Good credit is one of those super boring things that you know you probably care a bit more about. More than just info, credit is the key to basically affording everything you can’t put up cash for, which means you have to take care of yours since you’ll mostly need it for big purchases down the road. A car, a house, and even your overall financial health are determined largely by your credit. The first step to better credit is understanding how the credit reporting system works so we've boiled all the need-to-know info for you right here.
There's More Than Just One Number
Even though it’s commonly referred to as a credit score, it’s actually three different numbers from three separate credit reporting bureaus: Experian, Transunion, and Equifax. Those three numbers are based on the FICO model, which is what the majority of the banks and credit card companies use to assess how much of a risk you are when you want to borrow money or get a credit card. The FICO range is from 300 to 850, and the higher the number, the less risky you are. Each credit reporting bureau deals with slightly different information on you, so everybody will have three different FICO scores. Though, loaning institutions will usually only have relationships with one of the bureaus. When you access your credit reports, however, you can check out all three.
5 Key Things That Shape Your Score
1. Payment History, 35%: No brainer here. Paying your bills on time is obviously important to showing all creditors that they can expect to be paid back (even though they are betting you don’t).
2. Amounts Owed, 30%: This is how much total debt you currently have in your name and, yes, it includes student loans. You probably just screamed, but those aren’t what really impact this factor (especially if you’re paying them on time). It’s your credit card usage, known as revolving credit, that matters. In an ideal world, you have (or are working towards) a high amount of credit available with a low amount owed.
3. Length of Credit History, 15%: This section is pretty self-explanatory. It comes from the opening dates of your credit accounts. Having a longer history is beneficial, and it’s important to keep accounts open even if you don’t really use them anymore. One thing a lot of people do to maintain a long credit history is to swipe a paid-off card a few times a year and pay the balances immediately. Not only does it keep the established history, but it also boosts the payment history information and keeps the amounts owed down.
4. Credit Mix, 10%: FICO scores are helped by a mix of different accounts, so having store credit cards, major bank credit cards, car payments, and other loans are good, believe it or not. As long as you are paying them off of course.
5. Searches for New Credit, 10%: Applying for credit affects your FICO, and can hurt you if you’re doing it a lot. But, it's a common misconception that checking your score can affect it negatively, but it's not true.
Obviously, some of this information will be more important for some people than others. For example, if you managed to ignore those tempting credit pre-approval envelopes all through college and have little-to-no credit history in your early twenties, your FICO scores can’t be determined the same way someone who is in their forties and has twenty plus years of credit can.
Checking Your Report Regularly Is Free and Important
Considering your credit report can affect a lot of things you want to do in the future, knowing what’s in them is vital. Under federal law, you’re entitled to request a free credit report from each reporting bureau once every 12 months through www.annualcreditreport.com, which is the official site. You’ll enter identifying information about yourself to prove you’re you, and then you’ll get a look at the pages. There’s a caveat though: everyone’s interested in the scores usually, but you can’t get them for free. You’ll have to pay a fee (usually around $10 for the individual scores) to get access. Still, even without knowing any scores, the reports can give you some idea of where you’ll stand with creditors before you decide to apply for something.
You Should Check More Thank Once
Doesn’t it seem like we hear about hacking or identity theft at a major company every week? Which is why it’s crucial to check out your credit reports more than once a year, just to make sure nothing fishy is going on. It will cost you more money—usually less than $12 each, which isn’t bad at all, especially if you compare it to the mess someone else can make with your credit. If possible, do a credit checkup at least twice a year, including the free report. If a company that has your personal information is hacked, though, they’ll usually offer you free credit monitoring services for a period of time. Additionally, if you’re in the market for a car or large purchase requiring credit, it’s always good to know where you stand as you start the negotiation process.
The Good and The Bad
Your credit reports are always going to be changing, so you can raise a low score; it will just take some time. But there’s no quick fix to raising your score, though. Having your credit reports on hand can give you a good idea of where to start the repair, since they will usually note what specifically is impacting your score, and hat information can help you fix dings. The bad news is though, good credit can tank if you’re careless and keeping the five factors in mind when using credit can help you maintain it for the long haul.