How to Build a Better Credit Rating

Successful management of credit cards for bad credit can help boost a poor credit rating. They can also be a valuable tool for establishing a good credit rating for someone who doesn’t yet have a credit history. The first step in improving any credit rating is to first know exactly where your stand. Take a look at our Credit Report Review site for the best ways to get that critical information.

It’s amazing just how many aspects of 21st century life depend on a good credit. Everybody knows that the credit score is critical when lenders decide whether or not to extend credit. A good credit score can be the difference between an enthusiastic “Yes” or a disappointing “No” when applying for a mortgage or an automobile or other consumer loan. But it also is a major factor in determining the interest rate and other terms of loans. People who can boast a high credit score typically pay far lower interest rates than those who have worse numbers. That can translate into hundreds of dollars difference in the amount of interest that is paid over the life of a loan and even tens of thousands of dollars difference over the lifetime of a home mortgage.

Here are a couple of representative figures that should drive the point home. As of July 31, 2009, a consumer with a FICO score of 760 will pay $2,664 less in interest over a period of 36 months when financing a car for $25,000 than will one with a score of 620. Even more dramatically, that same consumer with the high credit score can expect to pay $108,360 less for a $300,000 home over the life of a 30-year mortgage than the one with the lower score.

In addition to the obvious impact on the ability to obtain credit and the cost of it, credit scores are used by insurance companies as a factor in determining policy premiums. Utility companies like those that provide gas, electricity and telephone service use credit scores to determine whether or not to charge new customers a security deposit and cell phone providers do the same. Landlords often take a person’s credit score into account when deciding whether or not to rent a house or apartment and many employers look at the score when considering an applicant for employment. Like it or not, the credit score has become an overall measure of an individual’s level of responsibility in life.

What is a Credit Score?

In short, a credit score is a measure of how likely a given consumer is to repay borrowed money on time and in full. The higher the score, the lower the risk to the lender.

Though it’s not the only game in town, when speaking of their credit score, most people are referring to their FICO score which is based on a mathematical algorithm from the Fair Isaac Corporation. Each of the three major credit reporting agencies, Experian, Equifax and TransUnion, comes up with a numerical score based on that formula and they’re not likely to be identical because they don’t use precisely the same data and mistakes can be made. Unless mistakes have been made, however, the three agencies’ scores will be very similar.

FICO scores range from 300 to 850. Here’s a breakdown of the percentage of Americans that fall into each range:

• 2% have scores below 500
• 13% range between 500 and 599
• 27% range between 600 and 699
• 45% range between 700 and 799
• 13% have scores of 800 or above

To get the best financial deals, it’s generally accepted that a score of 720 or higher is required.