There's no doubt about it: The credit scoring system we use in
the United States is complicated. What's more, there are plenty
of critics who claim that it's downright unfair.
While it's true that our credit reporting procedures could
probably use some reforms, there are ways to get past common
credit gripes. Take a look at the five listed here, plus our tips
for working within the system we've got.
1. I have to get into debt to build credit
People who prefer to pay cash often complain that there's no way
to build credit without getting into debt. This comes from a
kernel of truth: You do have to use credit to create a credit
But this doesn't necessarily mean you have to take on debt.
For example, if you use a credit card regularly and pay your
balance in full every month, you're building credit but not
getting into debt. Consider this option as an alternative to
taking out a loan that you don't really want or need.
2. Every little mistake is used against me
If your lenders are reporting your payment information to the
three major credit bureaus, and most do, you might feel like
they're tattling on you for every little mistake you make. It's
true that foul-ups like missed payments, taking on too much debt,
and submitting too many credit applications will get back to the
credit bureaus and affect your score.
But it's important to remember that you can avoid many of
these mistakes. For example, setting up text and email alerts so
that you know when your bills are due or if your credit card
balance is getting too high will go a long way toward preventing
And even if something does go wrong, a money misstep won't
stay on your credit report forever. Most negative marks drop off
after seven years; if you're making smart credit moves in that
time, your score will recover. In short, there are lots of
opportunities to avoid most mistakes and bounce back from the
ones you can't.
3. My savings aren't factored into my score
Many people are frustrated to learn that some of their good
financial habits, such as saving, aren't incorporated into their
credit scores. If you excel in this area, feeling a little
slighted is normal.
Remember, though, that the purpose of the credit scoring
system is to assess borrower risk. Lenders want to know how
likely it is that you'll repay money they've credited you, not
how likely it is that you'll save.
Look at working on your credit score as an opportunity to
highlight another side of your financial responsibility. Again,
pay special attention to paying your bills on time and staying
out of credit card debt. These two habits alone will help your
4. Credit reports are full of errors
Although lenders and the three major credit bureaus make efforts
to create an accurate report of your credit-related behaviors,
mistakes do happen. In fact, a 2013 study by the Federal Trade
Commission found that one in five Americans has an error on at
least one of his or her three credit reports.
The best way to cope with this gripe is to review your credit
reports carefully at least once per year and take steps to
correct mistakes if you find them. And the good news is that
getting an error fixed is expected to get easier soon, because of
new rules set out by the Consumer Financial Protection
5. It's not clear how my score is determined
Historically, the credit reporting agencies were secretive about
how your credit score was determined. While some information is
still proprietary, we have a much clearer picture these days of
what determines our scores:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Mix of accounts: 10%
- New credit inquiries: 10%
Again, the two most powerful things you can do for your credit
score are paying your bills on time and staying out of credit
card debt. But if you want to know more about your credit report
and credit score, the Nerds have lots of great resources. Be sure
to check them out!
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