Credit is a key that helps unlock life’s big decisions. Good, established credit can help you buy a home, lease a car, or even start a small business. When it comes to financial wellness, your credit is at the heart – and guess what? A personal loan can help to establish credit.
So, what is credit? Essentially, credit is proof of your ability to pay back borrowed money, goods, or services. Credit is represented by a number – called a credit score – and that number goes up or down depending on your payment behavior and history.
Let’s take a closer look at why it’s important to establish credit, how credit is determined, and some options – like personal loans – that can help to establish credit.
Why Credit Matters
You are so much more than your credit score – that’s something we believe strongly at World. Your credit score, though, does open you up to life’s possibilities. Establishing and maintaining good credit will increase your chances of approved credit applications, whether from a bank or a lender. With good credit, you’ll often be offered a lower interest rate, too, which costs you less in the long run. You are not your credit score – don’t let it stand in the way of unlocking your financial good.
The 5 Credit Factors
There are a few factors that affect your credit score. These are the most common ones:
1. Payment History
Generally, payment history accounts for about 35% of your credit score. It’s an indicator of habits – have payments been on-time? Reliable? Consistently late? This factor shows your track record, and shows lenders your abilities in the area of repayment.
2. Credit Usage
This is also known as your “debt-to-limit ratio”, and it makes up about 30% of your credit score. Basically, it represents how much of your overall credit limits that you’re using. This can give lenders an idea of how you are handling the credit you currently have, and if you are able to handle more.
3. Age of Credit
Age of credit is exactly what it sounds like – how long you’ve held certain credit accounts. The longer your credit history, the more data there is to pull to determine your score. This means that if you keep your first lines of credit open, you may maintain a higher score. Age of credit accounts for about 15% of your total score.
4. Credit Mix
Your credit mix is the number and combination of your current credit accounts. These can be car loans, credit cards, personal loans – anything that contributes to your credit score. A broader mix can signify a higher approval rate, leading to – that’s right – even more approval. Credit mix makes up about 10% of your credit score.
5. Credit Inquiries
Credit inquiries are documented whenever your credit is pulled, and they make up 10% of your credit score. Obviously, a hard pull is necessary to apply for lines of credit, but several credit pulls can be a sign of risk to lenders. Why? They might see it as a sign of low creditworthiness.
How to Establish Credit
The thing about credit is that, to have it at all, you first have to have something to make payments on. It might sound crazy, but it’s true. Personal loans are a fantastic way to establish credit from 0. You can get a personal loan with no credit and use it to build your credit history from scratch. We recommend borrowing a small amount at first, something that will be very manageable to make monthly payments on. As you make those monthly payments – consistently and on-time – your credit can grow, making you eligible for larger loans, leases, and even a mortgage.
Credit is part of modern life. Start establishing your own credit today with a personal loan, and Unlock your Financial Good.