5 Things You Should Know About Credit | The Odyssey Online
Start writing a post
Adulting

5 Things You Need To Know About Credit

Knowing these five simple things can help you protect your credit score and finally start building it.

96
5 Things You Need To Know About Credit
Hannah Mitchell

In This Article:

Before I knew about credit, I would apply for a credit card and hold my breath as I hoped to get approved. I had no idea what credit card companies were looking for and what popped up on their end when they performed a credit inquiry. Once I researched credit, I was mind blown by some of the things that affect your credit score. Once I understood credit, I was able to bring my score from roughly 640 to 740 within one year. These are helpful things you should know about credit so you can start building yours.

1. Credit inquiries hurt your score

A credit inquiry is anytime someone uses your social security number to run a credit check on you. It happens much more often than you think. It happens when you apply for a lease on an apartment and the landlord checks your credit and it happens every time you apply for a loan. Even if you're shopping to compare rates, you have to be careful. In some instances, there is a grace period after the first inquiry for a loan of that type. If you are shopping around for home loans, you have a 45-day window to get all your inquiries in or your score will continue to get dings. When I bought a car, the car dealership ran a loan application for multiple companies. I did not think anything of it at the time, but all of those companies counted as separate inquiries. My credit score took a hit from this for two years.

Every time you apply for a credit card, even if you are denied, it will count against you. According to Creditwise, no inquiries in a two year period is considered "excellent," one to two inquiries is "good," three to five is "average," and six or more is below average. Many people think that having a lot of credit cards hurts your score. In actuality, it only hurts your score if you got them in a short period of time. It is better to keep these cards open than to close the account because it increases your available credit. After two years, an inquiry is taken off of your score. This is where my credit normally takes a negative blow. In the last year, I refinanced my auto loan and applied for two credit cards, putting me in the "average" category. Now that I am aware that this harms my score, I take seriously when I authorize an inquiry. Beforehand, I would apply to credit cards, mortgage companies, and auto loan companies just to see what I would get approved for.

2. There are two type of inquiries: hard and soft

Not every inquiry harms your score. For example, if your banking app allows you to use companies like Creditwise or Credit Karma to check your own credit score, it will not harm your score. It is considered a "soft" inquiry. If an employer pulls your credit score while doing a background check or when a credit card company gives you a "pre-qualified" offer, it is also considered a soft inquiry. Apartment rental applications can be either hard or soft, but are commonly hard inquiries. My last rental application counted as a soft inquiry. It is good to ask, just in case you are not serious about a place. Any loan or credit application is usually a hard inquiry.

3. Store credit cards can be a waste of an inquiry

Many retailers offer small promotions to get customers to sign up for a store credit card. However, a store credit card is a hard inquiry and does not offer a lot to help your credit in other ways. A way to boost your credit is to have a lot of available credit. Your available credit combines all of the unused credit you have across all of your cards. Store credit cards usually only offer a small credit limit.

For example, I once got suckered into applying for an American Eagle store card because they gave me a 20% off discount on a pair of jeans. The credit limit was only $400. I do not need a higher credit limit, but the card does not offer much for me outside of that discount. I can only use the card at American Eagle and still need another credit card. My United Chase credit card started with a $5,000 credit limit and improves my score in the available credit category. My American Eagle store card still has a $400 limit, after two years, since I do not use it much. My Chase card increases my credit limit every few months which helps to boost my score effortlessly.

4. Keep your debt under 30%

Using more than 30% of your available credit harms your score. You should also spread your debt across all of your cards to keep it under 30% on each card. Lenders also check your debt-to-income ratio to see if your debt is less than 43 percent of your income. Your monthly debt is not your expenses or how much you owe your credit card companies. What is counted is actually your mandatory minimums. For example, if your monthly income is $4,000 and you owe $40,000 in student loans, your ratio would not be at 1000%. Lenders look at what your payments are for each month. If your student loan payment is $400 a month, that would give you a 10% debt-to-income ratio. Lenders add that to school, auto, and home loans to come up with a complete number.

5. Some debt is good debt

When lenders look at credit profiles, they also look for a variety of debt. It may seem odd that having a home loan (and all the debt associated with it) helps your score but it can. Certain debt, like home loans and student loans, are considered good debt. Auto loans and credit card debt is considered bad debt. A diverse credit profile shows a history of personal loans, auto loans, student loans, mortgages, and credit card debts. I have experience with all of these except a home loan. Realtors are frequently trying to seduce me to take out a home loan in order to improve my credit profile. Personally, it is much too large of a loan to take out before I am ready.

On a hard inquiry, it will show how much debt has been accumulated in a category and how much has been paid off. For example, for an auto loan, it will say the loan amount and how much I paid off that amount. For this reason, I have used student loan refunds (that are loans) to pay back loans I already have out. It helps lessen my interest and will show that I can pay back a higher amount.

Report this Content
This article has not been reviewed by Odyssey HQ and solely reflects the ideas and opinions of the creator.
Kardashians
W Magazine

Whether you love them or hate them, it's undeniable the Kardashian/ Jenner family has built an enormous business empire. Ranging from apps, fashion lines, boutiques, beauty products, books, television shows, etc. this bunch has shown they are insane business moguls. Here are seven reasons why the Kardashian/ Jenner family should be applauded for their intelligent business tactics.

Keep Reading...Show less
friends
Photo by Elizeu Dias on Unsplash

If I have learned one thing in my lifetime, it is that friends are a privilege. No one is required to give you their company and yet there is some sort of shared connection that keeps you together. And from that friendship, you may even find yourself lucky enough to have a few more friends, thus forming a group. Here are just a few signs that prove your current friend group is the ultimate friend group.

Keep Reading...Show less
ross and monica
FanPop

When it comes to television, there’s very few sets of on-screen siblings that a lot of us can relate to. Only those who have grown up with siblings knows what it feels like to fight, prank, and love a sibling. Ross and Monica Geller were definitely overbearing and overshared some things through the series of "Friends," but they captured perfectly what real siblings feel in real life. Some of their antics were funny, some were a little weird but all of them are completely relatable to brothers and sisters everywhere.

Keep Reading...Show less
Lifestyle

11 Types Of Sorority Girls

Who really makes up your chapter...

2425
Sorority Girls
Owl Eyes Magazine

College is a great place to meet people, especially through Greek life. If you look closely at sororities, you'll quickly see there are many different types of girls you will meet.

1. The Legacy.

Her sister was a member, her mom was a member, all of her aunts were members, and her grandma was a member. She has been waiting her whole life to wear these letters and cried hysterically on bid day. Although she can act entitled at times, you can bet she is one of the most enthusiastic sisters.

Keep Reading...Show less
Lifestyle

10 Reasons Why Life Is Better In The Summertime

Winter blues got you down? Summer is just around the corner!

2033
coconut tree near shore within mountain range
Photo by Elizeu Dias on Unsplash

Every kid in college and/or high school dreams of summer the moment they walk through the door on the first day back in September. It becomes harder and harder to focus in classes and while doing assignments as the days get closer. The winter has been lagging, the days are short and dark, and no one is quite themselves due to lack of energy and sunlight. Let's face it: life is ten times better in the summertime.

Keep Reading...Show less

Subscribe to Our Newsletter

Facebook Comments