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How does a credit score work

how does a credit score work

2 Answers

Cliff notes version. Here we go.

There are 3 credit bureaus - Experian, Equifax and TransUnion that creditors report to. Lenders can choose to report to one bureau alone or to all 3. They are basically competing businesses that provide the same product.

Then there is a company called FICO. They take information from your credit reports and create a credit score. It ranges from 300-850. Excellent credit is between 760-850. You will see that they are not the only company in town to offer a credit score, but they are the one that 95% of lenders use, therefore the only one you really care about.

To build credit fast you need to repeat the same credit usage without fail on a monthly basis. "Fast" is a relative term here, because it will still take about a year.

Basically, you

want to open 1 credit card that reports to the 3 bureaus you really like, which will be the backbone of your credit from today forward. The limit does not matter. Use it every month, use less than 20% of the limit, make your payment on time. Do not ever close that card.

It will take 6 months for the system to recognize you and compile a credit score. At that point you can consider a second card or applying to incerase your limit.

Monitor credit report several times/ year and dispute any inaccuracies. If you need to make a bigger purchase - pull your FICO score 6 months ahead of time. In the first 2 years you may need a cosigner or cash down regardless of your credit score so be prepared.

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Category: Credit

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