We all know credit history is important because lenders, landlords, and sometimes even employers evaluate our creditworthiness. Whenever you apply for a loan or credit card, the lender will use your credit file to determine if they think you are eligible for credit and what your interest rate will be.
But did you know that all credit is made from the tradeline? Although this fact is not often discussed, it is just as important to understand the structure of the building. Keep reading to find out why all credit starts with a tradeline.
What Is a Trade Line?
A tradeline is defined as an account that appears on your credit report. This includes both revolving accounts and installment loans.
Revolving accounts are accounts that can be used repeatedly without paying in full each month, so they can fluctuate in terms of balance and minimum payments. Examples of revolving accounts include credit cards and home equity line credit.
An installment loan is a loan that is repaid over a fixed number of payments over time. G Mortgage, auto loan, or student loan.
What Goes Into Your Credit Report?
Although FICO and credit reporting agencies keep a close eye on the specific aspects of their credit scoring models, the general categories that turn into credit scores are widely known. In general, here’s what’s going on in the credit report, which is then used to calculate your credit score:
Payment history, approximately 35%: Paying the right amount to your tradeline every month is crucial. Delayed or missed payments can result in derogatory marks on your credit report that lower your score. It is a good idea to have several different trendlines in a good position because this section is so heavy. If you have an abusive tradeline, it is important to maintain a perfect payment history with the rest of your tradeline to balance the negative sign in your report. You always want your good credit history to outweigh bad credit items.
Utilization, or how much you owe, approximately 30%: The ratio of your usage to the percentage of your total available credit to all your revolving accounts (e.g., credit cards) is expressed as a percentage. Both can consider. The lower your usage, the better. It is generally recommended to keep your total usage ratio below 30%, but it is better to keep it low.
Length of credit history, approximately 15%: This section considers factors such as the average age of your tradelines, the ratio of “mature” to the oldest trendlines in your credit file, and non-mature trendlines. A paved tradeline is usually considered one that is at least two years old. The length of the credit history goes hand in hand with the payment history, together making up 50% of your credit score, so a strong element to consider is the age of your accounts.
Credit mix, approximately 10%: Creditors want to make sure you can handle different types of credit, so they look for a balanced mix of different tradelines in your report. The most important thing is to deal in two main categories: revolving credit and installment loans.
How to Build Credit
The best way to create a good credit record is to keep various tradelines in good standing by opening and paying on time and keeping usage low. We offer more on how to optimize each factor of your credit score to get the best possible score entitled “How to get 850 credit score”.
The simple fact is that you can’t create credit without a trade line.
Opening a credit card is a common way to set up a credit file and start creating credit, but it’s not the only option. Other ways to improve credit history include student loans, auto loans, or credit-generating loans.
Tradelines and Your Credit
It is important to know about credit because credit is an integral part of your financial well-being. Since all credits are built primarily on tradelines, it is equally important to understand how tradelines can affect your credit.
Sometimes access to the tradeline can be a challenge for people who are either having new credit issues or have had problems in the past and are trying to re-establish their credit.