What is a Credit Score? (and how to get it)
No doubt about it, good credit is all a numbers game. The higher your score, the better deals you get on credit and loans – and the less you'll likely pay in interest.
Conversely, the lower your score, the higher the chances of having your credit and loan requests stamped "rejected." Or, if you do get credit, it comes attached to an anvil in the form of higher interest rates.
What's the best recipe for a good credit score? Try these tips on for size:
- First, understand what makes up your credit score – and know where you need to go. By and large, credit scores range from 300 to a perfect 850, and are forged from data the credit bureaus get from businesses that have extended credit to you. In just about every case, that data includes your payment history, the length of your credit history, the types of credit provided you, recent applications for credit, and the total amount of money you owe to creditors.
- Begin your credit score campaign by requesting a copy of your credit report to make sure the information being reported about you is accurate. Because, let's face it – if your credit report has inaccurate data, how accurate do you expect your credit score to be? Not very. (Your best bet: get a free report once a year at: www.annualcreditreport.com). Take a fine-tooth comb to your credit report and review carefully for any errors. Believe it or not, errors occur a lot more than you might think – usually in the form of accounts that aren't your own, late bills you paid on time, debts you've already paid off that are listed as outstanding, etc.
- Once you've verified that the information in your credit reports is accurate, the next step to figuring out how to best manage your credit scores is finding out where you currently stand. To do this, you'll need to find out what your scores are at all three of the major credit bureaus. You have three credit reports, which means you also have three credit scores. As a general rule of thumb, any number above 720 is good news. Anything below 650 will likely mean that you'll be saddled with less than stellar interest rates--and if your score is too low, you may be refused credit entirely.
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There is no magic bullet to improving your credit score. However, there are some key action steps you can take to gain detailed insight into your credit profile today - building a better understanding of your credit strengths and weaknesses.
Start by paying your bills on time – without fail. Credit card companies and mortgage lenders can bring the hammer down if your payment is even one day late.
The key here is to make on-time payments a regular habit. If you've had a few late payments or delinquencies, your first step should be to get current and stay current. Most creditors report your payment history to the bureaus every month, so if you can start paying your bills on time, you'll begin to see a gradual uptick in your credit scores (barring any other negative credit issues). Be realistic and understand that it won't increase overnight, it's going to take time to rebuild and show that you've changed your ways – but after 12 months of positive payment history, you'll often begin to see a gradual improvement. After 24 months of positive payment history, you'll likely see more significant improvement. This is because credit scoring models place more emphasis on the last 24 months of your patterns because they're more indicative of your future risk.
Besides paying your bills on time, you should also keep a close eye on your levels of debt. Particularly revolving accounts – or credit card accounts. With credit cards especially, you should aim to keep account balances as low as possible. The closer you are to maxing out your cards, the more your credit scores will suffer. Focus on paying down those balances – don't close the accounts – pay them down, and you'll see significant improvements as soon as the balances are updated in your credit reports.
Some other tips:
- Keep your eyes on the prize. Studies show that individuals with an average credit score would reduce card finance charges by $76 annually if they raised their score by 30 points.
- Avoid too many applications for new credit. Too many requests for credit can hurt your scores. A new account opening can impact your average length of credit history, the amount of debt you're carrying, plus the inquiry for credit will count against you – all of which are factors used in determining your credit scores. This isn't to say you shouldn't apply for credit, just do so sparingly and when you really need it. Don't use your credit as a 10% off coupon – it'll end up costing you more than the discount in the long run.
- In general, aim for between three and six active accounts, and one or two loans. A healthy mix is what's important here.
- Have a stable record of credit use and keep your accounts open for a long time.
- Know the myths associated with credit scores. For example, checking your own credit report does not cause your credit score to decrease, contrary to popular rumor. You can check your credit reports as often as you would like without harming your credit score. Only when you apply for new credit or loans does a "hard inquiry" count against you.
Getting and keeping a healthy credit score is all about planning, knowledge and execution. If you can manage to conquer all three, then you're well on the road to a lofty – and lucrative – credit score.