Your credit score is an important factor in your overall financial well-being. It comes into play for many important financial decisions you’ll make throughout your life. Your credit score not only helps a lender to determine your creditworthiness for an auto loan or credit card, but can also impact your home buying ability. A low score can result in higher rates on loans and insurances. It can even impact your employment opportunities. Yes, some employers now check credit scores to determine if potential new employees are responsible in handling finances.
To many of us, a credit score is most important when it comes to borrowing. Generally, the higher your credit score, the more credit options available to you and the lower your interest rate. A lower interest rate can mean significant savings, especially on bigger ticket items. So, just what determines your credit score? Read on to find out.
Payment History
Your payment history is the most important factor in determining your credit score. In fact, according to FICO, your payment history comprises 35% of your total credit score. Late payments and missed payments can have a negative effect on your total credit score. Lenders want to know that you will pay back your debt in full. Positive payment history is a good indication that you will do just that. Be sure to make all of your payments on time each month to keep your credit score in good shape.
Credit Utilization
Credit utilization refers to the percentage of available credit you are using at any given time. FICO reports that credit utilization accounts for 30% of your credit score. Your utilization is determined by dividing your total outstanding balances by your total credit limits. Experts recommend keeping your overall credit card utilization below 30 percent. If you max out all of your credit cards and carry high balances, a lender may feel you cannot handle your debt responsibly. On the other hand, lower utilization shows lenders and other creditors that you can use credit responsibly. Keep your credit utilization down by paying down high balances and making extra payments throughout the month.
Length of Credit History
Creditors like to see long credit histories. Unless you have a reason to close an account, such as a high annual fee on a credit card, you should keep it open. A long history is a positive sign to lenders and others checking your credit.
Credit Mix
Lenders typically like to see a mix of credit. This can include credit cards, various loans, mortgages, and other types of credit. It shows a lender that other creditors have trusted in your ability to repay. Be sure to have an ample credit mix.
Credit Score Ranges
Credit scores typically range from 300 to 850. According to Experian, the average credit score in America in 2019 is 703. Scores between 300 and 629 are considered bad and can make it difficult to qualify for credit. Scores between 630 and 689 are considered fair. If your score falls in this group, you may be able to borrow, but will probably face higher interest rates and limited choices. A credit score in the 690-719 range is considered good and can provide you with better interest rates and more choices. If your credit score is 720 or over, it is considered to be excellent. An excellent credit score can help you get the lowest interest rates and best rewards credit cards. It’s something to strive for.
Improving your credit score
Working now to proactively improve your credit score can save you headaches when applying for loans or other credit. How can you improve your score? Be sure to make all of your payments on time each month. Just one missed payment can have a negative effect on your credit score. Pay down your debt. Reducing your credit card and loan balances can help to improve your credit utilization ratio and in turn, improve your credit score. Try to limit new credit requests. As tempting as it is, don’t apply for every credit card offer you see. Hard inquiries can have a negative effect on your credit score. If you don’t have much of a credit mix, try to improve that. For instance, if you only have an auto loan, apply for a credit card or two. Finally, check your credit report regularly and dispute any inaccuracies. Errors do occur and the faster you discover them, the faster you can correct the problem. Learn more about requesting free credit reports on the Federal Trade Commission website.
Applying for Credit
It’s important to note that lenders look at more than just credit scores. Although credit scores are always important when borrowing, your income, and other debt also play a factor in lending decisions. Choice One Community Credit Union is here for all of your loan and credit card needs. Have a question about a loan? We’d love to help. Call or stop by any conveniently located Choice One Community Credit Union branch location, or click here to read more about our loan options online.