How to Build a Good Credit Score
Your credit score is a major key to managing credit and more. Although there are multiple credit scoring methods, FICO scores are most widely used in the U.S. The FICO system uses scores between 300 and 850 with 350 being worst and 850 perfect. Your credit score indicates your creditworthiness to lenders and creditors, and can also impact your ability to be hired, qualify for auto insurance or rent your next home. Don't give up if your credit scores are hanging out in the basement. It's a long way from the basement to the penthouse suite, but these tips can help you get started.
First things first: Order copies of your credit reports from each of the three major bureaus -- Experian, Equifax and TransUnion. According to federal law, you may receive one free copy of each credit report annually, but you'll be charged a fee for credit scores. While the scores the bureaus provide to consumers are not the same as the ones used by most lenders, they should be reasonably close.
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Review and compare your credit reports: In general, information shown in each of your credit reports should be consistent. Checking and comparing credit reports can reveal errors or inaccuracies that can lower your grade. Make a list of questionable entries from your credit reports and check your records. Report errors to the appropriate credit bureau(s) right away, as reporting errors can indicate problems such as identity theft or credit card fraud.
Need to correct errors fast to get a mortgage? Ask your lender (only a mortgage lender can do this) about a Rapid Rescore. For a small fee, these services can remove inaccurate derogatory lines from your credit report in about 48 hours. You do have to prove that the entry is wrong, and they can't remove true information, but for those needing a quick fix to close a mortgage this service is invaluable.
Now it's time to get down and dirty and clean up your credit:
Pay your bills on time: According to FICO, Paying your bills on time accounts for 35 percent of your credit score. One of the easiest ways to stay on top of your bills is to create a calendar for tracking when your bills are due. You can also have bill payments automatically drafted from your account to avoid missing payment due dates. Past due on bills? You can fix the damage by paying on past due accounts first. The National Foundation for Credit Counseling (NFCC) reports that recent activity on your credit reports is more important than past mistakes. Establish a steady record of repayment to help resolve past due accounts.
Don't max out your credit: This won't help much if your credit card balances are already through the roof, but keeping (or paying down) your account balances can help raise your credit scores, as amounts you owe contribute to 30 percent of your FICO score. Creditors and lending institutions consider your credit utilization ratio when deciding to grant credit or raise your credit lines. You can estimate this ratio for each of your accounts by dividing the amount you owe on each account by the amount of the credit line. For example, if you owe $2000 on a card that has a $10,000 credit line, your utilization ratio is 20 percent. Improve credit scores by paying off debt and not using your accounts or opening new credit lines until you achieve your debt management goals.
Keep track of length of credit history: FICO says that the length of your credit history accounts for 15 percent of your scores. While this doesn't mean that you should quickly accumulate a number of credit cards, it does make sense to open and maintain one or two major credit cards. Don't close accounts, particularly those that you've had for a longer time.
Manage new credit and types of credit:
10 percent of your FICO score is based on how many new accounts you have. Opening multiple accounts within a short time can signal financial problems. The final 10 percent of your credit score is based on what types of credit you have. Credit scoring companies and lenders consider a mix of credit types preferable to having only one type of credit. Credit cards, education loans, vehicle loans and home loans are examples of types of credit. A word of caution here: Limit new accounts to credit you need. Don't open store accounts to get a one time shopping discount or rationalize buying a new car to increase the types of credit you have.
Here's one last thing. Don't focus on credit scores alone, but do track your overall progress toward achieving higher scores. Watching your account balances and finance charges fall is a worthy reward for improving your credit profile.