If you have ever made a big purchase (think: bought or leased a car, purchased a home, secured lending for a business endeavor, etc.), then you know how important it is to have a strong credit score. Credit scores impact nearly every large purchase you make. Having good credit can be incredibly useful for securing loans and favorable interest rates. If you’re not so sure what your credit score is – don’t sweat it! We’ll dig into your biggest credit questions below:
What exactly is a credit score?
Think of a credit score as a report card of sorts that helps lenders determine how “trustworthy” you are as a potential lessee. Your credit score is determined using a variety of inputs, but ultimately demonstrates the level of financial responsibility you’ve been able to achieve.
What goes into the score?
Payment History: Your payment history accounts for about 35% of your actual credit score. Creditors use your payment record as a way to gauge how responsible you have been, and how likely you are to continue to demonstrate this behavior going forward. If you have consistently made your payments on time, you will likely have a higher score as a result. If, however, you’ve have missed a few minor payments, you may find that your score has been slightly impacted. If you have failed to make regular payments, this will have an even more negative impact on your score. The important thing to take from this is that the more you can demonstrate consistency and responsibility with your payments, the better!
Time: The age of your credit is a large component of your payment and overall credit history. This component can account for nearly 15% of your score! The reason? This piece of information can help lenders truly understand your pattern of behavior over a longer period of time. Generally speaking, the longer you have had to demonstrate good, consistent behavior, the more you’ll be able to positively impact your score.
Debt Utilization Ratio: Your Debt Utilization ratio reflects what percentage of your credit balance you’re carrying on your credit card (or on an outstanding loan) at any given time. Generally speaking, you can avoid hits to your credit score if you keep your credit card balance below 30% of the allowed limit. For example, if your credit limit was $1,000 you would want to keep a balance of $300 or less (30%) on the card at all times. Obviously, you can spend up to your credit limit, but maintaining a 30% debt coverage ratio will allow you to avoid incurring unfortunate, negative hits to your credit score.
New Credit Requests: Every time you apply for a loan or new credit card, you are incurring what is known as a “hard inquiry” into your credit behavior, which can result in a slight, temporary decrease in your score. While these small decreases are typically normal and should roll off in time, opening up several credit cards at a time or applying for various lines of credit may signal to a financial institution that you’re slightly desperate for credit, and may contribute to the perception that you are a risky candidate. Therefore, it is generally wiser to spread out your credit requests due to the implications they may have on your overall credit score.
Credit Mix: Your overall credit mix can account for about 10% of your overall score. What does this mean? It means that (as backwards as it sounds), the more responsible you are with making consistent monthly payments across the various components on your “financial plate”: such as a mortgage, several credit cards, and other financial obligations, the better you’ll be able to demonstrate strong credit history. If you only have limited experience in paying off monthly obligations (which is the case if you have simply one credit card), it gives lenders less information and history to use to assess your overall situation.
How often should I be checking it?
You are entitled to a free credit report every twelve months from each of the three main credit bureaus: Experian, Equifax, and TransUnion. Log on to one of the credit bureaus to find out where you stand.
When reviewing my score, what should I be looking for?
When viewing your score, the first thing to look for is your actual credit score number, and looking to see that all of the history and personal information provided is accurate. Typically, this report will show the main factors that contributed to your score, and may even suggest action steps you can take to improve or change your score.
Furthermore, be on the lookout for any suspicious activity. If your score seems wildly out of line with your expectations, do a double (or even tripe) check of the report. If anything seems suspicious, contact the credit agency to make an inquiry and make sure you are not a victim of identify theft or any other fraud.
What is a good credit score?
While the range varies according to what source you consult, a score of 690 and above is generally considered “good” credit. That said, an excellent score is 720 and above (the maximum score is 850). Aim for a score of 750, if possible. With a score of 750, you will find that you may have many favorable options when it comes to interest rates on long-term financing and credit cards. Worried your score isn’t where it should be? Rest easy, girlfriend …you CAN make improvements. Read here for our best tips on building and improving your credit!
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