Your Credit Rating

Once you attain age 18 you have legal capacity to engage in transactions including obtaining a credit card. Once you start to borrow money you will start to have a credit score. The three companies that will follow you and build your credit score are TransUnion, Experian, and Equifax.

The scoring model that they use is called FICO®. FICO uses a range in scoring from 300 to 850 and here is the breakdown of what the numbers represent:

300 to 650 – poor or worse
651 to 700 – fair
701 to 750 – good
751 to 850 – excellent

Your score is important because it will affect the cost of borrowing on important purchases. The best example is a car. The amount of interest you will be charged can vary greatly depending on your credit score. The better your credit score, the lower your interest rate should be.

The main factors in your score are payment history, the amount of debt you owe, how long you have been using credit, any new or recent credit, types of credit used, and your capacity for credit. These are weighted, and are weighted differently by the three companies, thus your credit score may not be the same for each of the three companies.

Further explanation:

Payment History – are bills paid on time, sometimes late, or always late

New or Recent Credit – Anything new will lower your score, at least for a while as you are adding debt

Types of Credit Used – A car or home purchase with a reasonable down-payment will not be as negative on your score as adding an additional credit card

Capacity – The unused amount of credit available to you. Each credit card has a limit. If you are close to the limit, this can negatively affect your score. Conversely, if you are paying the balance off in full each month, thus not using up capacity, this will have a positive effect on your score.

A great goal starting out is to obtain a good or better credit rating. There are many ways to get your credit score but be careful since o lot of sites with free credit scores are trying to get you to sign up for something. Hopefully the first credit card company you choose will have free credit score monitoring available.

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