The Importance Of Having Credit History

As you start thinking of your personal finance management, you can't leave credit rating issue without attention. So I decided to study a number of posts to draw conclusions about how to treat CREDIT SCORE.
To build your credit and increase the credit score one should know and understand how this score works to avoid serious mistakes. In fact, some companies can use your ignorance and try to convince you to improve your credit on their terms and at the cost they require.
A CREDIT SCORE IS…
A number, usually varying from 300 to 850, that is calculated in some mysterious way and that is a display of credit risk you represent for a lender. Banks and credit companies are extremely interested in the way you paid off your debts, how many of them you are having at the moment and whether you are able to pay anything off at all.
There are 4 degrees in credit rating that are determined by the number of credit points:
Excellent Credit - 750-850
Good Credit - 660-749
Fair Credit - 620-659
Poor Credit - 350-619
No Credit - 0-0
The higher your rating is the better risk you are considered to be, so the bank can give you credit with lower rates and with more rewards. If your score is lower than 600, it is rather difficult to find credit, while scores over 720 attract creditors to you as a borrower. Credit scores have much in common with GPAs or SAT scores – they let the company see how you are doing, but different banks can pay more or less attention to this figure. You can never be sure whether the bank will look at your credit score only or they will be interested in details of your credit history. Besides, there are banks that are ready to work with those who have less than 600 points, while others (AmEx, for example) will be interested in you if you have more than 650.
CREDIT SCORE CAN BE FOUND IN…
The number of points of your credit rating is based on your credit report which is a record of your past debts, payments and is a picture of your relations with credit companies. Credit bureaus use special formulas to calculate the score, evaluating each item according to the certain systems. It's interesting that each credit bureau has its own method for calculations (which is the reason for you having different scores with different bureaus), but most of them use the FICO (Fair Isaac Corporation company) system – the most used credit score calculating software designed some years ago. Credit rating calculated by FICO system is called FICO score to make it different from other scores.
For each consumer interested in boosting his/her credit score it is important to realize that the math used by any credit score calculation system is based on research and comparative mathematics, like those in insurance.
WHAT A CREDIT SCORE AND INSURANCE ASSESSMENT HAVE IN COMMON?
When you come to the insurance company, you are expected to answer question about your health, lifestyle, habits etc. as this information helps them evaluate the risk you are and the possibility of your making large claims later on. And the basis is research, as according to it, smokers are subject to serious illnesses and can require more expensive medical service, that's why they can pay higher insurance premiums.
Credit bureaus and credit companies have a similar approach, looking at general patterns that were worked out by research. People with multiple debts are not attractive for creditors and can not enjoy beneficial terms, since they are a great risk. So, you should conclude that:
1) credit score is not a personal characteristic of yours, it doesn't really show how good or bad you deal with money. It is just an indication of how lenders consider you to be reliable in payments or not – according to the previously gathered statistics.
2) to increase your credit rating you should act to become the kind of a debtor that is likely to pay back accurately, according to statistics. There is no need in changing your personality or dramatically increase your income, you just need to become a trustworthy lender, so after realizing this you will see it is easy to give or credit a boost or repair.
It is just like a chain: you are a client of a bank that is interested in your credit history before lending you money, and the bank is the client of a credit bureau which collects information about you.
WHEN YOU START YOUR CREDIT HISTORY?
When you open a bank account or get some bills to pay, a file is started in credit bureau. So the information about you is stored and collected. Each action of yours, either it is a late payment or closing an account, is reflected in the file, the banks reporting of them regularly. The score is calculated according to the history you have, each negative item decreasing it and each positive record adding more points. It is worth paying attention to the fact that every detail is taken into account – what sort of debt or loan you had, the amount due to pay off, how regularly you make payments and how soon you pay off the debt.
At the same time, you age, sex and income do not influence you credit rating (like they sometimes do in insurance). Credit bureaus do not reveal the secret of the way they calculate credit scores, so in most cases it is hard to say how many points are added or taken away after a certain change in your credit record.