A credit score is a simple 3 digit number yet it represents the overall health of your finances. It’s the backbone of your financial life.
Credit Rating and What It Means
Lenders typically use this rating chart to determine where you stand in terms of your credit score and what rates you will receive.
Excellent (Scores 780+)
Individuals with a rate of 780 or over will enjoy the best interest rates on the market. They also will typically always be approved for a loan.
Very Good (Scores 779-72)
This is considered near perfect and individuals with a rate in this range will still enjoy some of the best rates available.
Good (Scores 719-680)
An individual who has a credit score that falls within this range has good credit and will typically have little to no trouble getting approved for the new credit.
Average (Scores 679-620)
While this is still a good range, individuals with this score will receive slightly higher interest rates than those with higher scores.
Poor (Scores 619-580)
Scores in this range indicate the individual to be a high risk. It may be difficult to obtain loans and if approved, they will be paying a lot in terms of interest.
Very Poor (Scores 579-500)
Scores in this range are rarely approved for anything, but credit can be repaired.
Need Help (less than 500)
Individuals whose credit scores are less than 500 will not get approved for new credit and should seek credit improvement help.
Factors That Affect A Credit Score
There are 5 main factors that affect the calculation of your credit score. If you’re interested in improving your credit score these are the areas that you should focus on.
- History of Payments 35%
- Credit Utilization 30%
- Credit Length 15%
- New Inquiries 10%
- Credit Mix 10%
1. History of Payments (35%)
This is determined by the payments they have made to lenders or creditors. This ultimately reflects on how frequent they pay their loans or bills on time. Anyone looking to improve their credit score should always make their payments on time, without fail.
2. Used Credit vs Available Credit (30%)
This shows the amount of outstanding debt a consumer has and is also compared to the amount of available credit they have. For Example, If you have a total credit limit of $5000 and consistently carry a high balance, your credit score will be negatively affected. To improve your credit score, pay down your debt and make sure you keep your balance to lower than 35% of your available credit.
3. Credit Length (15%)
This factor is straightforward, the longer a credit account has been open, the better it is for your credit score. If you’re considering cancelling a credit card, make sure you cancel a new one and keep the older ones open.
4. New Inquiries (10%)
Every time a potential lender or creditor pulls your credit, your credit score will take a small and temporary hit. If you apply for a lot of new credit within a short period of time, your credit score will drop and other creditors will be able to see that you’ve recently applied for a lot of credit which they may consider to be a red flag.
5. Credit Mix (10%)
The more diversity in the credit accounts you have open, the better it is for your credit score. This shows potential creditors and lenders that you are a responsible borrower and can handle the responsibility that comes with having several different credit accounts.