Your credit is, without a doubt, one of the most helpful assets. Every day, more and more of your finances are determined by your credit score. Expensive deposits, higher interest rates, higher payments, and at times the inability to qualify for financing or leases can arise from your credit score not being strong enough. The first step to taking control of your credit is to learn what your credit is, and how credit report works.
In essence, your credit score is basically your financial report card. Your lenders (credit cards, car loans, mortgages, or anyone else you owe money to) pass on the standing and history of your account to one or sometimes all of the major credit bureaus (Equifax, Experian, and Transunion). The stuff they report include your credit limit, current account balance, whether your payments have been made on time, and the payment history of your account as long as you have maintained it with them. Also passed along is how often and by whom your credit has been pulled due to you applying for new credit, referred to as "inquiries." Once a month, your up-to-date account standing is reported to the credit bureau(s) that your lender has decided to record with. The limit, current balance, and history are all brought up to date. The credit bureaus measure whether your account is late in 30 day increments.
For instance, if you were to pay your credit card payment three days after it is due, your credit most likely won't be impaired, as you were not more than 30 days past due, which is how the credit bureaus measure. Keep in mind, though, that the fine print of your agreements can still result in you suffering penalties, at times considerably unpleasant, if you pay so much as a single day overdue. Just because you don't end up with a negative reporting on your credit doesn't mean you won't be hit with late fees or occasionally permanent increases to your interest rates.
The credit bureaus, through a scoring methodology they keep thoroughly hidden (defined as the Fair Isaacs Corporation scoring model, or "FICO score" for Experian, "Empirica Score" for Transunion, and "Beacon Score" for Equifax) work out your score month to month based on your current account standing and payment histories. Your score will often change month to month, sometimes very dramatically, depending on what is reported. Also taken into consideration is the amount of inquiries you've had of late, which can have a temporary effect on your score also.
In the case that one of your accounts hasn't had a payment made by the beginning of the next month, you are deemed "30 days late" and will receive a derogatory reporting on that account. If that account is still unpaid on the first day of the next month, you would be considered "sixty days late" and so on the first day of each month afterward. This can greatly effect your credit score. Late payments, collections, charge offs, bankruptcies, foreclosures, etc can all damage your credit score in a huge way. On the other hand, accounts with histories of on time payment histories will positively effect your credit score, causing it to grow stronger over time.
The key to really taking control of your credit is to examine it and learn how it works. You most likely wouldn't dream of jumping into an aircraft and careening off down the runway without the first clue how to control it, and yet so many people take that approach to learning how credit works. Do yourself the favor, invest in your financial education and learn how to control one of the key elements in you and your families life: Your Credit Score. You'll be happy that you did.
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This article has been condensed to fit the layout of this website. For the complete, original article, including additional supporting information and resources, please visit How Credit Reports Work
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