The Power of the Credit Score


Credit building is a new approach to financial counseling. Distinct from credit repair, which seeks to remove incorrect information from the credit report, and credit counseling, which focuses on debt repayment, credit building involves the opening and careful use of good lines of credit to establish and sustain a positive credit score

The road to good credit is shorter than most Americans think.

A credit report is built in a very specific way. A credit score is created when someone has at least one active loan or credit card that reports to the credit bureaus for at least six months. The score doesn’t take into account a person’s income or assets. It looks solely at the borrower’s payment behavior—whether reported loans were paid back on time, if credit cards were used responsibly (with on-time payments and balances below 30 percent of the credit limit), and whether any debts turned into collections.

The catch is that many people with poor or no credit live in neighborhoods overrun with predatory lenders, which don’t report to the credit bureaus. So if someone with no score or a low score is borrowing from a payday lender or a rent-to-own store, they’re not improving their credit, even if they’re making regular on-time payments.

But once a person has a loan that generates a credit score, the system can work in their favor. The credit scoring system doesn’t look at how much you borrow, just that you pay it back. A $300 loan will produce the same results as a $3,000 loan.Credit scores are also sensitive to recent information, so making regular on-time payments on a current loan or a credit card can have an effect fairly quickly—usually within three to six months.

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