It's a three-digit number that can make you or break you -- it can affect your ability to buy a home, rent an apartment, buy a car, and in some cases prevent you from getting a job. But despite its value, many of us are blissfully unaware of our credit score.
Do you know your score? When was the last time you checked it? Do you even know how it's composed?
If those questions make you feel uncomfortable, you're not alone. Bewilderment around credit is shared by plenty of people. Except, of course, for creditors. Money lenders have a very clear picture of your credit score, and emerging technologies are making it even clearer.
Credit bureau TransUnion recently announced a new algorithm that "enables more accurate assessment of consumer credit worthiness." The new system deeply analyzes a consumer's historical loan information and allows for "insight into consumer behavior," giving creditors an increasingly more accurate view on whether or not a consumer will be able to service a loan.
Facebook may lend its IT muscle to the world of credit too -- the social media giant has a patent for technology that would enable creditors to examine the credit score of not just you, but your entire network of friends. The wording in in the patent suggests that if your friends have bad credit, you could be on the hook:
"If the average credit rating of (friends in your network) is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected."
Whether or not Facebook will even use the technology is unclear -- it was part of a $40 million bundle of patents acquired in 2010, and a patent certainly doesn't guarantee that a given product will ever see the light of day.
But it does tell us that the world of credit is ever-evolving. If you don't know the basics of building a solid credit profile, now is the time to learn. Creditors are looking closer than ever before, and by sticking to the fundamentals, you will have nothing to hide.
Here are the five most important ways to keep your credit strong:
Pay on time, every time, in full. Payment history is the single most important factor in determining your credit worthiness. Simply put, late, short, or missing payments will cause the biggest damage to your credit. Automate your bill payment so that you don't fall behind, and don't take on new bills unless you are sure you can afford to pay them.
Keep your balances lean. Your "utilization rate" is the next most important piece of the puzzle. If you are carrying massive amounts of debt, you're less likely to be able to handle more. Try not to use more than half of your available credit.
Work on your long game. "Length of credit history" is the next most important aspect of your credit profile. Creditors want to see that you can be trusted over a long period of time, and you can prove that you're not a flash in the credit pan by keeping your credit cards active for as long as possible. Cutting up a card might be a good way to curb impulsive shopping, but keeping it open and using it responsibly will help establish your credit history.
Don't sign up for every credit card you see. While it's good to establish a long, steady credit history, it's not wise to apply for too much credit in a short period of time. Be selective in applying for new credit, because creditors will start to worry if it seems like you're constantly looking for more.
Variety is the zest of life. This is the lowest factor on the credit-worthiness totem pole but it's still something to consider. Creditors want to see that you can handle a wide variety of credit types, so don't limit yourself to one form. A responsible blend of options such as credit cards, student loans, mortgages, and car loans will show creditors that you can keep things balanced.
With a solid credit foundation, new credit-judging technologies shouldn't scare you. In fact, more accurate credit ranking can only be a good thing when you have built a credit profile that you are proud of.
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