It seems like so many people are obsessed with building credit and having a good credit score. From spending copious amounts on credit, to having multiple credit cards, many individuals feel the need to build up their credit score. While having a good credit score is important to secure low interest rates on large loans or mortgages (and not hard at all to achieve), there are many ways in which an individual can responsibly achieve and maintain a good credit score. However, there are many things that can hurt a credit score as well.
First of all, what exactly is a credit score? A credit score, or rating, is a measurement that ranges between 300 and 900 that lending institutions, or creditors, use to determine an individuals' ability to pay back a loan or a debt owing. The higher the score, the better. Credit scores are widely used around the world and are computed using algorithms produced by FICO (Fair Isaac Corporation). You might be more familiar with the commonly used term "FICO score" because of this method's commonality worldwide. While we won't discuss in detail how the algorithms determine one's credit score, we will discuss ways in which a credit score can be improved or hurt.
First and foremost, paying credit card bills on time will help improve and maintain a good credit score. The ironic thing is that creditors are only concerned whether you pay the minimum payments every month since they can profit off of you from the compounding 25% interest on the remaining credit card balance (how do you think VISA and MasterCard make money?)! Technically, as long as the minimum payments are being made on a credit card bill, then your credit score is great. However, you should treat your credit card as cash or a debit card and only spend as much as you can afford, even if your payments are delayed by a month. Doing this will force you into the habit of making the full payment of your credit card bill every billing period. Having 2 or 3 credit cards isn't a bad thing, as long as you can manage all credit accounts and use them responsibly. Any evidence that you are able to repay personal debt is a credit strength to your credit score. Not defaulting on any loan payments (including mortgage payments) will help maintain a good credit score.
As easy as it is to maintain a good credit score with responsible spending on credit, it is just as easy to demolish. As soon as payments become passed due and are not being paid, this then becomes evidence of an individual's inability to repay borrowed funds which will hurt a credit score (businesses account for these types of defaults under "Allowance for Doubtful Accounts or AFDA, which is the amount of money set aside to cover any revenue not recognized because of customer defaulting payments). Spending close to the credit card limit actually hurts one's credit score as well. Aiming for roughly a max spending of 50-70% of your credit limit will help ensure your score isn't being affected. Another action that hurts scores is the frequency in which an individual requests a report to see their credit score. A high frequency will concern creditors because it looks as if the individual is worried about their credit because they keep on checking and checking and checking to make sure whatever spending habits they are undertaking are not hurting their score! Although this "worry" may not be entirely true, it sure looks suspicious in the eyes of a creditor.
Other factors that play into credit scores include payment history on loans and amounts owing to credit accounts. Also, the types of credit being used has an effect on credit score as well (revolving credit like credit cards, or installment loans such as car or mortgage loans).
Individuals with lower credit scores will have a more difficult time trying to secure a loan, and will also have a hard time securing a loan with low interest payments. If a creditor doesn't feel confident about a borrower's ability to repay debt (liquidity), then the lender either won't issue a loan in the first place or they will hike up the interest on the debt. On the other hand, a borrower with a great credit score will give the lender a sense of ease or trust around repayment of debt obligations, and therefore a borrower will be entitled to a lower interest rate and probably a higher loan pre-approval limit.
Responsible spending on credit and regular credit card bill payments in full will ensure a high credit score and will remove the "need" for an individual to keep score. Such good habits will remove the necessity to find out what your credit score is because you may have been worried about your chances of getting a mortgage or low interest rate. I honestly have no idea what my own credit score rating is. MasterCard tells me that it is good, but who's keeping score anyway?