Figure Your Credit Score
You may be wondering how your credit score is calculated. The process is long and each of the three major credit reporting companies in the United States uses a different method. As a result, each of the three credit bureaus will return a slightly different credit score. But by taking some factors into consideration, you can generally get a good approximation of your credit score.
First, if you have never owned a credit card or had any type of bill in your name or otherwise borrowed money of any kind, your credit score is going to be zero. Technically it's not considered bad credit, but it is extremely difficult to get a loan with no credit. Having no track record for using credit wisely is as much a red flag to lenders as having a history of using it badly. While there are some companies that may be willing to take a chance on giving a major loan to someone with no credit (after all, everybody has to start somewhere), it is much easier to develop a credit history from a small start, for instance having a credit card with a very small credit limit and paying it regularly or having a utility bill in your name and paying it faithfully. Once you've established a credit history, it will be much easier to get larger loans such as a car loan or a mortgage.
Your credit history makes up about 35% of your total credit score and it is very important. Any bills you failed to pay or debts on which you have defaulted will hurt your credit score for 7 to 10 years before they are erased. Any bad choices you make today can hurt your credit for years to come. Even if you get back on track right now and start repaying those debts faithfully, chances are they will still show up on your credit report for the next several years as bills that were paid late.
Another 15% is going to be based on the length of your credit history -- a person who has shown stable habits of repayment over an extended period is regarded as more reliable than someone who has been handling credit only a little while. It is a good idea to start building credit as soon as you can, so that you will have several years of good payment habits behind you when you need to take out a major loan. Your score is will improve as time goes on as long as you are maintaining a bank account. In addition to the length of time you have had credit, this section will also contain information about how long you have lived at your current residence and held your current job. A person with a stable job history will have a better score in this area than someone who switches jobs and moves around a lot (however, you should not let concern about your credit score make you afraid to change jobs if it is necessary for other reasons; for instance, to get away from an abusive boss or an employer whose business practices raise ethical alarms).
The next 30% of your score is based on what you currently owe to creditors. Even if you are not late on paying your bills, having a large number of loans outstanding is considered a red flag and may lead to you being denied further credit. Creditors do not want their debtors to get overextended by incurring too many obligations, to the point that any unanticipated problem could result in late payments and outright defaults. Therefore it is important to take out only the loans you really need and to repay them on time or early if you can. If you pay off your loans early, you will not only see your credit score rise, but you will also save money on interest. An early repayment will show up on your credit history.
You will also want to try and keep your money in one place if possible, and avoid closing old revolving accounts only to take out new ones. 10% of your credit score is going to be based on the proportion of new accounts to established ones. They will look at how many different types of loans you have applied for and how many you have open now. When you are opening and closing accounts too fast, creditors generally wonder what is going on.
You need to use your common sense about credit. Knowing your credit score and how it is calculated will help you find mistakes on your credit report. By getting them corrected correctly, you can improve your credit score in the future. You are able to see a copy of your credit report annually for free, so you should review it on a regular basis to catch errors before they lead to you being rejected for credit.
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