Have you ever felt like you were doing everything right, only to be met with disappointment?
One of our legal assistants’ story is a perfect example. Despite paying her bills on time and in full, she struggled to get approved for a home loan because she had a thin credit file. She nearly hissed at the loan officer after being denied.
The Myth of Perfect Credit
Many people believe that simply paying your bills on time is enough to build good credit. However, this is a misconception. Credit bureaus look at your credit history, which includes the types of credit you’ve used and how long you’ve had accounts open. Monthly bills that are not related to a credit account are generally not reported to credit bureaus. If you have not built a good credit history you could have a hard time getting approved for credit.
The Importance of Credit History
A strong credit history is essential for securing loans, renting an apartment, and even getting some jobs. It’s a reflection of your financial responsibility and trustworthiness. Please keep in mind, credit reports are a fairly modern invention. The first credit score was introduced in 1989. Companies do need to have a seemingly fair way of evaluating someone’s history when they decide to loan or not to loan money. As a society we don’t want companies to rely on our looks, race or gender to decide if they think we are a good risk. Here in the US, the credit report and credit score don’t seem to be going anywhere. Instead, there is a complicated structure and rules that credit bureaus and information furnishers have to follow to remain compliant and protect themselves from lawsuits.
Limits of a Credit Score
Just like a high school student’s grade transcript, a credit score cannot tell anyone what you are going to do in the future. It can be looked at to predict how likely you are to default on a debt. Some kids do better when they are in college than they did in high school. A new environment can distance the student from people or things that made it hard for them to be successful. Taking classes in topics you enjoy can get you better grades. It can be this way for credit. Maybe moving into your own home helps you choose to save money by making food yourself instead of ordering. Maybe you had been renting from a bad landlord and had to leave the conditions of the terrible apartment building for you and your family’s safety. There could be a million possible reasons for something negative to appear on your report. It may not even be your debt showing up.
Please remember that your credit score is not a summary of who you are. Just like that high school transcript, it is a recorded history of how you did during a specific time period. It does not actually have any real bearing on how you will behave moving forward. It is only the best tool companies have to try and guess.
How to Build Credit
If you’re starting with a thin credit file, here are some steps to take:
- Get a credit card: By using it responsibly and making on-time payments, you can build your credit history.
- Use your credit wisely: Pay your bills on time and in full. Minimum payments are not a default goal. Always try to pay your card off in full or as close to it as you can each month.
- Monitor your credit report: Regularly check your credit report for errors and take steps to correct them. (www.AnnualCreditReport.com)
Remember: Building credit takes time and patience. Don’t get discouraged if you don’t see results immediately.
By following these tips and taking proactive steps, you can establish a strong credit history and unlock the doors to financial opportunities.
In case you are like me and hope for a happy ending: yes our legal assistant was able to make a few tweaks to her financial life. She built her credit positively and is now living in her very own home.
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