Why You Need to Know Your Credit History

Your credit history is basically a summary of your entire financial life up to this point. Until you started taking out credit, you didn’t have a credit history at all. Once you start this, though, you can easily create a bad history for yourself with just a few wrong moves. It’s like a game where bad moves take away more points than good moves add! Over time, though, your goal should be to build a good credit score, which is done by having a history of being financially responsible and using credit wisely and well.

If you don't know anything about your credit history, now is the time to start learning. There are many reasons to learn more about your history of credit. Here are just a few reasons to look at your credit report sometime soon so that you can start learning more about your personal financial history.

For one thing, knowing your credit history can help you see where you've made mistake in the past. Maybe you took out too large of a car loan at some point and ended up with very high payments. Maybe you have a history of using credit cards poorly so that you have a high balance all the time. This is a terrible blow to your credit score, and it can keep you from getting loans you really need in the future.

Another thing that knowing your credit history can do is to help you take note of possible identity theft. If you know where you’ve been with your own credit, you can see when other people are trying to take out credit in your name or when they have already done it. Your best defense against identity theft is to catch problems as soon as they occur. This is why you need to know what your credit history is and to check your credit report often.

For these two reasons, you really need to know what your credit history is like. Knowing where you come from can help you set a new course for the future. If you've done well with credit in the past, you'll be able to see what you should do to continue doing well in the future. If you haven't done so well, you'll be able to change your behaviors so that you can create a better financial future for yourself.

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A Snapshot of American Credit

Americans have become increasingly dependent on credit cards and loans to purchase items both large and small. Credit cards and consumer loans have allowed Americans to make purchases that are well outside of their means, which leads to a vicious cycle as we try to borrow more money to pay our existing debts. Studies show that 43% of Americans spend more money each year than they earn, and that the average household carries more than $8,000 in credit card debt. This has led personal bankruptcy cases to double in the last ten years.

Revolving credit accounts, such as credit cards, can actually help your credit score, as long as you can keep the balances low enough to pay off each month. Unusually low interest rates have prompted more Americans to apply for extra credit cards, however, which then prompt a higher level of spending. Add to the whole mix the advent of Internet shopping, which usually requires the use of a credit card, and we suddenly find ourselves in trouble with no way out.

The average American has approximately three bank credit cards, four retail credit cards, and one debit card in his or her wallet. Unfortunately, we don’t see our income as a limit for our spending, because Americans average $1.22 in spending for every dollar earned. To put it in business terms, we end each fiscal year in the red.

There are ways to counteract these numbers, however. By taking responsibility for the purchases that we make, we can begin to lower the amount of consumer debt in our own households. It is important to create a household budget, and then to stick to it implicitly. If there are large purchases that you feel you need to make, begin a savings account so that you can make these purchases with cash. You will actually feel a sense of accomplishment when you hand over a debit card instead of a credit card, knowing that you have truly earned the big-screen television or the laptop of your dreams.

If you feel that you are in over your head with your credit card debt, then it is time to make some calls to your creditors. You can work out payment plans to lower the monthly requirements, or you can work with the creditors to get the debts paid sooner. The most important thing, however, is that you take the initiative to get your household debt under control.

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7 STEPS THAT CAN HELP YOU INCREASE YOUR CREDIT SCORE

1.Make Payments on Time.

The single most important thing you can do to keep your score high, or improve upon your score is to make your payments on time. Payment history is the largest factor used to determine your credit score. Payments that are 30 days or more past due will show up on your credit report and negatively impact your score. These negative items generally stay on your report for seven (7) years.

2.Dispute Errors and Inaccuracies.

According to recent studies as many as 80% of consumer credit files contain errors. That means that 80 out of every 100 Americans have inaccuracies on their credit report. Chances are you might be 1 of those 80. Inaccuracies, especially ones that are harmful to your credit scores, can lead to higher interest rates on loans and credit cards or denials for new credit.

After you've obtained a copy of your credit reports review them carefully to identify any items that are negatively impacting your credit score and highlight everything you believe to be incorrect, inaccurate, errors or obsolete, These could be inaccurate or outdated accounts, unauthorized inquiries, collection that are not yours, duplicate derogatory accounts and outdated or unknown public records and accounts listed as "settled," "paid derogatory","paid charge-off" or anything other than "current" or "paid as agreed" if you had in fact paid on time and in full.

3.Make Sure Proper Credit lines are Posted on Your Credit Reports.

Often, in an effort to make you less desirable to their competitors, some creditors will not post your proper credit line. Showing less available credit can negatively impact your credit score. If you see this happening on your credit report, you have the right to complain and bring this to their attention. If you have bankruptcies that should be showing a zero balance make sure to they show a zero balance! Very often the creditor will not report a "bankruptcy charge off as a zero balance until it's been disputed.

4.Pay Down Debt and Don't Max Out your Credit Cards.

The second largest factor impacting your credit score is how much you owe. This accounts for 30% of your score. The more you owe, the lower your score will be. Someone who owes $30,000 is riskier than someone who owes only $1000, all else being equal. So a great way to increase your credit score is to pay down as much debt as you can. Another factor in the credit score formula is whether you use most or all of the available credit on any given account. The theory is that if you max out an account, it may reflect some financial difficulties that could increase your risk of default.

5.Keep Old Positive Accounts Open.

Length of credit history is another important credit score factor, so it can be to your advantage to keep open older accounts that are in good standing. While it is important to keep the total number of open accounts manageable, it may be more hurtful to your score to close an old account than to keep it open even though it increases the number of open accounts.

6.Keep Revolving Accounts Open.

It is very helpful that you maintain a variety of credit accounts.If you do not have four active credit cards, you might want to open some. If you have poor credit and are not approved for a typical credit card, you might want to set up a "secured credit card" account. A secured credit card requires you to make a deposit that is equal to or more than your limit. This guarantees the bank that you will repay the loan and is an excellent way to establish credit.

7.Use Caution When Applying for New Credit.

Every time you apply for a credit card, line of credit, or other loan, an inquiry is made to your credit report. While new credit is the least important factor in your score, it is still an important issue to consider. When you are shopping for a new loan or credit card, do your shopping in a relatively short period of time. So to avoid these inquiries, apply for new credit only if you must.

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Educate Yourself on Credit Scores and Reports

Your entire spending history is detailed in credit reports. Potential lenders can obtain this credit report and have access to your payment habits with utilities companies, school loans, car loans, mortgage payments, lease payments, and credit card bills. Not only can these creditors see your payment history, but they can also see the amount of debt you have in relation to the amount of credit that you have available to you. All of these factors work together to determine your credit score. If you have been irresponsible with your bill payments, and you have spent well outside of your financial means, then your credit score will suffer. This lets potential lenders know that you are a credit risk, and you could suffer the sting of a rejection, or end up with interest payments that add thousands of dollars to the cost of a large purchase.

Your credit habits are reported to three major credit bureaus: Equifax, Experian, and TransUnion. For the most part, these three credit bureaus keep separate credit histories, and what you find reported there depends on which creditors use what credit bureau. For instance, a retail store may only check the Experian credit report, which means that you will only be reported to Experian for that particular creditor. Larger lenders, however, will check all three credit bureaus. This is true for car, mortgage, and education loans. By defaulting on any of these loans, you can expect your credit score for all three credit bureaus to suffer.

Be sure to check your credit reports regularly. By doing so, you can be sure to remove any errors from your credit history, which can drastically improve your scores almost immediately. If you see that there are derogatory reports on your credit report, it is a good idea to contact the lenders in question to negotiate payment terms or pay off the loan in order to remove the bad reports from your credit history as soon as possible.

Your credit score is definitely the most important part of your credit report. Don’t be fooled into thinking that a good credit score will gain you automatic approval, though. Potential lenders check everything on your credit report, and one missed payment on your record could mean the difference between a lower interest rate and an outright credit rejection. Take responsibility for your credit rating, and actively work to keep it healthy.

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How Credit Bureaus Calculate Your Credit Score

The three major credit reporting bureaus all use a similar formula based on the Fair Isaacs formula, a proprietary mathematical algorithm that spits out your credit score number based on a bunch of information about you. The math part isn’t really what you need to know, though. What you need to know is what information goes into making your score and what type of information is the most important for your score.

Basically, your credit score is based on information about your entire financial life, including your debt, payments, and open accounts. The information that goes into your score, though, is weighted. This means that some categories count for more than others. Here is a breakdown of how the credit bureaus weight information, in general, to obtain your credit score.

The largest chunk of your credit score is based on the way you pay your bills. About 35% of your score is based on this information. Recent information counts for more here, but older information counts, too, especially if it’s something like a bankruptcy. It takes some time for missed payments, collection’s notices, and bankruptcies to fall off of your credit report, so these things may take some living down if you’ve been through them.

Next most important on the list at 30% of your score is your debt to credit ratio. This is the amount of money you owe versus the amount of money you’re allowed to borrow based on things like credit cards and lines of credit. The lower your debt compared with your credit, the better off you’re going to be in this category.

15% of your credit score has to do with the length of your credit history. The longer you’ve had good credit, especially credit in good standing, the more you’re going to get in this category. This is why you don’t want to close your oldest account after you’ve paid it off, necessarily.

Next, 10% of your score goes to each of two categories: mix of credit and recent inquiries on your report. It’s a good thing to have credit from different things, such as a car, a credit card, and a mortgage. It’s also a good idea to keep inquiries for your credit report low. If a lot of people are asking for your score, lenders will assume you’re getting ready to take out more loans, which makes you a higher risk client.

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