next time you borrow you are rewarded for your past good credit using behaviour.
Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a Zillow Blogger, the author of several books including “Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate”, and loves kicking the tires of a good piece of dirt! See more at ProfessorBaron.com.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.