Understanding how to build credit and how to use it responsibly helps consumers make decisions that lead to financial success. And making responsible decisions that can help you chart a path toward a successful financial future is easier when you're well informed. Free tools from sources such as the American Bankers Association, National Foundation for Credit Counseling and Wells Fargo's free, online Hands on Banking program can help consumers of all ages increase their credit know-how. These five tips can help you take control of your finances, manage your money and build a stronger credit history.
Five steps to strong credit
1. Check your credit report: Once a year, consumers can request a free credit report from each of the three major credit reporting agencies - Equifax, Experian and Transunion - at AnnualCreditReport.com or call 877-322-8228. Review the reports carefully and correct any errors.
2. Understand the factors that affect your credit: Whether you are new to credit or have been using credit for some time, your credit score gives lenders a snapshot of your credit risk. By understanding what impacts your score, you may be able to improve it.
3. Raise your credit score: Managing your credit responsibly over time is one of the best ways to build, maintain and improve your credit score. Five key criteria are generally used to calculate a consumer's credit score:
* Payment history: Information about whether you've made on-time payments has the most impact on your score.
* Credit accounts: A balanced mix of different types of credit can help improve your score.
* Credit usage: Owing a lot or being near your credit limit on multiple accounts negatively impacts your score.
* Length of credit history: Reviewers check to see if you can responsibly manage credit accounts over time.
* Credit applications: Opening multiple new credit accounts may represent a greater risk for lenders.
4. Create and monitor your budget: A budget gives you more control over your finances and helps you eliminate unnecessary expenses.
5. Know what lenders look for. When consumers apply for a loan, lenders assess their credit risk based on a number of factors, often called the Five Cs of Credit:
* Credit history. Have you established credit and is your credit score high enough to qualify you?
* Capacity. Is your income sufficient?
* Collateral. Does the collateral you're borrowing against have enough value?
* Capital. Do you have assets set aside as another source for repayment?
* Conditions. Does the current economy or purpose for the credit make it a risk?
Wells Fargo offers a variety of free tools designed to help individuals at any life stage learn ways to manage their finances more responsibly. For more information and resources about how to use credit sensibly to achieve financial goals, visit www.wellsfargo.com/creditsmart.