Credit is an important component of everyone’s financial journey. For some, it’s a method to get back on their feet. On the other hand, others take it as a way to get a good financial footing. It is used for different things, including emergencies or business capital.
Having a strong credit score provides you with numerous advantages. For one, you’ll have cheaper interest rates on credit cards and loans. Additionally, you can save money on insurance and security deposits for new utilities and telephone services.
People can easily enhance their credit scores. But first, you need to understand what makes a good credit score. Additionally, we’ll also provide you with information on how good credit scores are generated.
What Are Credit Scores?
Your credit score helps lenders assess your creditworthiness. That is, how likely you are to repay your debts. The score helps them decide whether or not they want to lend you money.
As you can imagine, getting a good credit score means that you are qualified for loans. On the other hand, having a bad credit score means you did not meet their qualifications. It can mean that you have late payments or have too many debts.
When this happens, you can get help from credit repair companies. They will review your credit report for any inaccuracies. After doing so, they will recommend steps for you to increase your score. And you don’t have to worry about the cost since there are companies that offer cheap credit repair services.
How Are Credit Scores Computed?
Credit agencies are the organizations that compile your credit report. This, in return, is used to compute your credit score. There are five components that affect the credit score. These include:
1. Your Payment History (35%)
Your payment history is the most important factor that affects your credit score. It also has the greatest impact on your credit scores.
Your credit ratings will benefit from a long history of on-time payments. On the other hand, missing a payment will damage them. Missed payments can hurt your credit score the longer a bill goes overdue. As a result, a 30-day late payment has a lesser impact than a 60-day or 90-day late payment.
The amount of damage late payments cause to your credit depends on how much you owe. You don’t have to worry about this, especially if you start making on-time payments. The negative impact on your credit score will gradually fade.
2. Your Credit Utilization Rate (30%)
Credit utilization is another key component to consider. Your credit utilization rate refers to how much you owe as compared to your credit limit. A smaller utilization rate can positively impact your credit scores.
On the other hand, a higher utilization rate means you’re maxing out your credit cards. It can also mean that you’re leaving a portion of your amount unpaid. Consequently, this poses harm to your credit scores.
3. Your Credit History Length (15%)
There are different factors relating to your credit history length that impacts your score. This includes:
- Your oldest and newest account’s age
- The average age of all your accounts
- Whether or not you’ve recently used an account
Opening additional accounts lower your average account age, which decreases your credit scores. However, these can be remedied by lowering your utilization rate and increasing your total credit limit. It also helps to make on-time payments to your new card.
4. Different Credit Mix and Types (10%)
Different types of credit help you enhance your credit health. You shouldn’t take out a loan and pay interest only to add to your credit mix. It doesn’t really affect your score significantly. If you only had installment loans, you should use a credit card for small purchases that you can pay off each month.
5. Number of Credit Inquiries (10%)
An inquiry is placed on your credit report each time you submit an application that involves a credit check. This indicates that you’ve made a credit-based application.
Credit inquiries account for 10% of your credit score. One or two queries aren’t going to hurt you that much. However, multiple inquiries, especially in a short period of time, can cost you a lot of points on your score. To maintain your credit score, keep your applications to a bare minimum.
It’s worth noting that checking your credit report generates a “soft” query. Don’t worry because this has no effect on your credit score.
FICO and VantageScore are the most often used scoring formulas.
However, it’s also possible that a lender will utilize its own rating system. And because of that, you’ll notice that you have varying credit scores. With that being said, there isn’t one number that identifies a good credit score.
These components are also the factors that affect your credit scores. This information comes in handy if you want to increase your credit score. Or, you can also use them to understand more about credit scores in general.
What Is a Good FICO Score?
You have a good FICO score if it falls between 670 and 739. If you have a score between 580 and 669, it means you have a “fair” FICO score. On the other hand, scores between 740 and 799 are regarded as “very good”. Anything over 800 is considered “outstanding”.
What is a Good VantageScore?
VantageScore identifies credit scores with “superprime”, “prime”, “near prime”, and “subprime”.
Superprime scores exceed 780, while prime scores range from 661 to 780. Those between 601 and 660 are referred to as “near prime”. Ultimately, those below 600 are referred to as “subprime.”
How to Get a Good Credit Score?
Paying off your debt on time and in full is the best method to achieve a good credit score. However, it’s not the only thing you can do to maintain your credit score. The following steps will help you increase your credit score.
1. Always Make On-Time Payments
It’s important to pay all of your bills on time, not just your credit cards and loans. Some people use third-party services that schedule timely rent and utility bill payments. If you don’t use one and you fall behind on those accounts, it can negatively impact your credit score. You can maintain a decent credit score by paying all of your bills on schedule.
2. Maintain a Low Credit Card Balance
Your credit score will suffer if your card balance is higher than your credit limit. To prevent this, your overall credit card balances should be less than 30% of your total credit limits. And it’s better if it’s lower than that.
You should not charge more than 30% of your credit limit. Even if you plan to pay off the sum when your payment is due. When your bill ends, card issuers normally report the balance. That’s the number that will appear on your credit report.
It’s better to keep track of your accounts online and make enough payments. This will get your balances as low as possible before the billing month ends.
3. Keep Your Old Credit Cards Open
Closing a credit card means your credit card issuer stops sending updates to credit bureaus. This can ultimately harm your credit score. Inactive accounts are given less weight in the credit scoring algorithm.
The credit bureau will erase that closed account’s history from your credit report after 10 years. When that happens, your average credit age will be reduced and this lowers your credit score. Doing this also reduces the amount of credit you have that is accessible.
4. Monitor Your Credit Report
Just because you handle your credit responsibly doesn’t guarantee everyone else will. Errors in your credit record could result in a reduction in your credit score.
Inaccurate information on your credit report can also result from identity theft and credit card fraud. Monitoring your credit report throughout the year allows you to identify errors sooner. By doing so, you can dispute errors on your credit report and maintain a good credit score.
These methods can help you improve your credit score. If you really want to have a good creditscore, you need to make a habit out of them.
However, it’s still advisable to hire credit repair professionals. They can recommend specific ways to improve your credit score.
Moreover, they will also help you dispute inaccuracies in your credit report. If you’re a new credit holder, you’ll find these professionals to be beneficial in improving your credit score.
Credit scores are important to get approved for a credit card or a loan. If you have a good credit score, you’ll have better chances of acquiring loans. Understanding credit scores help you achieve or maintain a good score.
On another note, attempting to increase your creditscore teaches you good money management skills. It’s laying a foundation that will assist you as you continue on your path to financial security.