I will give you a couple of good examples of what I mean. An average male, height 5’9″, weighing 150lbs, may appear to be in great physical health to the naked eye. On second thought, if you did some homework about the background about that same individual you may find some things that can severely impact your perception of his health. Does that person have an eating disorder, that is causing him to lose weight? Is that person a smoker or does his family have a long history of heart disease? How’s his cholesterol level? See what I mean.
The same things applies to credit. If you assume that credit is more than the threes digit score but rather an amalgam of different factors then you will agree that simply making the payments on time is not a clear indication of your actual credit health.
Credit in my opinion is a bridge towards borrowing money. Ultimately, credit is simply the ability to borrow money from a lender, bank, or broker. Many people mistake having a positive payment history for having credit. Let’s dig a little deeper. In today’s harsh economic environment banks, who are the gatekeepers of the money, so to speak, are evaluating your potential borrow-worthiness based on a whole host of factors.
Today banks want to ensure that you have a reliable income and a steady job. In other worlds, the banks would prefer you to be able to provide them with some type of verifiable income… a W-2… instead of being self-employed… where your true income can be a bit murky.
In addition, banks are more willing to lend you money if you have some type of collateral. Banks want to see that you are a homeowner, and furthermore, that you have equity in your home. In today’s lending atmosphere DTI (debt-to-income ratio) measures are being scrutinized more and more.
So, to determine if your credit is healthy by simply utilizing the measure of making payments on time is only half the story. That said, making payments on time to your creditors is a great indication of your future ability to pay back what you may eventually borrow. And, that’s important. Some ways in which you can ensure that your credit is healthy and that your payments are going to be made on time are the following…
Avoid late payments and late fees by setting up account alerts on your smart phone to remind you when your upcoming payments are due. Set-up auto-pay. Auto-pay sets up your payments on auto-pilot letting you schedule your payments months in advance. Choose your own due-date. Lots of creditors are much more flexible than they used to be and as long as you’ve demonstrated a good payment history they will let you set up the date that is most convenient for you. Finally, get with technology and download your creditor apps on your smartphone and use those mobile apps to make payments and check account balances.