Credit 101: Using Credit Wisely- Morgan Stanley Smith Barney

Whether you’re applying for a mortgage, purchasing car insurance, or signing up with a new Internet provider, your credit score may factor into how much you pay or whether you get approved. Understanding how credit-rating agencies calculate this number and how you can establish a healthy credit score early on in life can help increase your financial freedom and purchasing power in the future.
The Basics
Think of your credit report as your personal financial report card. Credit agencies use this report to generate a credit score for both consumers and businesses. The most common credit reporting system uses a three-digit score ranging from 300 to 850 meant to indicate to lenders how risky you are as a borrower. Every time you pay down your credit card balance or repay a loan, lenders report the to the credit bureaus, which use it to update your total score. A good credit score, typically 720 or higher, helps position you as a trustworthy, responsible customer. A low credit score can have significant implications on your ability to access credit and may even result in higher interest rates and down payments because lenders see you as a “high risk” borrower.
You can find out your credit score by requesting a credit report from one of the three national credit bureaus: Experian, Equifax, and TransUnion. You are entitled to one free copy a year, or within 60 days of being rejected for credit, employment, insurance, or rental housing due to bad credit.
Payment history. Paying your bills on time often has the greatest impact on your credit score.1
Credit-utilization ratio. This is the sum of all your outstanding credit balances (i.e.your total debt) divided by your total credit limit. In other words, how much of your total available credit are you currently using. For example, if you have a balance of $1,000 on a card with a $5,000 limit, your credit utilization ratio for that card is 20%. Generally, the lower your utilization ratio, the better.
Length of credit history. The longer your credit history, the better, so make sure to start building credit as early as possible.
Total open lines of credit & types of credit used. There are several types of credit that can influence your credit score. In addition to credit cards, your credit score takes car loans, mortgages, student loans, and several other forms of debt into account.
Number of hard credit inquiries. Checking your own credit may not affect your score, but there are a lot of other organizations who might request a report on your behalf. Many inquiries made by a third party in your name in connection with an application for credit can have a negative impact on your score, so try to keep these to a minimum.
Winning Plays to Keep Up Your Credit Score
Fortunately, there are several things you can do to maintain or improve your score. Here are some winning plays to keep your financial report card in good shape:
Avoid late payments. Late payments on anything from medical and electric bills to credit card payments or monthly rent push down your credit score and may appear on your credit report for up to seven years. Setting up automated payments for at least the minimum owed can help avoid this.
Use credit cards but pay them in full. Responsibly using credit cards can help show the rating agencies that you can handle a mix of credit types and keep your credit-utilization ratio low.
Avoid canceling credit cards. Canceling a card will decrease the amount of total credit in your name and lower your credit-utilization ratio as a result, even if you have no balance on a card. It can also impact you’re the length of your credit history, if you’re canceling an old card.
Avoid applying for several credit cards at once. Credit institutions record all credit inquiries made in your name. Multiple hard inquiries within a short amount of time can suggest that you might be “high risk”, which may have a negative impact on your score.
Be cautious when co-signing a loan. If your co-signer defaults on a payment, it could have a negative impact on your score too.
Review your credit report annually. Many credit reports have mistakes which could result in a lower credit score, so make sure to request a report once a year.
Whatever your starting point, taking the above steps can help improve your credit. A Financial Advisor can help you create a plan to reach your individual goals that starts with building a solid credit foundation.
Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.
Brian Jacobs is a Executive Director in Valencia, CA at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at brian.jacobs@morganstanley.com or by telephone at (661) 290-2022.
Brian Jacobs may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where he is registered or excluded or exempted from registration.
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