Among the many innovations that emerged after World War II, credit use has become a major factor in our entire economic profile. As a result, your credit rating is the most important factor in determining your credit APR when you apply for any type of credit: credit cards, 0% APR transfer offers as well as mortgage and car loans.



What's a credit score?

Credit reporting was created more than 100 years ago, when small retail merchants banded together to trade financial information about their customers. These merchant associations formed small credit bureaus, which later consolidated into larger organizations. By the 1960's, consumers demanded the right to examine their credit reports and amend false or misleading credit information that had been withheld from them. In 1971, Congress enacted the Fair Credit Reporting Act, giving consumers the right to view and correct their records, as well as privacy protection as to who had access to these records.

A fair credit scoring system was needed too. In 1989, Fair, Issac and Company, in conjunction with Equifax, created a credit scoring system, called “FICO”, this credit rating scoring system creates a summary of your credit history. Low scores mean that you may not qualify for a good rate for the credit you want. Some lending institutions may use your credit score to set the overall fees for the loan you are requesting. In the end, a good credit score can save you money.

Factors that affect your credit score

* Your payment history (35%): your score is negatively scored if you have paid bills late, had an account sent to a collection agency or if you have declared bankruptcy--the more recent the problem, the lower the score. For example, a 30-day late credit payment will hurt you more than a bankruptcy five years ago.

* Your total outstanding debt (30%): If the amount you owe on your credit card is close to the credit limit amount, the more likely it will affect your credit score negatively. A low balance on two cards is better than a high credit limit balance on just one.

* Length of your credit history (15%): The longer your credit accounts have been open, the better your score will be.

* Recent inquiries on your credit history (10%): If you have recently applied for several new accounts, it may negatively affect your score. Moreover, while you are in the “wait” period for getting approval for that new home purchase, many loan officers will advise you to delay making ANY new credit purchases until the loan is approved.

* Types of credit used (10%): Loans from finance companies generally lower your credit score. This is especially true if you don't have a lengthy credit history to base upon your credit score determination.

What the numbers mean

Credit scores range from 300 to 900, with the national average around 650. According to the FICO scoring system, the lower the score, the default risks become higher. They base this rating on historical industry standards, which show a direct correlation between low credit ratings and credit defaults.

The three credit reporting agencies (Equifax, Experian and TransUnion) all have different credit rating criteria. It's not unusual for you to have a different credit score, although they tend to be in a close range. Most lenders average out the credit scores between them to arrive at a logical mean credit score number.

How to improve your credit score

* Pay your bills on time. (If you can't make a payment on time, contact your creditor and request a payment schedule. Most credit card companies will offer you an option to pay your balance.)

* Maintain low balances on the credit cards you use. (Determine how you will use your credit card, and what type of credit card works best for you.)

* Don't close unused credit card accounts just because they are inactive. (By keeping a credit card account dormant for some time signifies that you are a responsible credit consumer.)

* Finally, get a copy of your credit report annually; it is now free to all consumers nationwide.

Your credit card score is the most important factor in determining your credit availability. Here are some insights as to what is reported and what you can do to keep a high credit score.

Copyright 2005 Ed Vegliante.