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Your credit score can save you thousands of dollars on a new car or a new house - or it can cost you a job offer or prevent you from getting an apartment. How does credit work? How can you get a good score?
Your credit history is a reflection about how you handle your finances. It shows what types of credit you have - credit cards, store cards, loans - and how often you make timely payments. Credit reports and credit scores show how trustworthy you are when it comes to handling your money. With each bill or payment that you handle on time, your credit improves and organizations feel comfortable lending you more money at a lower interest rate.
Here are some situations where your credit history is important:
- When you want to rent an apartment, the landlord or management company will check your credit to see if you are likely to pay your rent on time each month. This will help them decide if they want to offer the apartment to you
- When you buy a car, the dealership or other lender will offer you a better loan if you have good credit. If your credit is not good, they will offer you a loan with higher interest rate
- When you interview for a job, some employers will check your credit. Although your credit only shows your financial trustworthiness, some employers use this to help them determine your overall level of reliability
- When you a buy a house, your credit plays a large role in determining your mortgage payments. Good credit can help you get a low interest rate on your mortgage, while bad credit could cost you tens of thousands of dollars over the life of the loan
How Do You Get Your Credit Report?
In the U.S., there are three agencies that report on credit history: Equifax, Experian, and TransUnion. You are entitled to receive a free credit report from each agency once per year, and the official website to request free reports is annualcreditreport.com. The information on these reports is used to calculate your credit score, which typically ranges from 300 to 850. Your score is not included on your report, but you can get your score from several online services, many of them free.
- Personal information. Check to make sure this is accurate. Don't worry about outdated information unless it is an address or Social Security number that you were never associated with.
- Credit history. This is the bulk of the report, where you'll find details on all of your types of credit. For each account, you'll see when it was opened, the current balance, and the payment history.
- Public records. This section lists financial legal matters like bankruptcy or court records. Anything listed here will harm your credit score. Review this section carefully for inaccurate information.
- Inquiries. When someone checks your credit, it shows up as an inquiry. A "hard" inquiry occurs when you apply for a line of credit and a company checks your report. A "soft" inquiry is initiated by a lender, usually for a promotion or an annual review. Soft inquiries are not viewably by others and do not affect your score.
How can you improve your credit?
If you have negative information on your report, or if your credit score is on the low side, don't despair! Here are some tips to boost your score:
Start early. Your credit score factors in the length of your accounts, so don't wait until you're about to make a big purchase before trying to improve your credit. If you don't use a credit card, consider getting one if you are confident you can manage it responsibly. Use it for regular expenses like groceries and pay off the full balance every month to start building good credit.
Don't apply for too many lines of credit at once. Each time you apply for credit, the lender checks your report, which registers a hard inquiry. Too many hard inquiries in a short span of time can harm your credit, because it makes it look like you are in a desperate financial situation.
Pay in full and on time. Your payment history plays the largest role in determining your credit score, so try not to miss any payments. Paying off your balances in full will also ensure that you don't accrue any interest.
Think before you close an old account. Closing an old account can make it look like you don't have much credit history. If you have a credit card that you never touch, consider using it occasionally. If the card is idle and also has a high annual fee, though, you might want to cancel it.
Don't use too much of your credit. If your credit card has a $1,000 limit and you charge $900 to it, lenders assume that you have trouble controlling your spending. For each card that you use, try to keep your charges under 30% of the card's limit.