Building up a credit history is a pretty serious undertaking for personal savers. It involves keeping track of a variety of payments to ensure that they harmonize with incoming cash flows, and then balancing all of these different payments with the financial goals that incurred the debts in the first place. While it can be tricky enough to monitor all of these different payment and income dates that come and go from our bank accounts, borrowers need to also remember to prioritize specific kinds of debts so as it create the greatest amount of benefit to their credit score as possible in a given period.
This means that borrowers should be aware of which payments matter the most to their credit bureau, and which ones don’t even report in the first place, and are therefore incrementally less important with respect to an actual credit score. By understanding which debts report to a consumer credit bureau, and more importantly which ones don’t, we can prioritize our debt repayment to ensure that we are building up a credit score in the most effective way possible.
Debts that report on the credit bureau are usually those ones which are reasonably sized, and run through major financial institutions. Unsecured loans and lines of credit, credit cards, most car loan, and even furniture loans will report to the credit bureau, and therefore build up your personal credit score. This means that consumers need to be sure that payments are made within 30 days of their due-date on these particular loans, so as to ensure that they create positive movement in the credit score.
This includes those ‘loans’ from retail stores that wouldn’t intuitively come off as being debts. ‘Don’t pay for five years’, ‘Equal payments for five years’, and many other slogans used for technology and furniture companies are all offers to finance a purchase over a period of time, and are usually offered in conjunction with a third party lender. This means that these obligations are actually loans that are being financed through a bank, and should be treated accordingly. While it might be counter-intuitive to prioritize the furniture payment, it will create a major benefit to your credit score in the long run by keeping the payments on time.
To many a borrower’s disbelief, mortgages, some car loans, overdraft loans, and even some home equity lines of credit will not report to the credit bureau at all. This means that a payment to your mortgage will not actually improve your credit score, and conversely, missing a payment will not explicitly harm your credit score (in most circumstances). However, banks will monitor these loans for delinquency, and will report them to the bureau as being bad debts in the event that a borrower missed a large volume of payments. The end result is that these loans only change a personal credit score if they go into default, which will be effectively recorded as either a foreclosure, or a write off (both of which are enough to completely destroy a credit score for the short term).
So what do we take away from all of this information? Essentially it means that we can categorize our loans into two main types: firstly, we have those loans which we will use to rebuild our actual credit score, and should therefore prioritize, and then secondly we have those loans which will impact our relationship with our bank. While this second category of loans is arguably of less overall significance to our credit score, it is important to remember how it is that banks will lend as much on relationship as they do on credit score. This means that a customer with a history of missing mortgage payments in favor of credit card payments will find themselves in a somewhat unfavorable position with their primary bank if they make a habit of ignoring their obligations.