A bad credit score can haunt you for years to come. If you don’t have good credit, it may be difficult–or nearly impossible–to obtain more credit in the future, or qualify for a home or auto loan. But how is your credit score calculated, anyway? And how can you improve your credit score in the long run?
There are three major credit bureaus in the United States–Equifax, Experian, and Trans Union. They use the following to determine your credit score: you payment history (35 percent), the amount you currently owe (30 percent), the length of your credit history (15 percent), what types of credit you have used (10 percent), and any new credit you have (another 10 percent). You are scored from 300 to 850 points. The median is 725, and 720 is considered “good credit.” Credit below 600 points is poor. Approximately 13 percent of population of the United States has a score below 600.
How can you raise your credit score?
First, you need to check your reports–either online or by contacting the credit bureaus directly–to make sure all the information on them is accurate. If you find inaccuracies, you can have them removed. But the most important thing you can do to improve your credit score is to pay your bills on time. Get current, and stay current! Also, just because you have credit, don’t max it out–stay at about 50 percent of your limit. And don’t start opening several accounts just to establish new credit–this raises a red flag for many lenders.
Steps to Improve a Bad Credit Score
It’s never too late to improve a bad credit score. By establishing smart habits today, you can save yourself thousands of dollars in the future by qualifying for lower interest rates. A bad credit score doesn’t have to ruin your life forever–there are nonprofit credit counseling services that can help.
Read more about Bad Credit Basics in the Banklady Credit Library