If you want to be able to buy that shiny new truck or become a homeowner, you have to think about your credit score. It can hold you back from those big-ticket items if it isn’t good enough. But before we dive into credit scores, let’s talk about how credit works.
Credit 101
Credit is simply you borrowing money to pay for something and agreeing to repay that later under agreed-upon terms. Those terms generally include how much interest you’ll pay, how long you’ll take to pay it back, and how much you’ll pay each month.
Another important credit concept is creditworthiness. Before a lender agrees to loan you money, they want to know if you can repay it. There are several ways in which a lender makes these determinations, but one of the biggest things they will look at is your credit score. Your credit score primarily measures how risky you are as a borrower. The less risky you are, the more access you will have to good credit and loans.
What is a good credit score?
A credit score is commonly a number between 300 and 850. There are a variety of credit scores, but the most common ones use this model. This model is used by the two biggest credit-scoring companies, FICO and VantageScore, and you will most likely be using to gauge how good your credit is.
Here are the four common ranges of credit scores:
Excellent: An excellent credit score is generally between 720 and 850. With this score, you can access the lowest interest rates.
Good: A good credit score is typically between 690 and 719. With this score, you will be able to get credit cards with better benefits and better loans and you will be able to get them with affordable interest rates.
Fair: A fair credit score is often between 631 and 689. With this score, you will likely be able to get a credit card or successfully apply for a loan, but you may have higher interest rates.
Bad: A bad credit score falls between 300 and 630. With this score, you might have a hard time getting a credit card or loan, and if you can borrow, you will likely be doing so at a high-interest rate.
You are more likely to have a higher credit score as you get older because you have a longer financial history to consider. However, just because you have a low credit score when you are younger does not mean it will not rise. You can improve your credit score by doing several things.
What factors impact credit score?
If you were to visualize it as a credit score pie chart, you’d see five main pieces of the pie that would affect your credit score. Those five factors are:
Payment History: Do you pay your bills on time? This is one of the most important factors considered. This doesn’t just apply to your credit card and regular household bills, such as electric, mortgage, and phone bills. Lenders want to know if you can be relied upon to repay a loan, and they’ll look at your payment history to help them make that determination.
Amounts Owed: Do you already owe a lot? Are you nearly maxed out? If you already owe a lot you need to pay back, or if you’ve used nearly all the credit you’ve been allotted, this will impact your credit score negatively.
Length of Credit History: How long have you been using credit? This doesn’t always have to do with age Although, it is more likely that your credit history will be longer if you’re older. A lender is looking for a history that tells them how you manage credit.
New Credit: How much of your available credit is new? If you’ve been seeking a lot of credit recently, lenders will be concerned that you have money problems.
Types of Credit: What kind of credit mix do you have? Is it all credit cards, or is it also student loans or a mortgage? It is beneficial to your score if you have a mix so lenders can see how you handle the different types.
Plenty of factors go into your credit score, and by being aware of the above factors, you can greatly improve your credit score or keep it in good standing.
If you want to learn more about credit scores or apply for credit, please contact Bell Finance today.
