Understanding the basics of credit

June 23, 2020 | by HC Mutual

If you’re planning to apply for a loan soon, it’s the perfect time to learn more about credit. Achieving your financial goals begins with understanding the ins and outs of financial mobility and preparedness. In this article, you get to know the basics of credit scores, and how a good credit standing can help you and your family reach your dreams.

What are credit scores and
why are they important?

Your credit score is one of the factors that many financial institutions and banks look at to assess your eligibility to borrow and your capacity to pay back loans. The higher it is, the more likely you are to get approvals, better offers, lower interest rates, and more flexible payment terms. People with high credit scores are given these rewards to encourage good credit behavior, and to nurture a mutually beneficial partnership that paves the way for bigger financial opportunities.

What factors affect your credit score?

Upon your application, lenders will tap a credit bureau to get your credit report and score. These credit agencies will then use different scoring model softwares to make the computation. To help you get an idea of how they can assess your credit, here are the key factors to consider:

  1. Past loans – Have you ever applied for a loan? What types did you apply for? If you were approved, how much did you borrow?
  2. Payment history – Have you paid all your loans on time? Did you miss any months? Do you have any outstanding bills?
  3. Open accounts – Do you have active savings and checking accounts? Aside from your savings account, you may need to open checking accounts for loans that require repayment through post-dated checks. Having well-managed accounts in different banks is a good habit that can help your credit score and establish your credibility to a range of financial institutions.
  4. Inquiries – Each time you apply for any financing program, the lender’s request for your credit report will be put on record, and having too many may lower your credit score. Be sure that you really want or need the loan, and can follow through with it, before applying.

Keep in mind that all credit checks should be done with your express consent and signed authorization.

What differentiates credit score, report, and history?

Your credit history is a record of how you’ve handled your debts, payments, and credit throughout the years. On the other hand, a credit report is a comprehensive summary of your credit history that outlines all your transactions, loans, monthly payments, and balances. It also includes personal information like your name, address, occupation, TIN, and SSS/GSIS number.

Your credit report is what credit bureaus use to calculate your credit score.

How can you build good credit?
  • Keep your payments on time – Banks and financial institutions look at your payment history to evaluate your capacity to pay back your loan. Being late on these monthly payments even just once or twice will damage your credit score, especially if this happens two years prior to your application.

    When you apply for a loan at HC Mutual, we look at your credit standing at present—your past records and payment history will not affect approvals.

    However, paying in “a timely manner” does not mean that it is always advisable to clear off your loans too quickly. Lenders are looking for good credit history and creditor behavior. You can establish your discipline and trustworthiness better by being consistent with your payments over time. If you really want to settle your loan early, we advise to pay it within 6 to 12 months.
  • Borrowing is not always bad – While it’s good to pay in cash and to free yourself from debt, applying for a loan or credit card can boost your credit score. A lengthy but well-managed credit history can help you get approval for bigger loans and credit card limits.
  • Avoid overspending – If you own a credit card, try your best to stay within your credit limit. For the best results, spend only up to 30% per month.
  • Keep track of your accounts – If you have a savings and checking account, be sure to always keep them at their required maintaining balance. Avoid overdrawing to prevent difficulties in your next application and to avoid any bouncing checks, which can lead to both financial and legal repercussions. By exhibiting good creditor behavior and care in maintaining your accounts, you build trust with banks and other financial institutions for future credit.
  • Slowly pay off your debt – Clearing off outstanding dues doesn’t have to happen overnight. By taking doable steps to pay off your debt, you can improve your credit score and enjoy better financial wellness for the long-term.
  • Take it one step at a time – Having multiple active loans and credit cards at the same time may hinder your credit score, and may be seen as being too eager when it comes to credit. These can also be difficult to manage simultaneously when faced with unexpected expenses and personal emergencies. Choose which loan or credit card fits your budget best, and apply for the next one only when you really need it.

We understand that there may be circumstances that could unavoidably damage your credit standing. But you don’t have to worry—this is not the end of your financial goals. You can rebuild your credit history and fix your credit score. As you do so, you have the opportunity to plan out your finances more effectively, start building your savings, and maintain consistent improvement towards the future.

Source: CNN Philippines, Credit Information Corporation (CIC), iMoney PH, Moneymax

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