A credit score is a number that helps lenders and others predict how likely you are to make your credit payments on time. Each score is based on the information at that time in your credit report.

Five Parts to Your FICO Score

As a rule, credit scores analyze the credit-related information on your credit report. How they do this varies. Since FICO scores are frequently used, here is how these scores assess what is on your credit report.

1. Your payment history – about 35% of a FICO score
   Have you paid your credit accounts on time? Late payments, bankruptcies, and other negative items can hurt your credit score. But a solid record of on-time payments helps your score.
    
2. How much you owe – about 30% of a FICO score
   FICO scores look at the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.
    
3. Length of your credit history – about 15% of a FICO score
   A longer credit history will increase your score. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.
    
4. New credit – about 10% of a FICO score
   If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your rate shopping within a focused period of time, such as 30 days, to avoid lowering your FICO score.
    
5. Other factors – about 10% of a FICO score
   Several minor factors also can influence your score. For example, having a mix of credit types on your credit report – credit cards, installment loans such as a mortgage or auto loan, and personal lines of credit – is normal for people with longer credit histories and can add slightly to their scores.

Why Does Your Score Matter?

Credit scores affect whether you can get credit and what you pay (in interest rates, etc.) for credit cards, auto loans, mortgages and other kinds of credit. For most kinds of credit scores, higher scores mean you are more likely to be approved and pay a lower interest rate on new credit.

Want to rent an apartment? Without good scores, your apartment application may be turned down by the landlord. Your scores also may determine how big a deposit you will have to pay for telephone, electricity, or natural gas service.

Lenders look at your scores all the time. They look at your scores when deciding, for example, whether to change your interest rate or credit limit on a credit card, or whether to send you an offer through the mail. Having good credit scores makes your financial dealings a lot easier and can save you money with lower interest rates. That's why they are a vital part of your financial health.

Consider a couple who is looking to buy their first house. Let's say they want a thirty-year mortgage loan and their FICO credit scores are 720. They could qualify for a mortgage with a low 5.5 percent interest rate. But if their scores are 580, they probably would pay 8.5 percent or more -- that's at least 3 full percentage points more in interest. On a $100,000 mortgage loan, that 3 point difference will cost them $2,400 dollars a year, adding up to $72,000 dollars more over the loan's 30-year lifetime. Your credit scores do matter.

What is a Good Score?

When lenders talk about "your score," they usually mean the FICO® score developed by Fair Isaac Corporation. It is today's most commonly used scoring system. FICO scores range from 300-850, and most people score in the 600s and 700s (higher FICO scores are better). Lenders get your FICO score from three national credit reporting agencies (also called credit bureaus): Equifax, Experian and TransUnion.

In the eyes of most lenders, FICO credit scores above 700 are good and a sign of good financial health. FICO scores below 600 indicate high risk to lenders and could lead lenders to charge you much higher rates or turn down your credit application.

Boosting Your Scores

Your credit scores change when new information is reported by your creditors. So your scores will improve over time when you manage your credit responsibly.

Here are some general ways to improve your credit scores:

• Pay your bills on time. Delinquent payments and collections can really hurt your score.
• Keep balances low on credit cards. High debt levels can hurt your score.
• Pay off debt rather than moving it between credit cards. The most effective way to improve your score in this area is to pay down your revolving credit.
• Apply for and open new credit accounts only when you need them.
• Check your credit report regularly for accuracy and contact the creditor and credit reporting agency to correct any errors.

If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.

Improving your credit scores can help you:

• Lower your interest rates
• Speed up credit approvals
• Reduce deposits required by utilities
• Get approved for apartments
• Get better credit card, auto loan, and mortgage offers

How to build a Credit History from Scratch

If you are new to the US and/or you haven't financed a car loan, a computer, or some other major purchase in the US, how do you begin to establish credit?

Get a Store Credit Card
First, consider applying for a store credit card issued by a local department stores and use it responsibly. Ask if they report to a credit bureau. If they do – and if you pay your bills on time – you’ll establish a good credit history. Don’t overdo it. Just get one or two of these store credit cards, don’t use more than 50% of the credit limit (otherwise it will impact your FICO score), and pay your bills on time.

Get a Secured Credit Card
Second, consider getting a secured credit card. It requires that you open and maintain a bank account or other asset account at a financial institution as security for your line of credit. Your credit line will be a percentage of your deposit, typically between 50 and 100 percent. Application and processing fees are not uncommon for secured credit cards. In addition, secured credit cards usually carry higher interest rates than traditional non-secured cards.

Get Someone with Good Credit to Co-Sign
Third, consider asking someone with an established credit history -- perhaps a relative -- to co-sign the account if you don't qualify for credit on your own. The co-signer promises to pay your debts if you don't. You'll want to repay any debt promptly so you can build a credit history and apply for credit in the future on your own. Remember – if you don’t pay your debt on time on a co-signed account, that’ll negatively affect not only your credit but also your co-signer’s credit.

A positive credit history is an asset, not only when you apply for a credit card, but also when you apply for a job or insurance, or when you want to finance a car or a home.

Patience is important in this process. It takes time to establish credit and build a record of consistency in making payments to demonstrate your creditworthiness. And it is much better to go slowly and develop a strong credit record than to apply for too many credit cards or a loan that is larger than you can handle.

Start slowly, be cautious, keep track of your overall debt, and pay on time.

 

 

 

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