Everybody wants good credit. How do you get it? But what makes up good credit?
Three organizations collect credit information, Equifax, Experian and Trans-Union. In turn, these companies factor the credit into a single credit “score”, called a FICO, Fair Issac rating, and sell this information to lenders, credit card companies,banks, basically any credit-granting organization. Each company collects slightly difference information and computes the score slightly differently, so your FICO is different for each credit-reporting agency. Mortgage lenders usually collect all three and use your “middle” score as your rating. Anything in the 400s or 500s is bad credit, in the 600s is OK and in the 700s, especially above 750 is very good to excellent. In the 800s is golden. 850 is the max.
So, what makes up your credit report? Of course, the most important component in your credit report is your payment history. This represent about 35% of your final “score”. Typically, your landlord does not report your payment history to credit reporting agencies so good payments there will not build your credit. Some utility companies do report; some do not. To find out, ask. What will build your credit? Well, buy a car and pay for it in installments, making every payment on time. Or, get a Macy’s or Kohl’s card or a gas card and make your payments every month on time.
The next component is the amount owed. This represents about 30% of your credit score. Paradoxically, the more debt you have, the better your credit score--to a point. Each credit card, for instance, has a credit limit associated with it, perhaps $10,000 or $15,000 or $30,000 or $50,000. Let’s say you have three cards with $10,000 credit limit each. You now have $30,000 in potential credit. You can borrow up to $15,000 and increase your credit score, as long as you allocate it correctly. Never use more than 50% of your credit limit. So, in this case, you could borrow $5,000 from each card. As you accumulate cards and debt, as long as you pay at least the minimum every month, though, obviously more is better, your score will continue to rise. Further, your credit card companies will continue to raise your credit limits. Eventually, that $1000 limit you started with may rise to $50,000.
The next component of your score is the length of your credit history. That’s worth about 15%. Youth is not an advantage here. The longer you have had credit and managed it well, the better for you. If you have had a bankruptcy or a foreclosure or lates on credit cards, it takes time to “get over” these events before your score begins to rise again. As long as you handle what credit you have correctly, your score will rise.
Getting new credit accounts for about 10%. Be careful here. Try not to collect too many cards or too many loans. If you can keep track of all of them, fine, but it’s easy to miss payments if you have 20 active cards and loans, so take it slow.
The last component making up about 10% of your credit score is types of credit. Vary your credit among revolving accounts, such as department store cards; credit cards; auto loans and mortgages.Gas cards are an easy type of credit to get and manage. Mortgages are more difficult to get and more difficult to manage well. Most lenders put a limit on the number of mortgages you can have.
Once you’ve established credit, there are many ways to improve it quickly and, as we all realize to our chagrin, it is very easy to drop your score by a huge amount for a relatively minor infraction. If you would like to know what our credit score is right now, several sites give it to you for free. Check out Annual Credit Report, Credit Karma or Quizzle.