Credit scores are based on many factors and each financial institution may have specific methods unique to their scoring. But there are three common pillars that dictate your overall credit score that are common to most financial institutions. You need to address these three pillars in order to raise or increase your credit score.
These three pillars of your credit score are payment history, amount of used available credit, and length of credit history. These three areas make up about 80 of most credit scoring. Many financial institutions start off with your FICO score, which is based on a system developed by the Fair Issac Company to determine a numeric value based on your previous and ongoing credit transactions. Although many financial companies then apply some individual factors, your FICO score is often the beginning score.
Payment history is simply the information that any creditor has reported on your payments made during the term of your transaction. This could be a mortgage company, local bank or credit union, or even a department store reporting on a revolving credit account (charge account). This is why it s important to get a current copy of your credit score and review it for any errors or incorrect information. Some companies may not report your credit transaction so if you do have some positive credit history you can request that they do report it or even submit your own report on the transaction. Be aware that they will try and verify any consumer supplied information.
Each individual is assessed on how much of his or her credit is being used. Let s say you have 3 credit cards, a mortgage, and a car payment. Between these three areas and also based on credit history, there is a magic number for available credit. Say this number is $15,000. If your credit cards show a balance of less than half of your available credit on those cards, that s a good thing. If you show that you have hit your maximum available credit on each of those 3 credit cards, that s not good. You want the ratio of available credit and used credit as low as you can get it. That s why if you pay your credit cards down, your credit score often moves up.
The length of your credit history is important since the more transactions they can review; the more information is available to judge. A person with few credit transactions won t get the same score as someone with several current or past transactions since they have established a pattern. That s why it s good to use your credit from time to time in order to create some positive history of payments and amounts borrowed.
You would think that someone with no debt would be a good credit risk but that s not true since they have no history to review. In order to receive a good credit score you need to have at least some prior credit transactions to be used to calculate your credit worthiness. So if you don t have at least one credit card or loan of some type, it might be a good idea to get one. Make a few charges a month and pay them off on time and in full.
Our credit system is not good or bad but it is something that you do need to pay attention to if you plan on making any credit applications. The system really started in the 1950 s and has evolved over time to it s present form. Congress has passed some basic laws that both the Credit Reporting Agencies and creditors have to adhere too to protect consumers.
One is the federal Fair Credit Reporting Act (FCRA) that promotes the accuracy and privacy of information in the files of the nation’s consumer reporting companies. The other is the Equal Credit Opportunity Act (ECOA) prohibits credit discrimination on the basis of sex, race, marital status, religion, national origin, age, or receipt of public assistance. You can find out more about both these laws on the Federal Trade Commission website.
So if you take care of these three pillars of your credit report, everything else should fall into place. Make any payments on time, check your current credit reports for accuracy, and keep your debt to credit available below 50 and you should be in good shape. If you don t have any credit history, it s a good idea the next time you want to purchase something to buy it on credit. Make sure you make your payments on time and that the credit source does report to the major credit reporting agencies. You can start small and slowly build up some positive credit history. Never enter into any credit agreement without carefully reviewing the terms and make sure you can afford the payments.
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