Building good credit is a necessary component of maintaining a strong financial future. However, too few Americans pay attention to their credit status, especially as a young working adult. The importance of keeping credit scores pristine becomes more and more evident as you make larger financial decisions down the line. Without a high rating, you can find yourself with less than favorable interest rates and even restrictions on the types of purchases you can make later in life.
Credit scores were created by three reporting bureaus to help tell your story to banks, lenders and sometimes even employers. These 3-digit number are a reflection of how trustworthy of a borrower you are, based on your past history of paying your debts and other substantial factors.
Lenders rely on scores to determine whether or not you are a risky candidate to lend money to or if you can be entrusted with a line of credit (as is the case with a retail card, for example). Depending on the range your credit score falls into, your interest rates and whether you're even approved for a loan or new line of credit is directly affected.
So, think about those purchases you may need throughout life - financing a new car to get to your first job, buying a new home for your growing family or even being approved for a loan to help pay for your high school graduate's education - these are the major realities that millions of Americans face and having high credit scores can make all the difference.
There are many approached to improving your credit, either on your own with a bit of research or through a third-party entity. Before jumping on the first opportunity that claims to rebuild your score, remember that it's not something that can happen overnight. In fact, building a bad credit score to a good credit score that is considered tier 1 or A-grade credit takes time and a strategic approach. Here are some examples of how you can raise your score.
Check your credit report: Scores are directly calculated from your credit report, so double-check for errors or misinformation to clear any confusion.
Develop good habits: Pay off credit cards in full each month and don't be late on a monthly loan payment. Having a good repayment history can help your score immensely.
There are three dominant credit bureaus that provide reporting to lenders and creditors about about your credit history. Each offers a traditional score called a "FICO," as well as their own version of a credit score using their unique mathematical algorithm. The following is a breakdown of each credit bureau and their alternate score types:
While these credit bureaus offer their own interpretation of a credit score, most lenders only put weight in the universal FICO score to decide whether to extend you a line of credit.