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Credit scores are created by taking information from credit reports and analyzing that data to forecast how someone is likely to behave in the future. By looking at factors like how much debt consumers carry and whether they have paid their bills on time in the past, helps predict whether someone might pay a new bill on time or how they will handle a credit line increase. Most credit scores have a 300-850 score range. The higher the score, the lower the risk to lenders.
What is a good credit score? It depends! Each lender decides how to use these numbers but here are some basic guidelines:
760 – 850: Excellent
700 – 749: Average – very good
650 – 699: Fair
600 – 649: Poor
Below 599: Bad
There are several FREE sites you can check your credit score online. I use creditkarma.com. These checks do not affect your credit score unlike credit checks by lenders.
So let's talk about WHAT affects your credit score:
Payment history. It is the most important ingredient in credit scoring, and even one missed payment can have a negative impact on your score. Lenders want to be sure that you will pay back your debt, and on time, when they are considering you for new credit. Payment history accounts for 35% of your FICO® Score☉ , the credit score used by most lenders.
Credit utilization. Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. This ratio looks at how much of your available credit you're utilizing and can give a snapshot of how reliant you are on non-cash funds. Using more than 30% of your available credit is a negative to creditors. Credit utilization accounts for 30% of your FICO® Score.
Credit history length. How long you've held credit accounts makes up 15% of your FICO® Score. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores.
Credit mix. People with top credit scores often carry a diverse portfolio of credit accounts, which might include a car loan, credit card, student loan, mortgage or other credit products. Credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of credit products. Credit mix accounts for 10% of your FICO® Score.
New credit. The number of credit accounts you've recently opened, as well as the number of hard inquiries lenders make when you apply for credit, accounts for 10% of your FICO® Score. Too many accounts or inquiries can indicate increased risk, and as such can hurt your credit score.
In other words, missing payments, using too much available credit, applying for a lot of credit in a short time and defaulting on accounts can severely hurt your credit score for years, even up to a decade.
So now, the FUN part. How having good credit can save you money!
Lower Interest Rates on LOANS, CREDIT CARDS, & your MORTGAGE!
A better chance at getting credit card and loan approvals.
Getting approved for higher limits.
Easier approval for rental housing and apartments.
Better car insurance rates.
Avoid or have lesser security deposits on utilities and cell phone contracts.
Credit score is huge when purchasing a home and locking in a great interest rate. Just a 1% difference in interest rate on a $160,000 loan can cost you an extra $100 per month or $30,000 over the life of your loan!
Imagine that extra 1% interest difference on not just your mortgage but also on your car payment and credit card with higher rates. You could be paying hundreds more each month. Moral of the story, make it a priority to obtain excellent credit and KEEP excellent credit.
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