Though the concept has only been around since 1989, credit scores have become an important part of the financial landscape. A good credit score can help you get a loan or even a job; a bad score could keep you from getting a credit card, auto loan or mortgage – and in some social circles, even a date! With so much riding on a simple, three-digit number, it’s easy to see why people are concerned about what affects their credit score.
If you’re confused about your score, what affects it and how it can change, use this credit score guide to get a general idea of the process. Then, consult a qualified financial advisor to have the finer points of your personal credit score explained to you. The more you know about the factors that determine your credit score, the more you can do to maintain a number that will help you secure good credit for years to come.
Your credit score number explained
If you recently received a copy of your credit score, you may be curious about the meaning behind the number. Credit scores range from 300 to 850; the higher the score, the better your credit. The major credit bureaus break this range down into five smaller groups; however, no lender uses the same “score cutoff,” so it’s hard to say objectively what makes a score good or poor. Use this credit score guide to get an idea of where your score may land you, but be sure to ask your lender specifically:
- 300-579 – Bad credit: This means you will likely have trouble securing credit cards or loans. You may be in this range if you have missed multiple payments, defaulted on a loan, declared bankruptcy or have not yet established a credit history. You’ll likely need a co-signer to obtain any credit.
- 580-629 – Poor credit: You may be able to secure low limit credit cards or loans, but you will likely pay higher interest rates. Focus on raising your credit score by paying back a credit card on time each month.
- 630-689 – Fair credit: More mid-level loans and credit cards may be available, but rates will still tend to be very high. However, they will vary more widely in this range, and you should work to raise your score while finding a lender who will work with you now.
- 690-749 – Good credit: If you’re in this range, you will probably be approved for most credit cards and loans as well as receive lower interest rates. Some high-end products, like a jumbo mortgage, may not be available.
- 750-850 – Excellent credit: When your credit score is this strong, you are more likely to receive the lowest possible interest rates on loans and lines of credit, as well as higher credit limits and loan amounts. You may also receive benefits, discounts and rewards offers from your credit card company or lender.
What factors affect your credit score?
Credit scores are not arbitrary – they are based on your financial history, current behavior and overall financial responsibility. There are five main factors that help calculate a credit score, and each factor is given a different weight depending on its importance in determining the final score. You can learn more about what affects a credit score at myFICO.com.
- Payment history (35 percent): Payment history is exactly what it sounds like – a record of past payments and whether or not they were made on time. If you miss payments on any of your accounts, including credit cards, mortgages or utilities, your credit score could go down accordingly. One smart way to avoid this is to set up online bill pay when you open a checking account. Paying your bills on time ensures that you establish a solid payment history, which in turn helps to raise or maintain your credit score.
- Amounts owed (30 percent): Depending on how much of your financial portfolio is debt, this factor could either positively or negatively impact your credit score. Simply owing a lot does not necessarily hurt your credit score, but if the majority of your available credit is being used, it could be a sign to lenders that you’ve overextended yourself. Additionally, the amount owed for different types of credit is taken into account, where a high amount of “bad debt” can result in a much worse score than an equal amount of “good debt.” We’ll discuss “good” and “bad” debt below in more detail.
- Length of credit history (15 percent): When you first establish credit, you start out with a lower number because you haven’t objectively proven you can manage the responsibility of higher payments over time. That’s why it’s important to pay your bills on time and in full – as time passes, you will establish a good credit history that will give you access to better interest rates and other perks.
- New credit (10 percent): New credit isn’t the same as your length of credit history – it refers instead to how many accounts you open during a certain period of time. If a credit reporting bureau sees that you have opened multiple accounts in a short period of time, they may take this as a sign that you are struggling financially and may not be able to pay off your debts in a timely manner.
- Types of credit used (10 percent): This part of your credit score analyzes the types of credit you have applied for and used. You could have either “bad debt” or “good debt.” Long-term debt or installment loans such as a mortgage, auto loan or student loan is usually considered “good debt” because they invest in your future. On the other hand, credit cards and store accounts are often considered “bad debt” (especially if they are unpaid), as they are used to purchase disposable goods.
Ways to improve your credit score
If you have a low credit score, how can you improve your numbers? One of the simplest ways to start establishing good credit is to open a checking account so you can pay your bills on time and in full. Many utility companies allow you to set up online bill pay through your bank, which can keep payments from slipping through the cracks and going past due. Keeping a stable balance in your bank accounts can also help, as can using 25 percent or less of your available credit whenever possible. Everyone’s situation is different, of course, so it’s important to consult with your banker to learn additional strategies for raising your credit score.
Sponsored content was created and provided by Citizens Financial Group.
