Lenders use your FICO score, which falls between 300 and 850, as a predictor of your likelihood to repay debt. Your credit score will determine if you can borrow money to buy a car or a house or obtain a student loan. It will also play a role in establishing the interest rate on your loans.
Your score is determined by a mathematical algorithm from information contained in your credit report. While there are a number of credit-scoring models, the FICO credit score is used more than any other score.
The higher your FICO score, the lower the risk you present to lenders. You have three FICO scores, one from each of the largest credit bureaus: TransUnion, Experian and Equifax. According to Fair Isaac Corp., the company that introduced the FICO score, the median score is 723.
The categories making up your score include payment history, amounts owed, length of credit history, types of credit used and new credit.
You must be particularly careful with your finances when you are just starting to establish a credit history.
While you have an advantage in that you are starting with a clean slate, it can take several years to establish a good payment record.
Making good choices now will pave the way for a good or excellent credit rating, while mistakes may plague you for many years.
Things to Avoid When Building Your Credit
- Late payments. Payment history accounts for 35 percent of your score, and young borrowers have fewer credit lines to offset a low score in this area. It is crucial to pay bills on time to avoid credit rating damage. A bill that goes to collection will stay on your report for seven years.
- Using large amounts of available credit on individual credit cards. Do not use more than 80 percent of available credit. Experts advise borrowers to keep individual balances at less than 25 percent of limits.
- Applying for a number of new accounts. Credit agencies may interpret this activity as preparation for a spending binge.
Steps to Building a Good Credit Rating
- Pay bills in full and on time. Consider setting up automatic payments from your bank account if you have trouble keeping track of payment dates.
- Remain steadily employed since you will be viewed as more likely to pay your bills on time.
- Use your credit cards sparingly, and keep balances low.
- Show creditors you can manage different types of credit responsibly. Your score will benefit when you show that you can handle installment credit, such as student or personal loans, and the revolving credit of credit card payments.
How to Improve Your Credit Score
Review your report periodically, and correct errors. Personal inquiries will not lower your score. Consumers have a right to a free credit report every year. Reports may be ordered from http://www.annualcreditreport.com/.
- Since creditors consider debt-to-credit limit ratios, keep old credit card accounts to maximize the amount of credit available to you.
- Try to limit inquiries on your credit report, since a large number will lower your credit score.
- On-time payments are the surest way to improve your score since payment history contributes so heavily to your rating. Be patient. Your score will slowly improve over time as long as you pay your bills promptly.