A credit score is a number assigned to an individual that evaluates his or her financial responsibility. This score is assigned by outside credit rating agencies which consider different money factors that help to provide the final analysis. This number is often used by a variety of institutions, such as lending agencies, rental companies, and utilities providers to determine whether an individual is responsible enough to engage in the services which they offer.
This number is weighted very highly by all money lending agencies, and many people feel like they do not have the power to impact it in a positive manner. Often, people are surprised when they learn this number, and can become frustrated trying to understand where the number came from. Improving this number requires an individual to understand how it is decided, and what steps they can take to demonstrate their ability to manage money well.
Maintain a Positive Payment History
Paying bills in a timely manner will positively affect an individual’s credit rating. This is the largest factor used by rating agencies to determine an individual’s trust worthiness. These histories may be gleaned from past utilities bills, apartment or home rentals, car payments, and credit cards.
The credit rating agency typically looks at the payment history to see how often bills were missed, how late they were paid, and whether any outstanding debt remains. If a long gap in time exists between the time in which the payment history is checked and the last time a bill was missed, than this will impact the overall score very little. If bills were missed recently, the score will be lower. Unpaid bills will significantly damage the credit score, as will indications that repaying them is either not possible or not a priority. Bills that are sent to collections agencies and filing for bankruptcy are two such indicators.
Checking a credit score frequently can cause it to lower. Most credit rating agencies will allow individuals to check their scores once a year without penalties. If someone is considering taking out a large loan in the near future, they may want to check their score first so they are not surprised by any information contained therein. They can use this opportunity to discover whether any unpaid bills exist in their name. Most reports list the names of the sources of these bills, and that person can contact those businesses to attempt to settle their debt and have the bill removed from their record.
Don’t Cancel Credit Cards
Rating agencies next typically examine how much credit is available to someone, and how much of that credit they are using. This calculation will first take into account the amount of debt that is outstanding. This can include car loans, home mortgages, credit card debt, and student loans.
Second, the agency will weigh that number against all credit available to one person. Available credit is calculated by adding together the maximum amount of money a person can borrow at once. This is often in the form of credit cards and home equity lines. A person who owes an amount close to the maximum which he or she can borrow will have a low credit score.
Individuals should attempt to pay off their existing debt, and leave all lines of credit open to improve their credit scores. This step is often counter-intuitive to many people who are overcoming extreme debt. They assume that once they have paid outstanding credit card debts, they should close the accounts to demonstrate how responsible they are and that they don’t wish to get into high debt again. Instead, this lowers the amount of available credit they have. Borrowers can leave their credit lines active without using them for any length of time, and may wish to consider simply cutting the card instead of canceling it to curb their spending habits.
Begin Using Credit as Soon as Possible
Credit rating agencies also wish to see how long someone has been using credit. Those with long credit histories tend to have higher scores. This is because an agency can easily see the pattern of behavior that a person has developed over time in regards to money. They can see how timely he was in paying off bills, how much others are willing to lend him, and whether he honored his agreement to repay them.
Begin a positive credit score by opening a credit card early in life. Most companies approve very low limits for first time card users, to prevent them from generating a high balance which they later cannot pay. Parents can teach their children how to be responsible with money by helping them open a credit card during their final year of high school, and co-signing the paperwork. This allows them access to the balance statements at any time, and they can deactivate it if the teen proves he or she is not yet ready for the responsibility.
A good credit score is necessary for any major purchase in which a loan will be required, such as the purchase of a car, a home, or starting a business. This score is an outside evaluation of one person’s willingness to honor the contracts he signs and repay the debts he owes. Though it may seem beneficial to some to avoid debt by using cash instead of credit, and to make large purchases only after the money has been saved, this is not always practical. Handling money in this manner also creates a low, poor credit score, as the individual seems to be demonstrating to lenders that he does not trust himself to repay his debts.