Imagine if a friend came up to you and asked you for a loan – reversing roles in this case to put you in the bankers shoes.  Assuming your friendship is important you are probably not going to want to give a loan that your friend cannot pay back, regardless of your own personal finances, on top of which you’re also out the money you lent him.  You now need to figure out how much you are willing to give him, along with an interest payment reflective of the possibility of him not actually paying you back at all.  What kind of questions would you ask and what would you want to know before you gave out this loan?  Quite simply, you’d want to know if he could afford to pay you back, if his income was stable, or if he’d borrowed from someone else in the past and thus had a good reputation as being reliable.  More importantly than his reputation with others would be his reputation with you – has he borrowed and paid you back before, and is he likely to pay you back in the future.

This is obviously the fundamental basis of which credit is given and restricted, but it also naturally lets you understand how the factors related to credit work.  It’s this principal understanding that helps navigate and guide the rules of credit and help you use them to your advantage. 

Now let’s take a look at some common beliefs about credit and examine how they can help or hurt your credit score.

Getting a Credit Card at an Early Age

Potential upside to you:  Teaches the value of being responsible with credit
Potential upside for your credit: Establishes a credit history
Danger to you: Spending without income can instil very bad habits
Danger to your credit: missed payments, too much debt with no income to pay it off
Overall value to your credit score: Very little

Getting Multiple Credit Cards

Potential upside to you:  Access to multiple bonuses and benefits with each card
Potential upside for your credit: Establishes a credit history
Danger to you: Easy to lose track of credit cards and payment dates
Danger to your credit: missed payments, too much debt with no income to pay it off
Overall value to your credit score: Moderate

None of the two items mentioned above will have a drastic impact on your credit score, though they can certainly help.  In general, credit companies rate potential customers according to the following criteria:

Taken from MyFico These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different.

Earlier it was mentioned how establishing credit at an early age wasn’t important – having very little history is much better than having bad history, since young adults aren’t expected to have a long credit card history.  Missing payments is virtually the worst thing you can do to harm your credit card score. 

What can I do to build my credit score?

Unfortunately, it's a lot easier to lower your score than it is it raise it.

But there are a number of things you can do to try to raise your so-called FICO score, named for Fair Isaac and Co., the company that created this credit rating system now widely used by lenders of all stripes for a quick read on your creditworthiness.

While the system is widely used, it’s far from perfect. Good lenders use it as a starting point to gauge your personal financial level, and each one has their own ideas about how high your score should be. They may also base their decision on other information not contained in the score — like how long you’ve lived at your current address or held your current job.

• Pay your bills on time
• Don’t borrow more than you can afford
• Don’t get more credit than you actually need
• Don’t open up more credit cards than you need
• Keep your older credit cards over newer ones