What Your Credit Says About You

You may be tempted to write your credit score off as something out of your control, but having good credit is key to your financial success. While your credit score may seem like an arbitrary number and your credit report may seem like a daunting amount of information, it’s all based on how you’ve used your credit in the past.

Good credit is something entirely in your control. Let’s take a look at just what your credit means to financial institutions, and what you can do to improve it.

Why should I care about my credit score?

Though it can feel like your credit score has no impact on your daily life, it has a lot of impact on your financial life. When you apply for a loan, a credit card, or even a new apartment, the company you’re doing business with will check your credit. If your credit report shows that you often pay bills late or have a lot of debt, you’ll look like a risky financial proposition. You might not be able to get that loan, credit card, or apartment at all—or if you do, you’ll get approved with higher interest rates—and the apartment is likely to come with a hefty security deposit.

Frustratingly, being in poor financial shape often means it’s harder to get back on your feet financially—simply meaning, getting approved for credit could be problematic and you will most likely be paying more in interest and fees. While it’s easiest to work on building good credit from the start, if you are having financial trouble, you can still improve your credit and strengthen your score. It will take a little time and effort on your part, but the payoff will be well worth it.

What information appears on my credit report?

Before we can dig into how to improve your credit score, we have to look at your overall credit history and how it is tracked. Here’s what you need to know:

Your credit report. Think of your credit report as your financial report card. Your credit report tracks and records all the past and current accounts you’ve opened, your repayment history, and the amount of revolving debt you have. The repayment history displays if accounts were paid on time or late. Also, the credit report will disclose public information such as a judgment, collection, and tax liens.

Your credit score. Your credit score is a number—typically from 300 to 850 (depending on the formula used to calculate it), that’s based on the information in your credit report. Your score is made up of the following elements:

• 35% payment history, meaning whether you’ve paid bills on time.
  
• 30% amounts owed, meaning how much of your available credit you’ve used. Owing money isn’t necessarily a bad thing, but owing the maximum on all of your credit cards is a bad thing. Try and keep the revolving utilization to 30% or less.  Revolving utilization is amount of total revolving debt divided by the total amount of revolving credit limits.
• 15% length of credit history, meaning how long you’ve been using credit. A longer history is better.
• 10% credit mix, meaning having different types of credit, like credit cards, loans, retail accounts, and mortgages. The more variety in the types of credit in the mix, the better.
• 10% new credit, meaning how many new accounts you’ve opened lately. Opening a lot of accounts at once can be taken as a sign you’re about to go into debt—which creditors may not like.

If you keep these priorities in mind when you’re just starting to build credit and form good financial habits, you’ll have good credit before you know it. But if you’ve already made some financial missteps, improving your report can be a bit more difficult—but it’s not impossible.

How can I improve my credit score?

The first step to improving your credit score is to first take a look at your credit report. There are three credit bureaus in the United States that keep track of credit reports: Equifax, Experian, and TransUnion. You’re entitled to get a free copy of your credit report from each agency every year from AnnualCreditReport.com.

Once you have your credit report in hand, review it to see where your credit weaknesses are—and then work on doing better. If you have a history of not paying bills on time, set up payment reminders or automatic payments, so you’ll never miss a payment. If you’re in a lot of credit card debt, create a budget and start making a plan to pay it down. Though initially not a quick fix, your proactive repayment diligence will eventually begin to show in your credit report and score.

What if there are errors on my credit report?

Sometimes you have a low credit score through no fault of your own. Sometimes this may mean you’ve been a victim of identity theft—where someone has used your name to open new accounts and didn’t pay the bills. It could also mean that someone has erroneously reported information about you to one of the credit bureaus and now you’re credit report reflects the error.

Both of these problems are fixable—though fixing them will take some time.

The credit bureaus are required to investigate reports of errors and remove inaccurate data. To start the process, you’ll need to contact the credit bureau and the creditor reporting inaccurate information in writing, along with evidence of the error. The FTC has good instructions to help you through the process. Be patient and keep detailed records of everything.

While you’ll have to live through the frustration of a low credit score while you exchange letters, be patient—because cleaning up your report is entirely doable, and it’s one of the most important steps you can take to improving your credit and overall financial well-being.