Your credit score is a critical factor for your financial situation. The score impacts your ability to borrow, and the interest rate you’re charged on a debt. If you don’t understand how your credit history is scored, you can damage your credit rating.
Credit report basics
MyFICO.com is a great website that explains how a credit score is computed. FICO stands for Fair Isaac Corporation. Most large lenders make credit decisions based in part on the borrower’s FICO score. The calculation is driven by information provided by credit reporting agencies.
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Here are some items that will hurt your credit rating:
- Late payments
- Too many forms of credit open at once (multiple credit cards, for example)
- Applying for credit too often
In addition, the MyFICO blog points out some other credit myths:
- Medical debt: Keep in mind that medical debt will also impact your FICO score- just as other forms of debt.
- Level of indebtedness: The blog points out that you don’t need to have a large amount of debt to build credit- just a reasonable amount of debt (see more on this topic below).
- Requirement to report credit activity: Currently, there is not law requiring banks, credit card companies or other lenders to report activity to credit reporting agencies. What is required is that the data they report is accurate. If you have positive credit data (such as paying off a debt), you can request that your lender report the activity to the credit bureaus.
Not borrowing will keep my score high
You need to borrow money responsibly and pay it back on time to build a credit history. Create a personal monthly budget for yourself. Include loan payments in that budget. Make sure any loan you take out fits into your monthly budget.
FICO needs data from a credit bureau (credit reporting agency) to generate a FICO score. In order for a credit score to be calculated, you need to have at least one account (loan, credit card) open for 6 months or longer. At least one account needs to be reported to a credit bureau within the last six months.
If you borrow money and pay it back on time repeatedly, you’ll build a solid credit history.
Information submitted by credit reporting agencies is always accurate
That information may be wrong. The three credit reporting bureaus are Equifax, Transunion and Experian. Make sure that you review your credit report data periodically. Verify that the information reported by credit agencies is correct. If the data is wrong, it will impact your credit score.
Call the reporting agency and check their website to find out how to make corrections. If the reporting agency is resistant, contact a consumer credit firm. These firms can help you get the matter resolved.
I can’t improve my credit score
Yes, you can. By borrowing money responsibly, the credit bureaus will report favorable information to FICO. As a result, your FICO score can increase. A better FICO score means a better credit rating.
Use these tips to build a credit history and improve your credit score. A better credit score makes borrowing much easier- and less expensive. Smart choices about credit can make a huge difference for you over the long term.
Have you taken steps to improve your credit rating? I’d love to hear from you.
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