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Credit: Risk and Your Reputation
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Ian D.
Certified Credit Union Financial Counselor
Posted October 24, 2019
Do you work to build a positive reputation at work and with your friends? Most of us want to be viewed as reliable and responsible because that tends to attract people and opportunities. Think of credit as your financial reputation. A credit score is a snapshot of your reputation at a single point in time and tells others how likely you are to pay your bills (and do so on time).
Newer implies riskier
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The first time you ask someone to borrow money, they might be a little hesitant. This hesitation is amplified if you ask for a large amount. That’s because there’s a chance you’ll take the money and decide not to pay it back or find yourself unable to afford to pay it back. When you are brand new to credit, you’re considered a higher risk, so you might be offered a smaller loan amount or asked to provide a cosigner who has more credit history. This is reflected by not having a credit score if you’ve never borrowed. You’ll also start off with a slightly lower score when you first begin building credit.
Risk and the amount of debt
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If you already owe a lot of people money, lenders may be skeptical about offering you more money in loans. They’re not necessarily as worried about how many dollars you owe, but they look closely at what you owe relative to your available credit. For example, if you have a credit card with a limit of $1,000, lenders want to see how much of that you’re using. If you have the card maxed out, it could be a sign that you’re using debt to pay your living expenses, which makes you a risky candidate for more debt and more monthly payments. If you have a lot of available credit, it shows that you’re able to pay your living expenses comfortably and you likely don’t need the line of credit to afford rent. That makes you a lower risk and can increase your score.
Your reputation
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As mentioned earlier, credit is essentially your financial reputation. That’s because lenders look closely at whether or not you have paid back money you borrowed in the past. They also look at whether you are paying on all of your current debts. Lastly, they want to see whether you are making those payments on time or not. Although lenders generally don’t mind getting a late payment with a hefty late fee, if you’re making late payments regularly, it could signal a problem with your budget and makes you an increased risk. That’s why missing a payment can result in a significant drop in your credit score. It’s worth noting only payments that are 30 days or more past due will be reflected on your credit.
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