Whether you are aware of your credit score or not, this simple three digit number holds a lot of weight. It controls all of your major purchases from buying a new home to financing an automobile and can even impact your insurance and consideration for a new job. Credit scores for those of us just out of college are often either nonexistent or low, but it’s very important to start strong. Like a GPA, it’s much easier to establish a good score in the beginning and keep it high than it is to bring up a poor score.
So what exactly does your credit score do? It’s simple. All a credit score does is tell your “creditworthiness” or simply put–are you or are you not going to pay loaned money back. Most credit scores are based off a FICO (Fair Isaac Corporation) score which is based off your credit history ranging from 300-850. 300 being the low end, tells banks and credit card companies that you are an extremely risky client. A credit score that flirts between 300 and about 620 is considered low to bad credit. This can lead to extremely high interest rates on pretty much any purchase where a loan is necessary or possibly just being flat out denied for the loan altogether. A score from 680 to 850 is considered good to excellent credit, and will almost always lead to approval of a loan and the best available rates.
What affects my Credit Score?
- Payments: The most significant impact on your credit score is your bill payment history. Pay your bills on time. This is the single most important factor tied to having a good score. On time payments = higher credit score. Late or no payments = lower score.
- Debt: Avoid maxing out your credit cards. The more cards that have been pushed to the limit the more negative your credit score will be. It is best that you keep the balance on you card around 25% or less of your available credit limit. For example, if you have a $5000 credit limit on your Visa try to only charge up to $1250 per billing cycle then pay it off before charging more.
- History: The longer your credit history the better–which means it’s best to get started early. This allows lenders to take a deep look into your payment history. So if you have any credit cards that were obtained a while back but are no longer being used, do not cancel them all. Keep the ones with the longest history and make small purchases or cover a bill every couple of months to continue lengthening the history.
- Credit Types: By using the different types of credit (installment, revolving, mortgage) you will benefit by showing banks that you can manage all types of available credit thus making you a more reliable and attractive borrower.
Let’s take a look at the different credit types.
- Installment – any debt that has a specific number of payments (ex. auto loans and student loans) Tip: Although having installment loans, such as auto loans, on your credit report can help you build a solid credit history, having too many installment loans can bring your score down because they carry fixed monthly payments. Fixed payments are sometimes viewed by lenders as negative because they may affect your ability to meet other loan obligations.
- Revolving– debt that can carry a balance from month to month (ex. credit cards and department store cards) Tip: This was stated above but must be stated again. Maintain a good cushion of available credit between your current balance and your credit limits on all open cards. This has a positive affect on your credit score. This cushion shows lenders that you are unlikely to overextend yourself financially.
- Mortgage–debt obtained in the purchase of real estate(ex. homes and rental properties) Tip: Lenders recognize that obtaining and maintaining a real estate loan requires more skill and discipline than other account types. People who have real estate loans and pay them on time see an increase in their credit worthiness
Sites That Link to this Post
- Credit Cards: Three Types of People | June 13, 2012