Credit is an important part of everyone’s financial journey. For some, it’s a way to get back on their feet. On the other hand, others see it as a way to have a good financial base. It is used for different things including emergencies or trade capital.
Having a good credit score gives you many benefits. For one thing, you’ll have cheaper interest rates on credit cards and loans. Plus, you can save money on insurance and security deposits for new utilities and phone services.
People can easily improve their credit scores. But first, you need to understand what makes a good credit score. Additionally, we will also provide you with information on how good credit scores are generated.
What are credit scores?
Your credit score helps lenders assess your creditworthiness. In other words, what is the probability that you will 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 rating means you qualify for loans. On the other hand, having a bad credit rating means you don’t meet their qualifications. It can mean that you are late on payments or that you have too much debt.
When this happens, you can get help from credit repair companies. They will review your credit report for any inaccuracies. After that, they will recommend steps for you to increase your score. And you don’t have to worry about the cost because there are companies that offer cheap credit repair services.
How are credit scores calculated?
Credit agencies are the organizations that compile your credit report. This, in turn, is used to calculate your credit score. There are five components that affect 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 biggest impact on your credit ratings.
Your credit rating 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 is overdue. Therefore, a 30 day late payment has less impact than a 60 or 90 day late payment.
The amount of damage caused by late payments to your credit depends on the amount you owe. You don’t have to worry about that, especially if you start making payments on time. The negative impact on your credit score will gradually fade.
2. Your credit utilization rate (30%)
Credit usage is another key consideration. Your credit utilization rate is the amount you owe against your credit limit. A lower utilization rate can have a positive impact on your credit scores.
On the other hand, a higher usage rate means you are maxing out your credit cards. It can also mean that you leave part of your amount unpaid. Hence, it hurts your credit ratings.
3. The length of your credit history (15%)
There are various factors related to the length of your credit history that impact your score. This includes:
- The age of your oldest and newest account
- The average age of all your accounts
- Whether you recently used an account or not
Opening additional accounts reduces the average age of your account, which lowers your credit scores. However, this can be remedied by reducing your usage rate and increasing your total credit limit. It also helps to make payments on your new card on time.
4. Different combinations and types of credits (10%)
Different types of credit help you improve your credit health. You shouldn’t take out a loan and pay interest just to add to your credit mix. It doesn’t really affect your score significantly. If you only had installment loans, you would have to use a credit card for small purchases that you can pay off each month.
5. Number of credit applications (10%)
An inquiry is placed on your credit report each time you submit an application that involves a credit check. This indicates that you have made a credit-based application.
Credit inquiries count for 10% of your credit score. One or two queries won’t hurt you 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 inquiries to a bare minimum.
It should be noted that checking your credit report generates a “soft” query. Don’t worry as this has no effect on your credit score.
FICO and VantageScore are the most widely used scoring formulas.
However, it is also possible for a lender to use its own rating system. And because of that, you will notice that you have varying credit scores. That being said, there is no single number that identifies a good credit rating.
These components are also the factors that affect your credit scores. This information is useful if you want to increase your credit score. Or, you can also use them to learn more about credit scores in general.
What is a good FICO score?
You have a good FICO score if it is between 670 and 739. If you have a score between 580 and 669, that means you have a “fair” FICO score. On the other hand, scores between 740 and 799 are considered “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 called “near prime”. Ultimately, those below 600 are called “subprime”.
How to get a good credit score?
Paying off your debt on time and in full is the best way to get a good credit rating. However, that’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 payments on time
It’s important to pay all your bills on time, not just your credit cards and loans. Some people use third-party services that schedule timely payment of rent and utility bills. If you don’t use any and fall behind on these accounts, it can negatively impact your credit score. You can maintain a decent credit score by paying all your bills on time.
2. Maintain a low credit card balance
Your credit score will suffer if your card balance is higher than your credit limit. To avoid this, your overall credit card balances must 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 repay the amount when your payment is due. When your bill ends, card issuers normally report the balance. This is the number that will appear on your credit report.
It’s best to track your accounts online and make enough payments. This will ensure that your balances will be as low as possible before the end of the billing month.
3. Keep your old credit cards open
Closing a credit card means that your credit card issuer stops sending updates to the credit bureaus. This can ultimately hurt your credit score. Inactive accounts are given less weight in the credit scoring algorithm.
The credit bureau will erase the history of this closed account from your credit report after 10 years. When this happens, your average credit age will be reduced, which will lower your credit score. It also reduces the amount of credit you have that is accessible.
4. Monitor your credit report
Just because you manage your credit responsibly doesn’t mean everyone else will. Errors in your credit report could lead to 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 earlier. 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 credit score, you have to make it a habit.
However, it is always advisable to hire credit repair professionals. They can recommend specific ways to improve your credit score.
Plus, they’ll also help you dispute inaccuracies in your credit report. If you are a new credit holder, you will find these professionals helpful in improving your credit score.
Credit scores are important in getting approved for a credit card or loan. If you have a good credit score, you will have a better chance of getting loans. Understanding credit scores helps you achieve or maintain a good score.
On another note, trying to increase your credit score teaches you good money management skills. It’s about laying the foundation that will help you continue on your path to financial security.