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My Credit Score
A credit score is a number generated by a mathematical formula that is meant to predict credit worthiness. Credit scores range from 300-850. The higher your score is, the more likely you are to get a loan. The lower your score is, the less likely you are to get a loan. If you have a low credit score and you do manage to get approved for credit then your interest rate will be much higher than someone who had a good credit score and borrowed money. Therefore, having a high credit score can save many thousands of dollars over the life of your mortgage, auto loan, or credit card.
Payment History (35% of your credit score)
Pay all of your bills on time, every time. This includes your utility bills, mortgage and auto payments, and all of your revolving lines of credit like credit cards. Paying all of your bills on time will increase your credit score and show lenders that you are credit worthy.
Credit Utilization (30% of your credit score)
What is the total of your remaining car loan balance, mortgage, student loans, etc? This category adds them up. Never charge more than 30% of the available balance on any of your credit cards. Banks like to see a nice record of on-time payments, and several credit cards that are not maxed-out. If you are carrying high balances on your credit cards, then make paying them down below 30% a priority. Do use your credit cards – Many people who make mistakes with their credit believe that the best way to fix things is to never use credit again. If you are afraid that you cannot handle your credit cards correctly then the best policy is probably this one: Run only your utility bills on your credit cards each month, and then pay the balance in full by the due date. This ensures that your utility bills get paid on time automatically, and as long as you keep the habit of paying off your credit card balance each month your score will continue to go up. Leave the credit cards locked in a safe or drawer at home.
Length of credit history (15% of your credit score)
Keep your accounts open as long as possible – Even if you are no longer charging on the card. The best policy is to keep those unused accounts open, blow the dust off your card every few months to make a small purchase, then pay it off. How long each of your accounts have been active is a major factor in your credit score. Remember that this all takes time – Following the above steps consistently over a long period of time will increase your credit score and allow you to qualify for better loans and lower interest rates. Repairing your credit score does not happen overnight, so if you do these things for a few months and do not see a large increase in your score, do not give up. They are all habits that you will want to maintain throughout your life, as they will help you to keep your finances and lines of credit under control.
Recent or new credit (10% of your credit score)
Although many consumers think that too much credit activity can hurt their score, new and continued credit activity will actually increase your credit score. Applying for too many items in a short period of time, increasing the number of credit inquiries, can both decrease your credit score.
Diversification of your credit accounts (10% of your credit score)
Many smart investors say that diversification is the only "free lunch" in investing.
The same can be said about your credit. Types of credit diversity can include:
1) Revolving Credit
Credit cards are the most common forms of revolving debt. You’re allowed to borrow money within the credit limit on your card. And, you’re obligated to pay back a portion of your balance at the end of the statement period, which can vary from month to month depending on how much you’ve spent. This revolving, or rotating, process keeps your credit activity always current.
These credit agreements have a fixed payment for a certain amount of time. You borrow a sum of money and keep making payments to the lender until your debt is paid off. Student and home equity loans are examples of installment credit, as are mortgages and auto loans.
A secured credit card, a mortgage or an auto loan are all examples of secured loans. In each case, some form of collateral is required. The lender holds this collateral as a lien against the loan. If you fail to pay off what you owe, you can lose the car or house you’re financing. Secured credit cards are often for people with no credit or bad credit, since carriers want some sort of financial incentive before granting you an account.
4) Unsecured Credit
Unlike secured credit, unsecured credit requires no collateral or payment in advance. A standard credit card with a high credit limit is a good example of unsecured credit. The lender is basing its decision to let you borrow money off your good credit standing and your word that you’ll pay the debt back.
5) Open Credit
Open credit accounts include company charge cards, cell phone accounts and home utilities. Balances are normally paid in full each month, and there’s no interest, so they don’t usually appear on a credit report unless payments are late or delinquent.
Building a strong credit history takes time and discipline. Always being responsible with credit and recognizing that it is not "free money" is key to being able to make your payments on time. You are borrowing from your future earnings for using credit to buy appreciating assets like a business is recommended. Anyone that works hard everyday should be able to tap into their future earning and buy something they want and not something they need, like an expensive car or new clothing. For more information on building your credit score, credit reports, and credit repair follow us and please comment and share our information.