How Healthy is Your Credit Score?
Your credit score is one of the most critical numbers in your financial life. Whether you’re applying for a new credit card, personal loan, or a mortgage, it is vital to know your credit score so that you have the proper insight into what type of credit you qualify for and what interest rates you can anticipate. But what exactly is your credit score, and what does it consist of?
Below, we’ll discuss all the ins and outs of your credit and what you need to know about your credit score.
What is a Credit Score?
A credit score is a three-digit number, ranging from 300 to 850, that serves as an evaluation of your credit history and estimates how likely you are to repay borrowed money.
When determining your credit score, many different things are considered, such as payment history and duration of credit history, from your present and past credit reports, which we will discuss shortly.
While a low credit score may not prevent you from being eligible for credit, you may be forced to pay higher interest rates or place a considerably more substantial amount of money on deposit.
In some instances, you might also need to pay more for car insurance or put down more significant deposits on utilities. Landlords may also use your credit score to determine whether or not you are a suitable renter.
A high credit score, on the other hand, can grant you access to many more types of credit products. Additionally, you are also eligible for reduced interest rates and lower deposits.
Borrowers with credit scores above 750 also frequently have many financial possibilities, including the chance to qualify for 0% financing on automobiles, as well as credit cards with 0% introductory interest rates.
What are the Credit Score Ranges?
While each creditor has its own set of criteria for what constitutes a good credit score, the general guidelines can be found below:
- Excellent Credit: 720-850
- Good Credit: 690-719
- Fair Credit: 630-689
- Poor Credit: 629 or below
The most commonly used credit score model is the VantageScore. Although all three credit bureaus use VantageScore, each bureau looks at different factors, so a consumer’s score can vary depending on which credit bureau supplied the data.
Where Does the Information from a Credit Score Come From?
The three major credit reporting agencies – Equifax, Experian, and TransUnion – provide the information on your credit account. These agencies use the information to create the credit score, which is then provided to lenders when evaluating loan applicants.
So what does a credit score consist of? Let’s take a look.
Payment history accounts for 35% of most credit scores. A history of missed or late payments lowers your credit rating more than any other factor. When determining your score, creditors look at how recently you missed a payment or were late on a payment, as well as the number of accounts that have previously been overdue.
For a good credit score, you need to have as clean a payment history as possible with no or few late payments.
Charge Utilization Ratio
Credit utilization is responsible for 30% of most credit scores. Your credit utilization ratio is the amount of credit that you’ve used, divided by your total available credit limit
For example, if you have multiple credit cards with a combined credit limit of $8,000 and a balance of $3,000, then your credit utilization ratio is 37.5%.
To have a good credit score, your credit utilization ratio should be roughly 30% or less. Most experts recommend 10%.
Credit age is used to calculate 15% of most credit scores and refers to how long you’ve used credit. More accurately, credit age is the age of the oldest account, latest accounts, and average ages of all accounts on your credit file.
For a good credit score, you should have at least one account in your credit file that’s at least six months old.
Account mix makes up 10% of most credit scores and refers to how many credit accounts you have. Account mix can consist of things such as mortgages, car loans, or personal loans. Revolving accounts such as credit cards and lines of credit are also considered.
For a good credit score, most lenders prefer borrowers who have a diverse combination of accounts in their credit history.
Credit inquiries, classified into hard and soft, are used to determine 10% of most credit scores.
Hard inquiries occur when a creditor looks at your credit report because you have applied for a line of credit and can reduce your credit score by 5 to 10 points for as much as two years.
Soft inquiries, which refer to instances where you or a lender check your credit score, however, don’t affect your credit score.
While this category only accounts for 10% of your credit score, try to minimize credit inquiries as much as possible.
How Can I Improve My Credit Score?
Now that you have a better understanding as to what makes up your credit score, let’s take a look at a few ways you can start improving your credit score today.
Pay Your Bills On Time
Payment history is the most potent factor for your credit score, which is why you should always stay on top of your monthly payments. If you have a difficult time remembering to make payments, create a calendar reminder on your phone or opt to enroll in automatic payments.
If you have a SmartCredit account, you will also receive alerts for upcoming payments before they are due. This will help you avoid hits to your credit score from late payments.
Regularly Monitor Your Credit Score
Identity theft and reporting errors can quickly derail your credit score. Be sure to check your credit report throughout the year to ensure no unusual or fraudulent activity is occurring.
If you catch anything inaccurate on your report, follow the proper measures to dispute the error as soon as possible.
Consider Your Credit Mix
Lastly, credit scores take into account your ability to manage different kinds of credit. If you think your credit combination needs to diversify, consider taking on a low-interest rate loan that you know you will be able to pay on time.
Be Strategic About New Debt
While it’s smart to have a healthy mix of credit, too many hard inquiries over time may indicate that you are taking on more debt than you can manage, which can negatively affect your credit score.
However, provided that you continue to show that you’re a responsible borrower, your score should return to normal over time.
View Your Credit Score with SmartCredit Today
As you can see, credit scores are a quick way for lenders to predict consumer credit risk and credit behavior. Considering the importance of your credit score, it’s vital that you do everything you can to keep it in good standing.
If you want to take back control of your credit score, contact SmartCredit today to see where your credit stands. Find out what proactive steps you can take to start improving your credit score right away with SmartCredit.