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 calculated and what steps they need to take to improve their 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 involves something other than a straight cash transaction.
The computer systems that run the credit reporting system have huge amounts of data on every individual who has ever applied for a loan or credit card, or for that matter who has ever paid a bill.
For example, your utility bills are all a form of credit.
The utility companies provide you with their service (electricity, water, gas, etc.
) and then bill you for the amount of that service you've have used, usually on a monthly basis.
So these companies are essentially extending credit to you for their services since they pay for them (a type of "inventory") before they get paid by you.
If you don't make your utility payments, or are consistently late with those payments, that history will eventually get reported and show up as what is know as a "derogatory", or negative, entry that lowers your credit score.
Derogatory entries on a credit report reduce your credit score by varying amounts.
Unpaid medical bills, unpaid utility bills, late payments on mortgages, or defaults on credit cards are all forms of derogatory entries.
Of these, your 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, they are most likely not paying any other bills since having a roof over one's head is considered a basic necessity today.
After mortgage payments, everything else in your credit report is secondary, but still important.
Car payments rank right up there too.
Again the assumption is that if you're not making your car payment, or close to defaulting on a car loan, you are probably in a severe financial crunch because without a car you can't easily get to work and thereby earn money to make your car payments and mortgage payments.
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 all show up on your credit report.
If you have had 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 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, regardless of the interest rate, you should occasionally purchase something with that card (the amount is not important) and then immediately paid off.
This shows both the ability to get credit and a willingness to pay the bill.
Both of these actions will have a positive impact on your credit score.