As people have become more dependent on credit to purchase homes, cars and more, the importance of your credit rating has also increased.  Often times, people don’t understand what affects their credit reports or rating.  Most people don’t understand that their credit rating is one of the most important things they can ever own and the importance of protecting it.  If you don’t understand something, how can you protect it?

Every time you use credit, you are borrowing money from someone else.  You promise to pay each amount back within a specified period of time.  Your lender uses the amount you borrow, the interest rate and the length of time you are going to borrow it for to determine your monthly payments.  You absolutely, positively have to make each monthly payment, and pay it on time.  Your credit score is a statistical number that shows the likelihood of your paying the lender back.  Your credit score isn’t just a number that the credit bureaus get out of thin air.  It is precisely derived from a set formula.

Each credit bureau uses different criteria for calculating your credit score.  However, they each use the same basic formula and come up with basically the same number.  One credit bureau might only look at your credit report, while another may use more than one factor.  Either way, each bureau gives you an accurate rating based on your credit.

There are many factors that can be used when determining your credit rating.  Your payment history, the amount of your current debt, the length of time in which you have had credit, the mixture of different kinds of debt that you have, and the number of inquiries on your record.  The more loans you are trying to take out (inquiries), the more it will drag your credit down.  Your credit score will also be lower if you haven’t had credit or used credit for a very long time.

Credit scores range from 350-800.  The higher your credit score, the better it is.  If you have a lower credit score, lenders view you as a higher risk than someone with a higher credit score.  In other words, someone with a credit rating of 350 is going to be a bigger risk than someone with an 800 score.

So, why is your credit rating so important?  Every time you apply for a loan or even hook up your utilities, your credit is checked.  Your credit rating is the easiest way for lenders or utility companies to see what kind of risk you are.  The higher the risk you are, the more your payments will be.  This is according to financial theory.  Theoretically, higher credit risk means that a “risk premium” must be added to the amount that you borrow.  Risk premium helps protect lenders, mortgage companies, credit card issuers and others that may loan you money.  Imagine what would happen if lenders gave everyone the same rate and same amount of money.  Some people would pay it back faithfully, while others took advantage of the system.

Credit ratings are a fragile thing.  You need to protect your credit score with everything you’ve got.  If you make your payments on time, be careful about how much you borrow and make wise purchases, you should be fine.  Understanding what your credit rating is and what it is saying about you could save or cost you.

Your credit score contains so many intricacies. It can be hard sometimes to keep track of everything and to understand how each of your accounts affects your credit score. Use this as your personal credit score guide. It will help you understand and track your credit report better.

First and foremost, you need to understand what a credit score is. A credit score is simply a number that is generated based on your credit history. This number is the fastest way lenders can decide if they want to lend to you or not. It is an easy way to determine how much of a risk you are. Make sure you also understand the credit score range. Credit scores can range from 300-850. The higher your credit score, the better your credit is. Any score of 720 or higher is considered excellent. Anything under 620 is viewed as poor credit. It is important to understand these ranges in order to keep yourself from credit score danger. Stay away from lower numbers so you can have excellent credit for the rest of your life.

The most common scoring method for calculating credit scores is the Fair Isaac and Company system, also known as the FICO. Understand that the Fair Isaac and Company is an independent company. However, all three credit bureaus worked closely with FICO to develop its scoring system. It has been in use since the early 1980s. Each bureau has its own version of the FICO system. Equifax uses the Beacon system. TransUnion uses the Empirica system. Experian uses the Experian/Fair Isaac system. With each bureau using its own system, each credit bureau will produce a different score for any given credit report. There is often a credit score disparity from bureau to bureau and as a result, many lenders will choose the middle score of the three bureaus, not an average or the highest.

Now that you understand what a credit score is, here is how your credit score is broken down.

35 Percent of your score is determined from your past payment history. This is because lenders want to see how responsible you are at paying your bills on time. Several things can bring this score down: how many bills you have paid late, how many collection accounts you have had, how many bankruptcies you have filed for, etc.

30 Percent of your score is based on the amount of outstanding debt you have. The FICO looks at how much you owe on your car or home loan, how many credit cards are maxed out, etc. The key here is to have very few accounts at their limit. The more accounts you have that are at their limit, the lower your score will be.

15 Percent of the score looks at the time length of your credit history. The shorter amount of time, the lower your score will be. You score will be higher if you have had established credit for an extended period of time.

10 Percent uses the number of inquiries. Why does it take this into consideration? Your score will be lower if you have had several inquiries on your credit report in a short period of time. This looks like you are taking on too much debt. It also indicates financial trouble. Try to keep your inquiries low.

10 Percent of your score considers the types of credit accounts you have. You want to have a variety of accounts on your credit report. If you have 10 credit cards (revolving accounts) and no mortgage or auto loan, your score will be lower. Again, lenders want to see a variety of accounts. This will indicate stability to them.

It is very important to understand all of the aspects of your credit score. You need to be familiar with the FICO scoring system in order to keep your score as high as possible. Take responsibility for your score and make sure you working getting and keeping it as high as possible.

Credit cards can be a very valuable tool. However, some people do not realize that using a credit card actually takes skill and practice. People are misusing credit cards everyday and this can turn out to be a very costly mistake. Review the following and make sure you are not making these costly credit card mistakes.

1. Too Many. A common misconception with credit cards is that the more you have, the better off you are. This is absolutely false. Be careful not to have too many cards. Not only is it worrisome for a lender, but you run the risk of reaching the maximum limits on all of your cards. This can quickly lead to serious financial trouble. Be careful to only have as many credit cards as you can handle. Two credit cards are usually sufficent for most people.

2. Cash Advances. What benefit does a cash advance serve? Not many. Surely there are other, safer, options if you are short on cash. Credit card companies charge a much higher interest rate for cash advances. They also send you checks in the mail to lure you into taking these risky advance loans. Be careful not to fall into the trap of cash advances.

3. Medical Bills. We all know how quickly medical bills can pile up. Using your credit card to pay these bills should not be an option. Unless you have the money to pay it off at the end of the month, paying medical bills with your plastic can be costly. Hospitals and medical providers have payment plans available that can be used at a lower interest rate. Try not to even mix your credit card with medical bills; it will save you more money in the long run.

4. Everyday Items. Your Visa or MasterCard should not be used to purchase everyday items. Often times, these inexpensive items end up costly 3 or 4 (or more) times what they normally do if you don’t pay off the balance at the end of the month. People get into credit card trouble when they keep spending and spending and spending using their credit card. Instead of sticking to a budget and paying off the items at the end of the month, the balance often rolls over to the next month and you keep paying interest. If you do use your credit card for everyday purchases, make sure you know how much you have to spend and pay it off before the balance is due.

5. Minimum Payment. Paying only the minimum payment can also keep you a slave to your credit card. It is so important to not only pay the minimum payment, but to pay the entire balance. As you do this, your credit will increase and you will be able to handle your credit card finances in a responsible manner.

6. Not Shopping Around. Shop around for the best interest rates when looking for a credit card. You may find the perfect card with the perfect perks, and not even realize you will be paying 21% interest. It may be better in the long run to get a credit card without as many “benefits” and a lower interest rate. If you pay off your balance every month, the interest rate will hardly affect you. But, be careful because unexpected circumstances can always arise and you would hate to be paying triple the interest for several months.

7. Fine Print. The fine print that is most often over looked is actually your contract with the credit card companies. In this detail, you will find the answers to all of the questions you may have for your provider. Make sure you read over every tiny detail to prevent headaches further down the road.

8. Late fees. NEVER pay a credit card late fee. If you need to take an extra 15 minutes and write your due date down on every piece of paper you own, do it. Late fees can be as high as $30. This means that that $15 pair of socks you bought could end up costing you almost $50. Make sure you know the due date of your payments and even pay it a couple of days early, just in case.

9. Monthly Statements. It is easy to just look at the balance when you get your monthly credit card statement. Get into the habit of looking over your entire statement. If you see a problem, call your provider immediately, as well as send in written communication. Make sure you aren’t paying for any item or service you didn’t receive.

10. Credit. Good credit card practices equate to a good credit. Having a good credit is one of the most important things you can do for financial freedom. Make sure that it is important to you to have good credit. Valuing your credit will keep you away from credit card dangers.

These are just ten of the costliest credit card mistakes ever made. Be sure you know exactly what is going on with your credit card and especially, with your credit. Be an informed and knowledgeable consumer and you will be farther ahead in the long run.