So you want to buy a car or a house? How about get a credit card or a mobile phone?
You won’t get any of those things until they check your credit score. There are three main credit scoring agencies – Equifax, Experian and Trans Union. They each issue credit reports showing your creditors’ names, the amount you owe, the highest balance you’ve even owed, your available credit, whether the account has been closed, and whether the creditor closed it or you did. Based on that information you are assigned a credit score between 300 (low) and 850 (outstanding). Each agency scores a little differently, but here are the main areas in which you are graded and given credit scores, and the approximate weight that each area is given.
Payment history -35%
Credit scores reflect performance over time, so if you’re late on bills your score will be negatively affected. The more recent the problem, the lower your score. In fact, a 30 or 45-day late payment right now is worse than a bankruptcy 6 years ago. Scores will not change overnight, but you can improve your credit history over time with one simple action — pay your bills on time.
Outstanding debt -30%
This judges how close you are to your credit limit. A little amount owed on a couple different cards that have high limits is better than “almost at your limit” on one. Closing unused cards removes those available balances from the equation and can actually lower a credit score. Today, some banks are automatically lowering limits or closing accounts to reduce their own credit exposure, and that can hurt your credit score.
Credit history -15%
No credit is almost the same as bad credit. Married people don’t share a credit history: each married person has his or her own credit record. Of course, if all of your accounts are joint, your scores will likely be similar. If you divorce and close joint accounts, check your credit record to be sure that your credit history shows only your activity, not your ex-spouse’s
And remember, it is never too early to establish a good credit history. For all of you parents out there you might consider establishing credit accounts for your responsible teenagers, so they have a leg up when they go out on their own.
New credit and types of credit – 20%
One of the easiest ways to harm your credit is by applying for too much new credit. Inquiries by prospective creditors who are considering extending credit to you can have a negative impact on credit, so be careful about applying for too many credit cards at once. Credit bureaus recognize that consumers might inquire about a loan from multiple mortgage companies or auto lenders in a short period of time, so they don’t count each inquiry against the borrower.
The first step to increasing your score is to get a copy of your report and fix any mistakes. Everyone should check his or her credit report at least once a year to be sure the report contains no erroneous information. You can get free annual reports at www.annualcreditreport.com .