Your credit history starts as soon as you get your first credit card. It is a collection of all the credit accounts that you have ever opened and how you have dealt with repayment and borrowing. This history contains information about payments that weren’t on time, or any other issues you have had with repayment, including defaults or bankruptcy. This history is mainly based off of credit cards, mortgage, and car loans.
But, alternative credit scoring models can also use information from rent payments, cell phone bills, and possibly even utility bills. It is believed that these factors aren’t incorporated heavily into FICO’s scoring model, but may be used more in the future. Certain alternative credit scoring companies gather some of this information and provide it to FICO, but it is not known exactly how they use this data.
What if you have a Bad History?
Currently in the FICO credit scoring model, payment history makes up around 30% of your total credit score. If you have made late payments or defaulted in the past, you still have the opportunity to turn your score around. Your credit score number moves and adjusts when new information comes in, so if you change your spending habits in a positive way, your new credit score will reflect that.
You can actively increase your score in a few different ways. One way is to pay down any outstanding credit balances that you might have. Your credit to debt ratio is a factor that is heavily weighted in your overall score. A “credit to debt ratio” is the amount of debt you have compared to the amount of credit that is available to you. Many professionals suggest that consumers keep a “credit to debt ratio” to around 30%. In simpler terms, this means that if you had $10,000 worth of credit available to you, you should only have spent $3000 (or 30%).
Another way that you can boost your score is to get your credit report and look for errors. It has been reported that there are errors on up to 70% of credit reports. This often can happen when a debt is paid off, but the creditor forgets to remove the item. This inaccurate data can be removed by by filing a dispute letter with the credit bureau that made the error. Once you file a dispute letter a credit bureau has 30 days to check with the creditor.
Your credit is a lengthy history that shows how you handle money. If you have made some mistakes in the past and your credit score isn’t where you want it to be, it can always be fixed with some work and a little bit of time.
