Credit scores determine simple activities in our financial lives, even if we are not aware of them. For example, our credit cards, our mortgage rate, car loan rate all rely on our score and make it easier to obtain credit when needed.
Someone with good credit can get the lowest rates to refinance their house, and take advantage of low interest offers. We all face debt so the fastest way through this is to go with low interest credit (under 5%). However this becomes very difficult when the credit score is considered 'Fair' or worse. This is generally under 650. Note - you can access your credit score for free at www.creditkarma.com.
Credit is calculated on your perceived ability to pay off debt, so even if someone has a lot of assets but no debt repayment history (or a student with no history at all), they can have a low score.
Ways to Increase Your Credit Score:
1. Keep unused credit accounts open. Credit scores include a ratio of credit available vs. debt, so if you have available credit which you are not using, your score goes up. This means when you finish paying off loans, don't close the credit account. Keeping it open widens your credit available to debt ratio.
To increase your score call your credit cards and ask them to raise your credit limit, then keep this credit off limits. Note - you can add another account, but this will impact the average age of your credit (see #3), so perform a credit score simulator on creditkarma.com before getting a new account.
2. Ensure payments are ALWAYS made on time. Even one or two late payments (that you make up later) can affect your score. To do this, setup automatic payment options with your credit accounts so that the minimum payment is always made on time. Even if you can only make minimum payments to your loan, if you pay on time, it builds your credit score.
3. Watch the average age of your credit accounts. The next calculation credit companies check is the average age of your credit accounts. Therefore the older your accounts are, the higher your score. Keep old accounts open (even if you get new accounts, having some really old ones will balance the average number).
4. Watch those credit inquiries. Each time to you apply for credit, including credit cards, loans, and even cell phones, a 'hard inquiry' is sent to your credit score, that stays on your account for a year. Therefore if you have to do this, keep the dates together so that the impact is reduced. Inquires for similar items (such as two car loan companies) are often counted as one as it looks like you are shopping around. However if you are thinking to apply for a big loan, such as a mortgage, obstain from opening new credit accounts for the year before.
Of course, derogatory remarks, such as items sent to collections and foreclosures are listed, with the later staying on your account for 7 years, but you can still build credit by keeping many accounts open, with a long history of on time payments, low use of credit and fewer inquiries.