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.

You aren’t the only one who feels like you’ll never have good credit.  It seems like only yesterday when you qualified for anything you wanted.  What happened?  How did it happen so quickly?

Millions of Americans feel just the way you do.  Your credit card and other bills are piling up and you can’t seem to even qualify for a new car, let alone your dream home.  Follow these proven steps to rebuild your credit.

1. Stick to your budget.  Budgeting is a fundamental element in rebuilding your credit.  Budgeting will keep you from spending more money than you make.  Carefully look at your income and what you spending your money on.  Make sure you are paying your creditors before going on that mini shopping spree.  Review your budget daily, if needed.  As you do this, you will be able to track exactly where your money is going and you’ll be able to cut back on unnecessary spending.

2. Rank.  Make a list of all the creditors you owe money to.  Put them in order of highest interest rate.  Be disciplined to pay off those highest interest rate accounts first.  You’ll be surprised how much money that actually saves you because you won’t be paying as much in fees and interest.

3. Cut your balance.  First of all, try not to carry a balance on any of your credit cards.  If you have to carry a balance, especially while you are working to pay it off, keep it less than 40% of your limit.  For instance, if your limit is $2500, your balance should be no more than $1000.  This alone will cut back on your dependence on the credit card.

4. Check your report.  Make sure you check your credit report at least once a year.  Financial experts recommend that you check it every three months.  As you do this, you will be able to correct mistakes much faster.  You will also be able to watch out for identity theft this way.  The best way to rebuild your credit is to be informed and also stay informed.

5. Get help.  If you feel the burden of financial stress, seek the help of a financial planner or credit counselor.  Don’t wait until you are late on your payments and you have stacks and stacks of unpaid bills.  These professionals will be able to help you get a hold of your finances long before the creditors know there is a problem.

It will take patience, diligence and a great deal of will power to rebuild your credit.  It takes a lot longer to rebuild your credit than it takes to hurt it.  Make sure you plan ahead and stick to the plan.  This will help you steer clear of additional unnecessary debt.  Stay focused and you will see the improvement; in your credit score and in your spending habits.