How Do I Get Better Credit?

Questions commonly asked are: what is the perfect credit score, what is a perfect credit score, what is line of credit?

There’s no doubt that, as Americans, we’re a nation of shoppers.  We love to buy and to have, and there’s a reason why there are so many strip malls and department stores in our country.  It’s because there’s enough spending money to go around, and plenty of wonderful things for us to spend it on.

It’s rare that people pay cash for anything anymore.  Credit is king, and understanding what it is and why it’s important is key to surviving in the 21st Century.  If you want to get auto insurance, buy a house, or even get a job then you need good credit.  If you don’t, you’re going to pay more.  Sometimes, a lot more.

According to a survey conducted by the Consumer Federation of America and Washington Mutual, 40% of Americans have no idea what their credit score is, or even if there are any mistakes on it.  Yikes.

So, without further ado let’s jump into exactly what credit is, and why you should care about your score.

Credit is really just a simple term for how trustworthy you are when it comes to money, more importantly, other people’s money.  Would you loan someone $1,000 if you knew they were up in their neck in bills and never paid anyone back?  Probably not. 

Well, banks and credit card companies are the same way.  When you have a credit card or a car loan, you’re essentially saying, “I’m borrowing this money from you and I promise to pay it back.”  If you keep your promises then you have a good score.  If you don’t keep your promises then you have a low score.  As a result, future lenders will be much more wary about trusting you with their money.

Now, there are two types of credit: item-based credit and revolving credit.  Item-based credit is a loan for something specific, such as a car, a new kitchen, or a whole house.  Revolving credit is your credit cards.  It’s called “revolving credit” because you use it as you go and then pay it back.  Sometimes you use a little, sometimes you use a lot. 

So, that about covers what credit is.  Now we should discuss why you should care about your score.

Up until recently, there was much mystery surrounding the all mighty credit score and how it was calculated.  Thanks to the Fair Credit Reporting Act, we now know much more about how scores are determined, which means good things for the average joe like you and me.

Credit scores range from 300 to 850.  There are lots of little details that determine where you fall on the scale, so let’s look at the major ones.

Probably the biggest factor in your credit score is your payment history.  This makes up 33-35% of your score.  If you pay your debts on time and in full, you get a good score.  Simple as that. 

Another big whopper is the amount of debt you have versus the amount of credit you have.  This number should always be less than 50%. 

For example, if you have two credit cards with a limit of $5,000 each, you have a total of $10,000 worth of credit.  If you have a current credit card debt of $2,500 between the two cards, that’s only 25% of your total credit line of $10,000, so you’re in the clear.  Now, we should all shoot for NO credit card debt, but if that’s impossible right now then keeping your debt lower than 50% of your available credit is a good way to raise up your score.

About 15% of your score is determined by how old your credit lines are.  If you have had the same credit card for 5 years in a row then that’s a good thing.  Constantly opening and closing accounts does not fare well on your credit report.

Another factor is how often you apply for cards.  If you apply for every card you see, then your report is constantly getting “pinged” by lenders checking you out.  This can lower your score.  If you want lots of cards, then space out your applications.

So, that’s how your credit score is determined.  Why should you care?  Well, your credit score is becoming the most important number is every American’s life.  Employers are increasingly running credit reports on job applicants to determine how responsible they are.  You cannot buy a house or a car or rent an apartment anymore without someone checking your credit.  If you have a poor score, you are going to pay much more interest on loans than someone with a great score.

In short, credit is king and it doesn’t look like it’s going anywhere soon.  If you want to do fun things like buy a house, a car, or even a cell phone, then you’re going to have to have a good score.  Don’t fret, though.  YOU have the power over your score, not someone else.  Don’t go on crazy shopping sprees that you can’t afford and pay your bills on time and you’ll have a high score before you know it.