Credit is used to make purchases of goods and services like houses, cars, a college education, travel and much more. In order to receive the credit necessary to make a purchase of this magnitude one must establish credit worthiness. This is done using your FICO or credit score.
Different types of credit include loans (mortgages, car loans, student loans, etc.) and revolving debt (credit cards). Loans tend to have definite repayment periods and terms while credit card repayment terms are constantly changing depending on how much debt you have, your APR, etc.
Loans typically have a longer application and approval process, due to the difficult decision to lend large sums of money. Credit cards, on the other hand, tend have a rapid (sometimes
instant) approval process. More often than not you can apply for a credit card online.
How Credit Scores are Determined
A FICO (Fair Isaac Company) Score (or credit score) is computed by three major companies that use three different methods:
- Equifax - Beacon System
- Transunion - Empirica System
- Experian - Experian / Fair Isaac System
Get Your Equifax Credit Report Now!
Most creditors and lending institutions will use a mix of all three systems or simply use their own.
The credit score is broken down into 5 major components. Their approximate weights in determining a credit score is as follows:
- 35% Payment History - Paying bills on time and making more than the minimum payments goes a long way here.
- 30% Outstanding Debt - Having credit cards used 25% of the spending limit or less is a good thing.
- 15% Length of Credit History - Opening a bunch of credit cards all at once won't immediately improve your debt ratio. Keep accounts open for long periods of time.
- 10% Number of Inquiries - Lots of inquiries for your credit report shows that you're looking for credit. This could hurt because it shows that you're desperate for money (money that you'll probably have a hard time paying back).
- 10% Types of Credit - Overusing credit cards is not a good thing. Having multiple mortgages can be.
Credit scores determine both the decision of the loan and the interest rate. Obviously, the higher the credit score the better chance of being approved and the lower interest rate you'll have to pay because you're less of a credit risk to lending institutions.
Get Equifax Score Power Now!
Improving a Credit Score
There is no "quick fix" to a vastly improved credit score. The best length of time to target a better credit score is two years. This is because most credit reports report on your last two years of payment history (which weighs the most on a credit report). Some best practices for improving (and maintaining) a good credit score are:
- Check your credit report for errors. If there are any report them immediately.
- Reduce (or maintain) a balance - to - limit ratio on credit cards of 3 to 4. A balance to limit ratio of 1to 4 is ideal.
- Make payments on time. A best practice is to pay a week early to minimize any possible errors that would delay payment. With credit cards is also a good idea to pay more than the minimum if possible.
- Don't open new credit card accounts in hopes of raising a credit score. This will raise inquiries on your credit report and will be translated as a credit risk.
- Don't close old credit accounts. This will increase your debt - to - limit ratio because your credit limits will decrease. Also, old accounts are looked more highly upon than new accounts.
- The optimal amount of credit card accounts is three. These should be open and active. Even if the balance is paid in full every month make sure that every credit card gets used. Sometimes it's even a good idea to pay bills using credit cards (especially credit cards with reward points).
Maintaining a good credit score is much easier than improving a bad credit score. If, however, you find yourself in a position where you need to improve your credit score bring bad debts current first then work on debts with higher interest rates. And remember, improving a credit score is a process that takes time. Don't be discouraged if results aren't immediate.
Apply for a Credit Card Online
Seeing how credit best practices is to have three open and active credit card accounts the best (and fastest) method to apply for a credit card is online. The lender receives the application almost instantly and is able to make a decision fairly quickly. To apply for a credit card online simply click the "Apply" button on any credit card on this site. First, locate a card that corresponds with your current credit score (to maximize the odds for being approved) then apply online for that credit card.