The credit score: What three-digit number is more important to the American consumer than that? It determines a big part of how we live our lives — how big our homes are, what sort of automobiles we can afford, and where we take our vacations. And yet, despite how pivotal they are, credit scores are a mystery to most people. How do they calculate credit scores? Who keeps track? How do you change them for the better?
First, let’s talk about what the credit score is, and where it comes from. Basically, the credit score is a summary of your history of paying your bills, how much debt you have, and what sorts of credit you have. It’s a distillation of your entire credit report, which is much more detailed. How is your credit report compiled? Well, all the merchants, vendors, banks, landlords, and lenders with whom you have financial dealings report on how you pay your bills — whether good or bad — to the credit bureaus. Now, it’s only financial info that goes to the credit bureaus. Things like religion, age, race, and sex have no bearing on it.
Then all of that data is compiled and sent to the three central credit bureaus, Experian, Equifax, and TransUnion. They then determine your credit score and provide to those same lenders, when they inquire as to your creditworthiness. It’s a huge network of financial data, all connected with databases and computer networks. So that’s where the reports originate. Now what about the credit score? To arrive at the number, the credit bureaus take into account your payment history, how much debt you have, how long you’ve had credit, and the most recent types of transactions you’ve had. The most important factors are payment history and how much you owe.
Now, various lenders might look at your credit reports differently, emphasizing some things over others. For example, some mortgage lenders will overlook a low-ish credit score if they can see that your most recent behavior has been positive. But on the other hand, another lender might see how much debt you have at the moment and decide you’re a poor risk, even if all your recent payment history has been good. Having said all that, how do you actually manipulate your credit score in your favor? Understand up front that there are no magic techniques to boosting it. You can’t do it artificially or through trickery. If your credit report is current and accurate, there’s nothing you can do to change it.
Here are some guidelines to follow, however, that will lead to better financial health. - Make your payments on time, every single month. If you get behind, catch up and stay caught up.
- Keep your balance low. Shuffling it from one card to another doesn’t help, at least not from the standpoint of your credit score.
- Don’t open new cards just to get rid of old ones. Just focus on taking care of what you have.
- Don’t apply for credit unless you need it. Too many inquiries into your credit report looks bad.
Your credit score is basically a measure of your overall financial dealings. If you spend frivolously or unwisely, it will be reflected in a lower credit score. Unless you’re independently wealthy, you need a credit score that’s high. Take care of it.
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