Like it or not your credit history is an integral part of everyday life. Whether you are making a big purchase like a home or car, or applying for a credit card, your credit scores are practically unavoidable.
They’re one of the main factors a lender uses to determine creditworthiness. They help lenders see how high (or low) the risk of you becoming delinquent on a loan is. Higher credit scores translate to lenders that you are a lower credit risk. Higher FICO® scores also mean lower interest rates.
FICO® scores are based on data in your credit reports from one of the three major credit reporting bureaus: Experian, TransUnion and Equifax. Factors such as your payment history and the amount of your outstanding credit to the length of your credit history and credit mix, help determine your FICO® Scores.
FICO® scores have the potential to determine your quality of life. Knowing where you rank is important. Once you know your FICO® score you can begin making it better, if necessary, or maintaining a good score to ensure a healthy financial outlook.
Credit Score Rank – How Lenders See You
Any credit score 800 and above is considered exceptional. Borrowers within this range will more than likely not have any problem getting credit.
740 to 799: Very Good
Practically automatic approval along with the lowest rates on whatever you apply for including mortgage loans, automobile loans, credit cards and even lower insurance rates.
670 to 739: Good
Good chance of being approved for credit with competitive interest rates. Even though this is a pretty good credit score, there may be some lenders that offer slightly higher rates and less favorable terms than they would offer consumers with “very good” credit.
580 to 669: Fair
Most lenders will approve you for auto, personal loans and credit cards but it will likely be at a higher interest rate. It may be challenging to get a mortgage loan unless you have a good down-payment and job stability. With a middle of the road score range such as this, it would be a good idea to get your credit scores, analyze them and determine what you can do to make them higher.
579 and lower: Bad credit
Alarm bells ring every time your credit is pulled (No, I’m just kidding) but scores in this range indicate serious financial problems and action needs to be taken now. Lenders will deal with you with extreme caution. It will be difficult to secure major credit such as a mortgage or automobile loan. The credit cards available to you will be limited but there are a few credit cards available to consumers needing to rebuild or build credit like the First Access Visa® Card.
What makes a FICO® Score
Now that you know what your credit score means to you it is imperative that you know what factors make up your credit score:
Payment history – 35%
Payment history is the most important component in your credit score. A late payment can stay on your credit report for seven years. The more recent the late payment is, the more it hurts. A 30-day late payment is less damaging than a 60-day late payment. If you are a few days late, your creditor is unlikely to report the account in arrears. If it’s more than 30 days you can assuredly expect a ding to your credit. One single, recent late payment can deal a heavy blow to an excellent or good credit score. It can take as much as 100 points off your score.
Total amount of debt owed – 30%
The FICO® scoring system looks at your credit utilization on both your individual cards (revolving credit) and as a total against all your credit cards. Maintaining a low credit card balance helps you credit score. Another way to reduce credit utilization is to get a higher credit limit. If you’ve used too much of your available credit, that signals to lenders that you could be in financial trouble.
Length of credit history – 15%
The longer your credit history the less less risky to potential creditors you are than someone who has only recently opened their first credit accounts. Your credit score reflects the age of your accounts as well as how long it’s been since you’ve used them.
New or recent credit – 10%
Opening too many new credit accounts at once can hurt your score. So can too many inquiries into your credit when you’re shopping for a credit account.
Good mix of credit types used – 10%
Creditors like to see a variety of credit accounts instead of just one type. Revolving credit lines (credit cards) and installment loans (car, mortgage, student loan) give you a good mix of credit.
Barring serious delinquencies such as charge-offs and collection accounts, a quick way to improve your credit score is to either pay down your credit card debt to less than 10% or less of your available credit — or, if you don’t have the cash to pay down your credit card debt, ask for a limit increase (but do not use it). Decreasing the amount owed will increase your credit scores.