Your credit report is your financial reputation at a glance. It is a record of your bill paying habits, outstanding debt and available credit, the length of your credit history, types of credit used, and new accounts that you’ve opened.
Your credit report can affect whether you will get a loan, the terms of the loan, your homeowner and auto insurance rates. It is used by employers to make hiring decisions and by landlords to decide if they will rent to you.
To build a better credit report, you don't need a hammer and nails. The first thing you need to do is to know what’s actually on the report. If you haven’t already, go to www.annualcreditreport.com to get a free copy of your report from each of the three major credit reporting bureaus. The credit score does not come with the report, however. To see your score, you need to contact the three bureaus, Equifax, Trans Union, and Experian or Fair Isaac.
Check the accuracy of the information you find there. Are there accounts that aren’t yours? Is there information that should have been removed? Correct any inaccuracies.
The most important factor in determining your credit score (35%) is whether you’ve paid your bills on time. Consider having automatic payments made so that you don’t inadvertently forget a payment.
Keep your credit balances low. Credit utilization is the second most important factor (30%). It is a ratio of your credit balance on each account to its credit limit as well as the overall credit use among all accounts to your total available credit. This means that you don’t want to max out any one card, while leaving another card unused as a spare, for example. Keep the balance on each card at about 25% or less.
Closing an account could actually hurt your score. There are a couple things to keep in mind on this one. First, it will increase your credit utilization rate as was just discussed. If it raises the rate beyond 25%, leave the account open. You don’t have to use it—except perhaps for one small charge every now and then to prevent the issuer from closing the account due to lack of use. Second, length of credit history is another factor in determining the credit score. You may want to consider keeping one of your older accounts, even if it is one with a high interest rate. Again, you don’t have to use it. But if you do, charge only a small amount and pay in full when the statement arrives so you don’t have any interest charges. By paying the full amount each billing cycle, you will never pay a cent of interest.
A fourth part of your credit score has to do with inquiries. Checking your report will not affect your score, whether it is you or someone else looking at it. What does affect it is applying for credit. If you’re buying a house or car, do your loan shopping within a short period of time and it counts as only one inquiry. It can vary, but about 30 days for a house or 14 days for a car. The inquiry won’t bring the score down a lot, maybe about five points per inquiry, but if you are in a borderline case, even those few points can count.
You need to use credit to have a credit score. Use of cash or a debit card is not reported to the credit bureaus, so that cannot help improve your score. If you’re unable to get a credit card, think about getting a secured card. With a secured card, you make a deposit up front with the issuer. In return, you get a credit limit of the amount of the deposit or somewhat more. It looks like a normal credit card, but because of the high interest rates, charge only what you can repay in full. It should be used only to rebuild credit by paying on time not as another credit card.
Another option could be to start with a gas company or department store card. They are generally not as difficult to get, but they also don’t count as much toward building a good report. Nevertheless, they may be a good place to start.
The credit score is important when you will be applying for a loan. If it is not in a good place at the moment, start working on it now. It likely didn’t get there overnight, and it won’t magically improve overnight either.
See the following resources for additional information on improving a credit report:
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