Protecting Your Credit Rating

Having a good credit rating is crucial when it comes to accessing any form of consumer credit from credit cards, loans, store credit and even home insurance. Credit scores and ratings are calculated using a number of factors but the score you get will have a big impact on your access to credit and the interest rates you pay.

In the United States, credit scores are calculated by three major credit reporting agencies: Experian, Equifax, and TransUnion. The range of scores possible is 300-850 although it's very unlikely you'll be at either end of that range. A credit score of 640-650 is considered below average, and if you're in that range, you want to work to improve it. Most people fall into the 'average' range of 650-720. Over 720 is a good credit score.

If your credit score is in need of a boost then you need to know where to focus your energy to make a difference. About 35% of your score is calculated on repayment timeliness, 30% on the amount of outstanding debt, 15% on the length of time you've had credit, and a final 10% each for the types of credit you have and amount of new credit opened.

Obviously, the easiest thing to tackle and the one that has the highest impact on your credit score is repayment timeliness. There are some easy things you can do to improve this portion of your credit score. Set up monthly automatic payments for your credit accounts. Ensure that the monthly transfer is set at least as high as the minimum payment. You can always make another payment manually to get you balance down farther, but at least you know the monthly transfer will keep the account from a late payment.

Since about 30% of your score is based on the amount of your outstanding debt, you'll want to pay down your balances. Allow the automatic payments to be posted, transfer any extra money you can, and don't use your credit cards for any new purchases! Write down the balance in a location where you can see it, and watch it go down.

Sometimes people have a low credit score because they have little or no credit. If you're just starting out, one way to build credit and get a good score is to open a credit card, make a few purchases on it, and pay that card off every month. Using credit wisely and repaying on time will actually give you a better score than if you have no credit at all. That's because with no credit, the credit scoring agencies have no way to know if you'll repay on time or not.

Obtaining credit and demonstrating good repayment habits is very important to do before you apply for a large loan, like an auto or mortgage. With a low credit rating from having little or no credit, you're not likely to be offered the best rates when you do seek out a loan. And getting a less-than-optimal interest rate on an auto or home loan can cost you thousands in extra interest—plus your disposable income will be lower each month due to the higher interest repayments.

So if you don't have any credit, consider getting one credit card, charging a small amount every few months, and repaying it each month. If you have too much debt, begin now to pay it off. Make at least the minimum monthly payment, and make it timely. Now it's time to sit back and watch your credit score improve.