In order for lenders to determine the risk of lending money to consumers, a method of measuring the consumer’s creditworthiness was necessary. A consumer’s creditworthiness is measured by the consumer’s credit score – a three-digit number between 300 and 850 that determines the potential of being given a credit. It represents your credit risk and tells lenders how responsible you are with managing credit.

The higher your credit score, the better you look to potential lenders and the higher your chances of being given a credit. Inability to measure the risk of lending to a consumer could bring about a loss of the money by the credit grantor, interrupted cashflow or an increased cost of collection hence the reason for a credit score.

To put simply, a credit score is the 3-digit number from 300 – 850 that makes it easier for you to access loans and makes it easier for lenders to trust you.

A good and obvious way to build your credit score in the United States is by repaying your loans in due time. A second way is by keeping your debt as low as possible. As we go forward, we’ll discuss other ways by which you can build your credit score.

Many financial institutions and lenders rely on the FICO scoring system to determine what a consumer’s score should be. About 95 of the 100 largest US financial institutions are FICO clients. FICO stands for Fair and Isaac Corporation. Fair and Isaac were one of the pioneers of devising a model for calculating credit scores. Although the formulas for calculating a consumer’s credit score is secret, FICO itemizes a list of component factors that make up a credit score. These factors include: Your total debt, the types of loans, repayment history, the length of your credit history and recent searches for credit. 

Always remember that the higher your credit score, the lower your interest rate on loan repayment.

In order to keep tabs on your credit score and know if you need to work on your credit lifestyle, you need to be aware of the score ratings. According to the FICO scoring system, a score between 800 – 850 is excellent, 740 – 799 is very good,  670 -739 is good, 580 -669 is fair and 300 -579 is poor. 

There can never be enough emphasis on the importance of having an excellent or very good credit score. In the case of a low credit score, it can be very hard for you to get a loan on a mortgage or even a store credit. Some Job applicants with low credit scores have been turned down by potential employers who requested their credit reports during the application process.

The following tips will help you build your credit score and also help you access loans easily:

• Prove where you live: In the United States, a proof of where you live is a document that shows that a person actually stays where they say. Some of the documents that can be used as a proof of place of residence include: utility bills like water, gas or electricity, that are not more than 3 months old and that shows your name and postal address. Your driver’s license, original mortgage statement are also documents that can be used to prove where you live. Any inconsistencies in your address could suggest to lenders that you may not be trustworthy. Always document old and new addresses. It’s also not a good thing to move homes too frequently. Moving frequently or changing your address frequently could suggest to lenders that you are not trustworthy.

• Pay up your bills on time: A history of timely debt payment is an indication that you’ll be responsible in the future. According to Experian, paying your accounts on time and in full each month is a good way to show lenders you’re a reliable borrower, and capable of handling credit responsibly. As much as you can, avoid defaults, late payments and third-party collections. 

• Do not file bankruptcy: According to John Ulzheimer, credit expert, formerly of FICO and Equifax, filing bankruptcy is a horrible idea because it would indicate non-performance which could harm your credit score. Filing for bankruptcy is a step that has a very long negative impact on your credit score. Equifax maintains a first file for bankruptcy on your report for as long as 6 years and filing for a second bankruptcy stays on your account for as long as 14 years from the date of discharge. If you have filed for bankruptcy in the past, you can seek ways to help you repair your credit score after filing bankruptcy.

Make note of errors and discrepancies in your credit report: Inconsistencies in your report can make lenders hesitant to grant you credit. Reporting these errors will help you build your credit score. Please report even the most minor errors such as misspelled names, incorrect addresses, or disconnected mobile numbers. You may think these details

• are minimal, but they are not. Check your credit report to ensure that the information is accurate and free from errors.

• Keep old accounts open: Keeping old accounts open helps in showing a long credit history. Closing old accounts will only shorten your credit history and make it more difficult for lenders to be able to track your credit history enough to approve a loan. A long and good credit history is a major ingredient for accessing loans. Note that your account will be closed if a credit card inactivity is noticed so it is important to keep at least a small amount of activity on your card. While there may be a good reason to stop using a card, be aware that it can hurt your utilization rate and the length of your credit history. Utilization is the second factor after payment history of credit. This is to let you understand how important your utilization rate is.

• Take advantage of score boosting: When you first start out in the credit world, there’s no magical way to have a lengthy credit history which can leave you at a disadvantage. If you find yourself in this situaton, taking advantage of credit boosting programs or opportunities is a great way to help your credit score. You can get credit for the bills you already pay with Experian Boost. Some of the popular bills that work with Experian Boost are Netflix, AT & T, Verizon, Disney and many others. All you will be required to do is to connect the bank account you use in paying your bills and choose a positive payment history you prefer to add.

• Reduce the frequency of applying for credit: The frequency of loan application can affect your credit score in a negative way. Whenever you seek credit approval, a hard inquiry is carried out on your report. This hard inquiry lowers your credit score temporarily.  

Hard inquiries are a part of the loan application process that serve as a timeline of when you have applied for new credit. It may stay on your credit report for two years, although they typically only affect your credit scores for one year. Depending on your unique credit history, hard inquiries could indicate different things to different lenders. For example, hard inquiries could indicate to lenders that you take too much loan and may already have too much debt. For most of the loan applications you make, it is treated as a single inquiry which has the capacity to impact your score. Exceptions are only made when you are shopping for things like automobiles or mortgage loans because it is assumed that you may

need to check with different dealers or make multiple inquiries so multiple inquiries are counted as one.

• Learn about your credit inquiries: It is always a smart move to seek the right information by learning about your credit inquiries from one of the three major credit bureaus – Equifax, Experian or TransUnion. The number of credit inquiries you have made is contained in your credit report and it also includes a list of lenders or credit grantors who have requested to see your report. Some other details you will find in your report include: Your credit limits, balances, some personal details like your security number, your name, old and new addresses etc.  The knowledge of your inquiries could help you make better financial decisions

RECAP:

• A credit score is a 3-digit number between 300 and 850 that determines the creditworthiness of a consumer.
• Credit scores are used to determine how trustworthy a person is in terms of loan repayment
• The higher your credit score, the easier it is for you to access loans.
• A low credit score not only hurts your chance of being approved but your interest rates too
• A good credit report saves you money by helping you qualify for a lower interest rate.
• Late payment and other negative reports can stay on your account for as long as seven years. 

It is important to be patient when trying to build your credit score. A good credit score doesn’t just happen. It takes patience and long-term financial habits to build your score. Remember that a good credit score can be ruined within a short term and a bad credit score takes a long time to repair.