How Can I Build my Credit Score?

If you have ever applied for credit -- whether it be a credit card, loan, or mortgage -- you have probably heard the term credit score. Your credit score is a number between 300 and 850 -- the higher the number the better the score. Your credit score is what lender’s base their lending terms on when you apply for credit. Your credit score is based on the following factors:

• Payment History (35%)

• Amounts owed (30%)

• Length of credit history (15%)

• New credit (10%)

• Types of credit used (10%)

As you can see, payment history is the mostly heavily weighted number in the score, so be sure you are making payments ON TIME and paying at least the minimum. Lenders will also look at the amount you owe, versus the amount of credit you have. The length of your credit history and the new credit you have applied for will also be weighed. Lastly, the type of credit you are using (student loan, mortgages, credit cards) will be assessed to create your score. Credit cards with revolving debt impact your score the greatest- and credit cards that carry more than 35% of their limit with weight heavily on your score.

When you are looking to buy a home, it is important to first build your credit score in order to obtain the best rate interest rate on your mortgage. A credit score can also help in obtain better homeowner's insurance rates. It is strongly advised to check your credit score once a year. There are several websites such as creditkarma.com, freecreditreport.com and credit.com, in which you can check your credit score. Additionally, many banks and credit unions offer their members one yearly credit report, free of charge.

The best way to maintain a high credit score is to make sure your bills are paid on time and in full, whenever possible. Delinquent payments will cause your credit score to plummet. Additionally, a credit score reports how much of your possible credit is currently being utilized. You will want to keep your debt ratio down in order to reap the rewards of a high credit score.    

If you're trying to rebuild your credit score, there is hope! Although negative information can remain on your credit report for up to 7 years, you can begin to raise your credit score. First, be sure all of your accounts are current. Contact the companies that you have delinquent accounts with and establish a plan to correct them. If possible, pay off these accounts and keep the card with a zero balance. You also want to avoid applying for new credit while you are trying to rebuild your score, as a percentage of a credit score is calculated by the number of new accounts opened. Another tip when building your credit score is to watch your report closely- make sure the accounts listed on it all belong to you and are reflecting accurate information. If you detect any inaccuracies, be sure to contact the three major credit reporting companies immediately.

• Equifax 1-800-685-1111 (Fraud Hotline: 1-888-766-0008)

• Trans Union  1-800-916-8800 (Fraud Hotline: 1-800-680-7289)

• Experian  1-888-397-3742 (Fraud Hotline: 1-888-397-3742)

Kent Smetters

Kent Smetters is the Boettner Chair Professor at The Wharton School of the University of Pennsylvania, the Interim Faculty Director of the Penn Wharton Public Policy Initiative, and a Faculty Research Fellow at the NBER. He was the former Deputy Assistant Secretary of the U.S. Department of the Treasury, and he subsequently served as a member of the U.S. Congress’ bipartisan Blue Ribbon Advisory Panel on Dynamic Scoring. Kent holds bachelor degrees in Economics and Computer Science from The Ohio State University as well as an MA and PhD in Economics from Harvard University. He previously cofounded a national registered investment advisory firm that built a new technology platform, grew the firm to over 50 advisors and then sold the firm to a large, publicly-traded company. Growing up in a financially poor family, Kent donates his time to “Your Money” to help families work, save and set goals in order to achieve the most in life. Kent is often cited in major news outlets.