Lenders use a credit score to evaluate the probability of a person repaying his debts. Learn more about how your credit score is determined and how you can improve it.
UNDERSTAND YOUR CREDIT REPORT
- Credit Score. A FICO (Fair Isaac Corporation) score is the best known credit score; however, there are also three major credit bureaus including Equifax, TransUnion, and Experian that calculate and report credit scores. Though each company calculates the score differently, on average the range of scores is as follows:
- Excellent = 720 and up (900 is the highest score on average)
- Good Credit = 660 to 719
- Fair Credit = 620 to 659
- Poor/Bad Credit = 619 and below (300 is the lowest score on average)
- Credit Report. A credit report is a record of your credit payment history. It includes identifying information (i.e. name, date of birth, and address), account history (i.e. account issuer, date opened, credit limit, balance, and payment history), public records (i.e. bankruptcy records, tax liens, and overdue child support payments in some states), and inquiries, which is a record of businesses and lenders that have reviewed your credit history within the past two years. Your credit score is not included in your credit report. It is purchased for an additional cost.
- Obtain Your Credit Report. Through the Fair and Accurate Credit Transaction Act, you can pull your credit report for free once a year by visiting the website of one of the three major credit bureaus (Equifax, TransUnion, and Experian). Essentially, you can could pull your report every four months at no cost. If you exceed this frequency, you can purchase your credit report at any time by visiting one of the three major credit bureaus (Equifax, TransUnion, and Experian).
THE IMPORTANCE OF CREDIT
- Your Credit is Reviewed. Many lenders use your credit score and report as a resource when deciding to lend you money. In many cases, it is also pulled by businesses when making decisions about offering you employment, accepting your rental agreement, deciding insurance rates, and much more.
- Establish Credit. Since the length of your credit history is considered when calculating your credit score, it is important to establish credit as soon as possible. An easy way to start establishing credit is by applying for a credit card. Read our Credit Card Management article for more information on using credit cards responsibly.
10 WAYS TO IMPROVE YOUR CREDIT
- Make all Monthly Payments. Missed payments have the most significant impact on your credit score, making up nearly 35% of your credit score. To help stay on top of your payments create a monthly budget, avoid making unnecessary purchase, contact your credit card company and inquire about decreasing your monthly payment, and make the minimum payment.
- Make All Payments On Time. Many individuals are able to make the payment, but forget to make the payment before the due date. To avoid making late payments, set a monthly reminder, inquire from credit card companies and/or banks to see if they have a monthly reminder email service, and streamline all your monthly bills in order to make for easy remembrance.
- Keep a Close Eye on Your Credit Report. Keep a close eye on your credit report to make sure there are no errors on your report. If you uncover an error, a dispute should be filed with the credit bureau in order to fix the problem. For information on how to properly file a dispute, visit the bureau website.
- Avoid Closing Old Lines of Credit. Many people believe that in order to improve their credit, they should close old or unused lines of credit. In actuality, old lines of credit have the potential to improve your credit score. When lenders view a credit report, they observe the amount of credit the borrower has available and the amount of credit used.Ultimately, lenders want to see that you have a high amount of credit available but only use a small portion of it.
- Increasing Your Line of Credit. Increasing your line of credit, while still only using a small portion of it, has the ability to increase your credit score. But beware! This is not recommended if this increase in available credit will tempt you to spend more. Also, ask if the request will require a new credit inquiry, as this may have negative impact on your credit score.
- Open New Accounts Wisely. A credit line is a new credit card, loan, or any other type of borrowing. New credit lines account for about 10% of how your credit score is calculated and are highly monitored by credit issuers and lenders. Opening many accounts in a small time frame has the potential to lower your score. New lines of credit should be opened wisely – think through the decision and the alternatives first.
- Savings Equal Security. Saving money takes discipline and ensures you have an emergency fund. Getting into the habit of setting aside a little every month will help in case you ever have a large unexpected expense.
- The Importance of Low Balances. A credit card balance is the amount of money that is owed to the credit card company. Lenders want to see a low credit card balance after each monthly payment. It is best to fully pay off your credit card balance each month. If this is not possible, pay as much as you can afford to lower the monthly balance. Try to at least pay more than the minimum payment.
- Beware of Credit-Repair Scams. Credit repair relief solutions advertised on TV or the radio may sound tempting but often times they are a scam. There is no overnight solution to repairing your credit.
- Take Advantage of the Different Resources Available. Consider visiting the three major credit bureaus’ websites (Equifax, TransUnion, and Experian) and visiting myFICO.com. In addition, many financial resources such as blogs and articles are available online. Please take caution when reading to make sure the information presented is from a reliable and accurate source.