What are credit scores?
Credit reports are used by banks, credit card issuers and automobile dealerships to help them determine whether or not you are a good risk and if you are likely to repay any loan taken out.
Also, many potential employers and landlords check your credit score to find out about your past credit history.
There are some very simple steps you can take to raise your credit rating, as well as many things you can do to avoid having your credit score decline in the future.
Note: This article applies to the United States. While some of the information here is relevant for other jurisdictions, check with your relevant local sources to verify first.
Understanding your credit score
There are five major components to your credit score.
Payment history (35%)
The most important component of your credit score is your payment history.
Do you pay your bills on time?
Do you have a history of late payments?
If so, how late?
Have you ever been turned over to collections?
You can expect that late payments will deduct points from your score.
Amounts owed (30%)
What’s your overall debt load?
If you’ve taken on too much debt, then your score could suffer.
Length of credit history (15%)
How long is your record when it comes to managing credit?
If you’re brand new to the scene, then lenders will view you as a risky borrower when compared against someone who’s been paying off debt for decades.
New Credit (10%)
If you’ve just taken out a bunch of new loans and/or opened credit card accounts recently, your score is going to take a hit.
Types of credit (10%)
A healthy mix of debt (a mortgage, a credit card, and a car loan) is viewed a little more favorably than debt consisting entirely of credit cards.
However, you don’t want to open a new credit account just to have “balance.”
Instead, focus on the other components of your score.
Different lenders may use industry-specific scores.
For instance, a credit card company may look at your FICO Bankcard Score, or an auto lender may order your FICO Auto Score, to give them a more specific look at your relevant credit information.
When applying for a personal loan, student loan, or mortgage, your credit score from all three bureaus may be examined.