You may know how many credit cards you have in your wallet, and how much you owe on each. But do you know what your credit rating is? Or why it might be important? Here’s the low-down on high credit scores.
Credit history matters
Your credit history is looked at by lenders to determine if they want to lend to you or not. The three major credit bureaus in this country (TransUnion, Equifax, and Experian) compile your credit history and share it with the credit card companies and lenders you have submitted credit applications to.
Credit scores are based on your credit history
If you have credit history, you have a credit score. Or credit scores, I should say. There are many different credit scoring formulas out there (the well-known FICO score is just one variation). All credit scores are based on the information on your credit reports, and weigh the same important factors. Namely:
- Do you pay your debts back each month?
- How much debt do you have?
- How frequently do you apply for new credit?
- How long have you been a responsible user of credit?
If you routinely miss monthly credit card and loan payments, if you’re up to your ears in debt, or if you spend you free time responding to pre-approved credit card offers you get in the mail, your credit scores won’t be pretty. Also, credit newbies like college students are likely to have lower scores than those with nice, long, credit histories.
Good credit saves you money
Why does any of this matter though? Who cares if you’ve wrecked your credit rating? Well, as I said before, your credit rating is the key to getting approved for new loans and credit cards. If you’ve got great credit, lenders are likely to open up their coffers to you at a low interest rate. A good credit score can add up to major savings, especially on larger purchases like a house or a car. The difference between a 6% and a 9% interest rate on a 30-year $150,000 home loan, for instance, equals about $4,500 in the first year of payments alone.
Check your credit
So how do you know how good your credit is? Start by checking your credit reports from TransUnion, Experian, and Equifax. You can go to www.annualcreditreport.com, the government website that offers you one report from each bureau annually. You can also purchase any number of credit scores, but they will really only be estimates to give you a general idea of your credit rating. The only way to know the importance of any credit score is to ask the prospective lender which one they use.
Build your credit
Once you’ve reviewed your credit reports and scores, you can take steps to start building your credit. The absolute best way to do this is to pay your bills on time each month. If you do this and nothing else, you’ll achieve a good credit score within a few years. Beware of “fast fixes” from credit repair specialists. Most of these are bogus and will simply drive you deeper into debt.