Credit Scores and What Really Affects Them

Over the years, I've heard a lot of different theories about how to increase your credit score. Most of them are grounded in some truth, but are based on incomplete knowledge. For example, a lot of people say that given the choice to buy a car with cash or finance it, you should finance the car to build credit. Although, that is generally true over time (in the short term, the auto loan will actually hurt most credit scores), there are often better ways to increase one's credit score without the initial negative effects and without having to pay real money on interest.

A credit score, such as the FICO score (produced by the Fair Isaac Corporation), is a numerical way for banks and lenders to determine if an individual is a credit risk. The scores generally range from 300 to 850 depending on which company and which method is being used to calculate the score. In theory, an individual with a 300 on this scale would be someone who would definitely default while an individual with a score of 850 would be guaranteed to not default. Since nothing is ever certain, the scores are designed so people will fall between these two extremes.

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Credit Scores and What Really Affects Them