In recent years, your credit score has become more and more important to your life. Credit score use is not limited to just banks and credit card issuers. Many companies now use credit scores to decide whether they want to do business with you. For example, insurance companies use your credit score to quote your insurance rate. Cell phone companies use your credit score to determine whether you should pay a security deposit. If there’s a business with whom you’ll have a financial relationship, you can safely assume they’ll be using your credit score.
What is a Credit Score?
Your credit score is a three-digit number that’s used to predict the likelihood that you’ll repay your debts on time. Credit scores are calculated based on information in your credit report, like how timely you’ve paid your bills, whether you’ve ever filed bankruptcy, and the last time you applied for a credit card or loan. Things like how much money you make and whether you’re employed don’t directly influence your credit score because they’re not listed in your credit report.
Your credit score is based on five key categories of information:
1) 35% is how often you pay your bills on time
2) 30% is how much debt you have
3) 15% is the age of your credit
4) 10% is the type of credit accounts you have
5) 10% is the number of credit applications you’ve made recently
What is a Good Credit Score?
Having a good credit score makes it easier to get approved for credit cards and loans. You’ll typically get approved for lower interest rates, which means you’ll pay a lower cost for borrowing the same amount of money as someone with a lower credit score. Good credit scores also keep you from having to pay security deposit for certain services like cell phone service and utility services.
Generally speaking a good credit score range is above 700. If your credit score is above 700, you’re considered to be a low risk. According to myFICO.com, only 8% of borrowers with a credit score above 700 will fall more than 90 days behind on credit card payments.
If your credit score is below 700, you’re a riskier borrower. Between 620 and 699 is a fair credit score. If your credit score is below 620, you’re considered to be one of the riskiest borrowers of all.
How to Get a Good Credit Score
Improving a bad credit score takes time, but it can be done. You must start by reviewing your credit report to figure out what’s bringing down your credit score. Often credit reports include details about the negative factors that influence your credit score. Here are some things that could contribute to a bad credit score:
- Late payments, especially several accounts that are more than 90 days late.
- Mortgage late payments over 30 days.
- Debt collections and charged-off credit card balances.
- Maxed out and over-the-limit credit card balances.
- Not enough experience with different types of credit accounts, e.g. both credit cards and loans.
- A short credit history.
- Too many recent applications for credit.
If you want to increase your credit score you must pay your bills on time. Late payments have the most significant impact on your credit score. You should also be careful not to charge more than 30% of your credit limit to keep your level of debt low. Open new accounts sparingly, but try to include both credit cards and loans. Keep your credit card accounts active and in good standing, especially the older ones.
A good credit score can help you save money and make life easier. Check your credit score periodically to make sure you’re either maintaining a good credit score or working your way to one.