Debt management is an important skill for anyone who owes someone else. Understanding your options for managing debt will help you stay in control of your debt rather than letting it control you.
Getting credit when you don’t have any can be intimidating. Building Credit focuses on giving you the information you need to obtain credit and handle it responsibly. Using these techniques will help you build a solid credit history.
Whether you're building or rebuilding your credit, knowing the right way to make charges and payments will help raise your credit score.
Credit Report & Scoring explains your credit report and score, how they are maintained, and how you can obtain them both.
Your credit report is a compilation of information about the way you pay your bills. Credit reports are maintained by credit bureaus and used by lenders to decide whether to give you a loan.
Your credit score is a three-digit number that is used to predict how you will pay your bills. The score ranges from 300-850 and is calculated using your credit history information from your credit report.
When you make an application for credit, the creditor or lender uses your credit score to quickly make a credit/no-credit decision. This same decision can very well be made by simply viewing your credit report, but the credit score makes decision-making easier and less subjective.
While there are several different versions of the credit score, the most commonly used version is the FICO score (Read FICO vs. FAKO). Developed by the Fair Isaac Company, the FICO score is used by many creditors and lenders to decide whether or not to extend credit to you.
Because some parts of your bill-paying history are more important than others, different pieces of your credit history are given different weights in calculating your credit score. Even though the specific equation for coming up with your credit score is proprietary information owned by Fair Isaac, we do know what information is used to calculate your score.
Payment history is 35%
Lenders are most concerned about whether or not you pay your bills. The best indictor of this is how you’ve paid your bills in the past. Late payments, collections, and bankruptcies all affect the payment history of your credit score. More recent delinquencies hurt your credit score more than those in the past.
Debt level is 30%
The amount of debt you have in comparison to your credit limits is known as credit utilization. The higher your credit utilization – the closer you are to your limits – the lower your credit score will be. Keep your credit card balances at about 30% of your credit limit or less.
Length of credit history 15%
Having a longer credit history is favorable because it gives more information about your spending habits. It’s good to leave open the accounts that you’ve had for a long time.
Inquiries are 10%
Each time you make an application for credit, an inquiry is added to your credit report. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble. While inquiries can remain on your credit report for two years, your credit score calculation only considers those made within a year.
Mix of credit is 10%
Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn’t a significant factor in your credit score unless you don’t have much other information on which to base your score. Open new accounts as you need them, not to simply have what seems like a better mix of credit.