Most of us have a general idea of the importance of having a good credit score.
But what about when it comes to breaking it all down to the specifics for achieving good credit? Your credit score will determine whether you qualify for a loan, how much your loan will be and what interest rate you will pay on the money that you borrow.
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Credit Score Range
Your credit score. It’s amazing how much this one little three-digit number can affect so much of your life, especially when it comes to buying, or rather, borrowing money to purchase something.
Whether you are applying for a car loan, a home mortgage or even a credit card, one of the first things a lender will do is check your credit score rating to see how good your credit is.
Based on this information, as well as other variables, the lender will then approve or deny your credit application.
What Affects My Credit Score?
There are tangible reasons why your score changes, and specific steps that can be taken to improve it. Let’s look at the factors that impact your credit score the most, according to FICO.
- New Credit (10%) – FICO believes that having several new credit accounts pop up in your report within a short period of time means you represent a greater lending risk, especially if you have a short credit history.
- Types of Credit (10%) – This is not a key factor, accounting for only 10% of your FICO score, but still a consideration. Try to have a good mix of credit; retail accounts, credit cards, installment loans, and a mortgage are all considered. For example, not having a credit card can actually lower your score.
- Length of Credit History (15%) – The longer you’ve managed credit, the better. Having a brief credit history can lower your score.
- Amounts Owed (30%) – Carrying a large debt load can lower your score, even if you make payments on time. Having used a large portion of your available credit can account for 30% of your credit score. FICO also considers remaining balances due, as well as the number and types of credit accounts you have.
- Credit History (35%) – Timely repayment of borrowed money is the most important factor in your credit report, impacting 35% of your FICO score. This includes credit cards, retail accounts (like department store credit cards), loans, and finance company accounts. A single late payment can impact your score for up to seven years. Your credit history also includes bankruptcies, foreclosures, lawsuits, and other public record and collection items. These legal actions can impact your score for up to 10 years, though the impact slowly decreases with time.
Credit Score Scale
- A credit score of 720-850 is excellent: At this level you get the best rates on credit cards, car loans, and home mortgages. Above 720 is generally considered a “perfect” score.
- A credit score of 681-720 is good: You’re in the pocket. With a score in this range, you’ll get plenty of credit card offers, qualify for loans with good rates, and pay lower insurance premiums.
- A credit score of 641-680 is fair: You may qualify for that loan or credit card, but your rate will be relatively high.
- Anything under 640 is considered a poor score: You’re likely to be considered a high-risk borrower, and that means your credit card interest rates will be much higher than average and you won’t qualify for a typical loan.
When we talk about credit scores, it’s easy to wonder who is doing all of the compiling of data. By and large, the three big players in the credit score business are the three major credit reporting agencies, Equifax, Experian, and TransUnion.
Each of these companies makes money selling your credit information, history, and your credit score to banks, businesses, and even potential employers.
Your credit report details your payment history, the amount of debt you’ve piled up, and where you work and live. It even includes if you’ve ever been sued, arrested, or filed for bankruptcy.
All of this information is used to generate a credit score – basically a grade – that measures your financial reliability.
The good news if you do have a below-average credit score is that, as time passes and you continue to pay your bills on time, your credit rating will gain ranking in the credit score scale.
Most bad marks will stay on your credit report for no longer than 7 years. Each and every month that you pay your bills on time, your credit rating improves.