FAQ: How to Build and Improve Your Credit

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Credit can be confusing. We are told that credit is important and that having “good” credit is crucial for financial health. But despite all the advice, Americans have over $ 13 trillion in different types of loans and credit card debt. Let’s go over the basics.

What does it mean to have a credit score?

Credit is money borrowed from a grantor that you pay back over time with interest. Credit is “how you are rated in the financial world,” said Laura Adams, host of the Money Girl podcast.

She talks about the credit score, which creditors use to determine how risky it is to lend you a loan and how likely you are to pay them off.

What is a “good” credit score?

“The reality is that there are hundreds of different credit scoring models that are in use,” Adams said. “[Lenders] all of them have a little different way of evaluating you, and the kind of shortcut they use, in many cases, is a credit score.

The most commonly used score is the FICO. Ninety percent of credit lenders use the FICO scoring system to assess an applicant’s risk.

VantageScore was created by the three credit bureaus – Experian, Transunion, and Equifax – to compete with the FICO system. VantageScore is growing in popularity, but FICO is still the industry standard.

The FICO scale ranges from 300 to 850. Ted Rossman, industry analyst at CreditCards.com, explained that a score of 740 or higher is generally considered “excellent.” A “good” score is between 670 and 739 and approximately 660 to 669 is “fair”. Everything below is “poor”.

“The point is, however, that most people have good to excellent credit,” Rossman said. “Experian found that the median is 704.”

When and why is credit important?

Lenders look at your credit history when deciding whether or not to lend to you. It also determines the rate of interest that you pay if you get approval for these loans.

“The vast majority of us need access to loans to buy assets like homes and cars,” said Jose Quinonez, founding CEO of Mission Asset Fund, a nonprofit focused on integrating low income and financially excluded communities in the financial system. system.

Your credit history can affect even more than your ability to get a loan – it can also be assessed by homeowners, insurers, and utility companies.

If you need a credit history to get a line of credit, how do you start building credit?

There are entry level ways to start your credit report. Secure cards – prepaid cards where you pay the bank the amount of credit you will have on the card – are one way to start a credit history.

You can also be added as an authorized user to someone else’s account. It is a great way for parents to start a credit history for their children or other young people. Certain private institutions also offer specific loans for the constitution of credits.

With all of these options, make sure the lender reports to the credit bureaus so that you are actually building a credit history.

What can I do to improve my credit rating?

We already know that the number comes from an algorithm that extracts information from your credit report, but what does it extract and how does it weigh it?

Your payment history represents 35% of your score: Did you pay your loans on time? The length of credit history is 15%. The combination of different types of credit – installment and revolving – is 10%. The new credit, that is, the opening of a large number of lines of credit at a time, also represents 10%. Credit owed represents 30% of your credit score.

Credit usage, a ratio of the amount of credit you actually use to the amount of credit you have, is the second most important factor. If you have a line of credit with a limit of $ 5,000 and you use $ 1,000 of that credit each month, that works out to a 20% credit utilization rate. The lower the rate, the better. Rossman says that a value below 30% is ideal.

How often should I check my credit report and what should I look for?

You can access your credit report once a year from each of the three credit bureaus on annualcreditreport.com. Rossman of CreditCards.com recommends rolling out the office’s three reports throughout the year, requesting one every four months.

Checking your credit report doesn’t hurt your score. Inquiries from you have no effect on your score. A serious investigation comes from a potential lender and may lower your score slightly for a few weeks.

When you check your credit report, look for items that don’t seem correct and check against your bank statements.

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