While it's common knowledge that a person's credit score can affect their ability to get a good rate on a loan for a car, to start a small business, or to get a mortgage, the specifics of what goes on the credit reports that those rates are based on are unfortunately misunderstood by many.

How your credit score is determined

There are three main reporting agencies, all of whom track the same information concerning your credit-worthiness. The credit score itself is determined by a formula weighing different information provided by the credit reports supplied by these companies. The implicit implication of this is that, depending on which credit report a financial institution "pulls" in order to determine your eligibility and rates for a loan, they could assign you a drastically different score. This is an uncommon scenario, however, since ideally all credit reports will contain the same information.

Factors affecting your credit score

The key to understanding your credit score is to keep in mind that only what is on one of your credit reports can influence it. The specifics of how that information is weighted and penalized varies over time and with the credit scoring agency, but the factors are constant since they are only what's included in your credit report.

Here's a list of those financial factors, roughly in order of importance

1. Derogatory Marks
   • Do you have unpaid bills or loan payments from more than 60 days ago?
2. Payment History
   • How many of your bills have you paid on time?
   • This can include every month's payment for every line of credit for the life of each line of credit
3. Credit Card Utilization
   • Do you max out your cards? This is a bad idea for an additional reason: Credit card interest rates are obscene
4. Age of Credit History (How many years have you had each line of credit open (Longer is better)
   • Credit Inquiries
     • How many lines of credit have you applied for in the past 1-2 years
     • Depends on reporting agency
5. Total Accounts (slightly redundant since age of credit contains this information, but not weighed very heavily)
6. SSN, current and previous addresses, (self-reported) employer. (None of these factors affect credit scores)

And that's it!

Factors not affecting your credit score

The good thing about credit reports is, though misunderstood, they are very democratic. They don't enable judging a person's credit-worthiness based on their skin color, ethnicity, political-leanings, etc. All that they allow banks to use to determine a person's credit worthiness is their history of credit interactions. Though there is an implicit inclusion of a person's age, i.e., the older you are the more easily you could have had lines of credit for 10+ years, which helps a lot.

Implication of factors affecting credit

Again, because most people don't even realize what's on their credit report, there's a lot of misinformation swirling around about how to improve your credit. As you can see from the list of factors, there are certain aspects you can focus on improving, some of them not at all intuitive, that will improve your credit score tremendously. I have distilled the combination of factors into bits of advice, depending on your situation, that can allow you to increase your credit score, over the course of a few years, up to 850, a "perfect score" (with the VantageScore 3.0 scoring system).

How to take advantage of your new understanding of the credit report

I have separated the advice into a few categories of people. Choose the one(s) which best match your situation.

• You have outstanding debt which is in collections
  • Believe it or not, before I understood how credit reports works, this was me! Now I have a score of >800, so there's clearly hope if you're in credit despair over this
  • Advice:
    • Pay off your debt!
    • Make sure to tell your debtors to report to the credit reporting agencies that your debt was paid in full
    • Write letters to each reporting agency disputing that the debt should no longer be listed on your credit report (They don't like to remove things without being prompted)
    • You can still get credit cards with automated online systems, if you apply
      • Even in the case where you owe money, having more lines of credit will help you in the long run

• You only have a few credit cards
  • There's a limit on how high your score can go, even if you've had your cards for a long time, and pay them off every month
  • Advice:
    • Open lots of credit cards! More on this in General Advice

• You have a high balance on a credit card
  • Open a card with an offer to transfer your debt, and take advantage of that offer!
    • You'll save a ridiculous amount in interest for a year, eighteen months, or two years
    • You'll have a larger "available credit" which directly decreases your credit utilization, improving your score immediately
    • You'll have another card, increasing your total lines of credit

• General Advice
  • Open lots of credit cards!
    • You should be applying for 2~3 every year, until you have at least one with every big bank (Citibank, Chase, Capital One, Discover, American Express, Barclay's, Credit Unions, etc. (be creative in looking for credit cards)
    • Though you can wait for a good bonus offer. If you're desperate for credit I'd say $150 is good, but generally you'll want $300+ sign up bonus (though they do require heavy spending in the first 6 months)
  • Close credit cards with annual fees before you've had them for a year
    • These people are called card-churners and banks hate them, but the credit report doesn't indicate that you are one of them
    • They generally do it for the enrollment bonuses, but recently banks have cracked down on them by only allowing a person one enrollment bonus in their lifetime
    • Believe it or not, closing new accounts will increase your average length of credit, improving your score! Pretty dumb how they encourage churners, right?
    • If you only have a few open accounts, however, that can be detrimental to your score
  • Pay off your bills every month!
    • While CC utilization of >1% helps, beyond that it only hurts! Stop paying off this predatory lending you don't actually need!
  • Check your credit reports for errors, or inefficiencies in your activity
    • Should you be opening more lines of credit? If you have less than 15, then yes
    • Have you missed any payments? You should pay them off right away

How to check your credit report

Due to the raising trend in identity theft, there's something called a Fair-credit reporting act. Just search for one of the three credit reporting agencies Equifax, TransUnion, or Experian and "FCRA request" and you can get a free and full credit report once a year (or whenever a credit request gets denied). Check it for errors! Better yet, pull all three, and check all three for errors! If you're in a rush, many credit card companies now offer you a monthly peak at your score. At least knowing this will suggest which premium credit cards you are able to reasonably apply for.

Closing comments

I hope this article has helped you develop an understanding of how to build credit! If there's further interest, I can write a follow-up on specific credit card deals, situational advantages of specific card products, the difference between "soft-pulls" and "hard-pulls", credit freezes and how they can help you, how to spend reward points, moralistic gray-areas for improving your access to credit, or similar advice.

Addendum

I originally posted this article a year ago, when Steemit was much younger. Since originally writing it, my credit score has gone above 800, so you know I know what I'm talking about ;-). Seeing a very informative post by @jrcornel on the same topic inspired me to post this again, hoping it will get broader exposure to a new audience.

Image source: Nick Youngson - link to - http://nyphotographic.com/

Disclaimer: This is an original Steemit article. Though the topic is heavily covered in other blogs, the writing is all based on my own experiences and research.