These days, having good credit is required for just about all aspects of life: to buy or rent a home, to purchase a car, even to get a job. Unless you're independently wealthy, and have cash to pay for everything you could ever want, chances are you'll need credit to move forward in some of your goals.
What is a credit score?
There are three major credit bureaus: Experian, TransUnion and Equifax. These credit bureaus take all of your credit history and grade it on a scale of 300-850. The higher the score, the better your credit. If your score is 0, that means you have no credit history.
To determine your score, the credit bureaus will take into consideration a variety of criteria, including how long you've had credit, your open accounts or loans, your payment history, how much of your available credit you're using, how many times you've applied for credit, etc. Each bureau will put slightly different weight on each category, but the numbers are usually in the same ballpark.
How do I build credit?
Your initial credit rating is 0. This means you don't have any credit whatsoever. To get a credit score of something you need to apply for credit, whether this is a credit card, loan, or any other financial transaction that reports to the credit bureaus.
Many lenders will not approve a loan for borrowers with a 0 credit score. There are just too many variables for them to consider it a good risk. As a result, the easiest way to start building credit is to apply for a credit card.
To build positive credit, use the credit card for small purchases, such as gas, that you can pay off at the end of the month. When you get your bill, pay it in full. Do this for a few months, and your credit score will go up. View the "Credit Cards" article under "Basic Info" for more specific information on how to use credit cards.
Why is my credit score low?
There are many variables that can cause a low credit score. The most common are:
- Missing payments
- Consistent late payments
- Bills that have gone into collections
- Excessive inquiries on your credit report (too many credit applications)
- A high debt-to-available-credit ratio (using too much of your available credit)
Paying your bills on time consistently, keeping your debt low, and holding on to just a few open credit accounts for a long period of time, will help boost your credit rating.
How long do items appear on my credit report?
7 years. This means that after 7 years of inactivity, negative items will disappear, and positive items will, too.
Making a payment, or in other ways keeping that account active, will keep an item on your credit report. This can work either for or against you, depending on your credit history.
If you have an account that is bringing your score down, and you make a payment, it will stay on your report. If 7 years pass without activity, it will drop off your report. Likewise if you have an account that you've had for a while, and you've made consistent payments, keeping that account open and active will help your credit score, because it shows a positive credit history.