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Your Credit: How to Build & Maintain Strong Credit

One of the most important aspects of overall financial health is maintaining a good credit report and credit score. Unfortunately, too many Americans don't know how important credit reports are or don't know how to improve their credit after bankruptcy.

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Why You Want Good Credit

The Fair Isaac Corporation has developed a method of assessing borrower risk. This assessment comes in the form of your FICO credit score, which can fall between 300 and 850. Those with "excellent" credit (a score between 760 and 850) benefit from greater access to credit, lower interest rates and more.

Did you know that your credit score can affect all of the following?

  • Access to credit (credit cards, car loans, home loans, student loans, etc.);
  • Interest rates you pay on your loans;
  • Employment opportunities; and
  • Ability to rent a place to live.

These days, credit scores aren't just checked by lenders anymore - potential landlords and employers more often include a credit check as part of an applicant's background check. If your credit score isn't so hot, it could seriously hamper your lifestyle.

How to Build Good Credit

Like anything worth having, good credit takes time and effort to develop. But, by understanding how your credit score is calculated, you can make conscious decisions that will improve your rating in the eyes of lenders.

While the exact formula used to determine credit scores remains a secret, the following factors are known to affect your credit score:

  • Payment Punctuality (35%): This is a major part of your credit score, and should be taken seriously. Luckily, with a little organization, this is also pretty easy to take care of: pay bills on time!
  • Debt to Credit Ratio (30%): The less of your available balance you use, the better. Asking for credit increases without using any more credit allows you to improve this ratio.
  • Length of Credit History (15%): Obviously, there's no quick fix for this one. Consider keeping accounts open even if you use them rarely or never - having an older account in good standing can improve your score.
  • Types of Credit Used (10%): Credit cards, student loans, installment purchases, and home/auto loans are different types of credit. Having a variety of types (revolving, installment and consumer finance) boosts your score.
  • Recent Credit Inquiries (10%): Frequent credit inquiries and applying for new forms of credit can hurt you if done in excess. Done over several years, though, this shouldn't have any noticeable effect.

These guidelines outline what you can do to keep your credit in good shape. Besides sticking with the above habits, it's important to keep track of your credit report. Luckily, that's a free and easy task.

Monitoring Your Credit Report

Since the passage of the Fair Credit Reporting Act, Americans have had access to one free credit report from each of the "big three" credit reporting bureaus each year. To access your free credit report, visit www.annualcreditreport.com. (Note: this is the ONLY site where your credit report is FREE.)

Many credit reports contain errors, so it's important to check your reports regularly to make sure your information is all correct and up to date. If you do find mistakes on your credit report, you can dispute them following these steps outlined by the Fair Trade Commission.

Checking your credit report regularly allows you to:

  • Verify the accuracy of information and correct mistakes, so you can get the loan terms you deserve.
  • Determine whether anyone besides you has accessed your accounts. If someone has, you can take action before you suffer serious financial damage because of identity theft.
  • Have an idea of where you stand in the eyes of lenders.

Your Credit Score

Your credit report is adequate for giving you an idea of your overall credit health. If you're interested in learning your credit score, you can buy it from myFICO.com. If you're in the process of borrowing a large amount of money (to buy a house, for instance), buying your FICO score might be a good idea.

If you're considering filing bankruptcy, know that a bankruptcy filing may stay on your credit report for some time. However, filing bankruptcy also gives you the opportunity to rebuild credit and eliminate old debts that may be weighing down your credit score.

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