For whatever reason the financial system in the United States is not well understood by most people. In particular the credit system and how it works is an area that most people simply don’t understand. While the average consumer doesn’t need to know the dynamics of how banks make money and decide how to loan invest their money (actually your money), consumers should know how their credit score is affected by the financial system and how to improve credit score.
At its simplest level, an individual’s credit score is basically a history of their financial transactions including their taxes paid, mortgage payments, car payments, and any other transaction that involved something other than a direct cash payment for item. The amount of data gathered by the credit reporting system in the United States is staggering. For example, your electric bill is actually a form of credit. You are expected to pay for your electrical service after it has been used in the calculations of how much electricity used in the prior month. This makes the company a creditor. So they are essentially extending credit to you for the electricity. If you fail to make your electricity payments, eventually they will report this to the credit reporting agencies it will show up as a derogatory entry.
Derogatory entries on a credit report of those entries that drop your credit score and also the focus of improving your credit score. Unpaid medical bills, unpaid utility bills, late payments on mortgages, or defaults on credit cards are all forms of derogatory entries. Of these mortgage payment history (if you’ve had a mortgage) is the one that has the biggest impact on your credit score. The assumption here is that if a person is late with their mortgage payment or doesn’t make their mortgage payment at all the emotional and not paying any other bills as having a roof over one’s head is considered a basic necessity today.
From mortgage payments everything else in your credit report secondary. Car payments are important as well. Again the assumption being that if you’re not making your car payment or close to defaulting on a car loan you’re probably in a severe financial crunch. A missed car payment or a late car payment is an indication to the credit reporting agencies that you are in severe financial difficulties.
After house and car comes everything else. Retail store credit cards major credit card such as MasterCard Visa or Discover and medical payments for people who don’t have medical insurance will show up on the credit report. If you have late payments on any of these they show up as derogatory entries. If you’re current on all your payments that is also reflected on your credit report but that doesn’t mean you shouldn’t work on improving your credit score.
One interesting note about your credit score is that you can have a low credit score because you don’t have credit cards, or have credit cards and don’t use them. If you make a habit of paying cash for everything and have the ability to at least get some sort of credit card the matter what the interest rate is, you should occasionally purchase something with a credit card (the amount is not important) and immediately paid off. This shows both the ability to get credit and a willingness to pay. Both of these actions will have a positive impact on your credit score.