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10 Things You Absolutely Need To Know About Your Credit

Lauren Gensler, Forbes Staff –

After graduating from school, your credit score is probably the only grade you’re given that you care about deeply. Except this time it’s for your financial life. The three digit number is telling of how well (or how poorly) you’ve done with credit. Like academic grades, it’s also a big deal for your future.

Here are ten things that are crucial to know about building and keeping a good credit score:

1. Your credit score can determine whether you get a loan. Banks and lenders look at your credit score when they are deciding to approve you for a loan or not, whether it’s for a car, a home or personal use. It’s also a factor when you apply for a credit card.

2. Your credit score also helps determine your interest rates. A bad credit score can cost you real money, since lenders often charge higher interest rates to borrowers they view as risky. On the flip side, a high credit score can save you some serious cash, since you’ll be more likely to score the best interest rates.

3. Your credit score is derived from your credit reports. There are three big credit bureaus — Experian , Equifax EFX -0.07% and TransUnion — and you have one credit report from each. Your credit score is calculated based on the information in these reports. On them, you’ll find identification info (like current and previous addresses) plus your history of dealing with credit (like payments you’ve made on student loans and credit cards in your name.) Under federal law, you’re permitted to pull your reports for free once per year. Request one every four months at annualcreditreport.com.

4. It’s up to you to get errors fixed. It’s important to make sure the info on your credit reports is accurate. If you spot errors — like an account that isn’t yours or a late payment you know you made on time — it’s your responsibility to get them fixed.

5. You can get your credit score for free. An increasing number of credit card providers (like Discover and Chase ) are issuing free credit scores to cardholders. You can also see your score gratis at certain sites like CreditKarma. “The credit score went from being a mysterious tool no one other than lenders knew about to being given away almost ad naseum,” credit score expect John Ulzheimer told FORBES last year.

6. There are several factors that make up your credit score. FICO scores are calculated based on the following, which are listed in order of importance:

35%: Payment history. This one is simple. Just pay your loans and credit card bills on time.

30%: Amounts owed. This has to do with something called your credit utilization ratio. Essentially, you don’t want to be using a high percentage of your total available credit. For instance, instead of maxing out your credit card, aim to spend no more than 30% of your credit limit.

15%: Length of credit history. Generally, the longer you’ve been using credit, the better.

10%: Credit mix. It’s best to have a variety of accounts, including revolving debt (like credit cards) and installment loans (like mortgages).

10%: New credit. Refrain from going overboard and applying for a bunch of new loans and credit cards in a short period of time. It looks like you’re desperate for credit.

7. A lot of things surprisingly don’t impact your credit. Your credit score is calculated strictly from the information in your credit reports, which is fairly limited in its scope. It only cares about your history of paying back money you promised you would. However, lenders often consider other information when evaluating you. For instance, nowhere on your credit reports is your income, alma mater or history of paying bills on time.

8. You have more than one credit score. The vast majority of lenders use FICO scores, provided by Fair Isaac Corp. Other lenders use VantageScore, which was created by the credit bureaus themselves. There are also dozens of different versions of these scores, so chances are the credit score you see is not the same one lenders are looking at. The difference typically isn’t cause for concern, though, and all credit scores are calculated from the same place — your credit reports.

9. Employers and landlords can do credit checks. Heads up: your credit may be considered when you apply for a job, apartment or when you try to get a new iPhone from Verizon. In the case of employers, they must ask for your permission to check your credit and if they decide not to hire you based on this info, they must tell you. Landlords aren’t required to get your permission, but do have to notify you if they deny you an apartment or change the terms based on your credit.

10. There are ways to dramatically improve your credit score. Maybe your credit score is in the gutter because you lost your job and had to declare bankruptcy last year. Or perhaps it’s nonexistent because you’re a recent grad, immigrant or new divorcee. Don’t fret. There are surefire ways to build a high credit score. The advice typically boils down to: Seek out credit and use it responsibly. There are certain missteps you’ll want to avoid, too.