Understanding Your Credit

What is this score you hear so much about? And how can one number have so much power? Understanding the facts about credit scores will help you make choices that will protect your options in the long run. 

First, know what a credit score is. It is a mathematical risk assessment based on the information available in your credit report. It does not factor in such information as income, employment, age, sex, and race. If you are in the market for a home or car loan, a high score is important, as lenders will look to it to assess their risk in lending you money. 

The same goes if you are looking for a credit card with a low interest rate. Even potential landlords may look at your credit score to help them determine their risk in renting to you. Though you may not be in the market for a loan or home now, you never know what the future holds. Keeping your score as high as possible is usually a good idea. 

A common scoring model is one developed by Fair, Isaac and Company. They issue a FICO score, which is based on many factors. Five of these factors are significant and within your power to control. They are (in order of greatest weight) payment history, amounts owed, length of credit history, pursuit of new credit, and types of credit in use. If your score isn't where you want it to be, the good news is that you can take steps to improve it. 

• Obtain copies of your credit report from all three major credit reporting agencies to check for and correct errors. 
• Pay down your debt. If you can't pay the total balance each month, pay more then the minimum required payment. 
• Pay on time, every time.
• Avoid aggressively transferring balances to new cards. 
• Keep your credit card balances well under the maximum available limit. 
• Only apply for and have the credit you need. 
• Repay collection accounts, judgments, and liens. Recent information matters most – so the faster you do all the right things, the faster you can repair damage. 
• And avoid "credit repair clinics," as they can't do anything you can't do for yourself for free.

Keep in mind that you can’t build credit without using it. Having several (two to four is a good rule of thumb) active credit instruments shows capacity and responsibility. Balance is key. Too many unused open accounts shows potential for high future debt, which can lower your score, while too few accounts can also have a negative impact because you won’t have a long history of responsible credit use.