What Makes a Good Credit Score?
One of the essentials of a healthy financial life is a good credit score. If you want to succeed financially, getting the best interest rates on loans, and having access to the best deals, you need to improve your credit score. A good credit score can open doors and save you money. If you want a good credit score, though, you have to be willing to work for it.
Factors Influencing Your Credit Score
Your credit score is comprised of a few factors. A special algorithm, weighting these factors, is used to come up with your score. The information used to determine your credit score is found in your credit report. What appears in your credit file is assigned numerical value, and then plugged into the algorithm to provide a snapshot of your ability with to handle credit.
There are the 5 main factors that influence your credit score:
- Payment History: Because lenders and others are most interested in how well you have paid your obligations in the past, this is the most important part of your credit score. Your payment history includes whether or not you pay on time, whether you have missed payments, and whether your payment behaviors have resulted in foreclosure or bankruptcy. You can do a lot to make a good credit score when you make your payments on time.
- Amount of Debt: Next, is the amount of debt you have. Your credit score includes an accounting of how much debt you have in relation to how much credit you have available. If you have total available credit lines of $5,000, and you have $4,500 in debt, your credit score will be negatively impacted. In order to have the best credit score possible, you should try to keep your debt to less than 30% of your available credit. This is called credit utilization.
- Length of Credit History: How long you have been using credit matters. The longer you have used credit, the better your score will be. It shows that you have a long history of meeting your obligations. Keeping older accounts active can be a good way to help give your credit score a little bit of help, although this factor isn’t enough to overcome a poor payment history or a large amount of debt.
- Types of Credit: Your credit score will also take into account different types of credit that you have. Revolving accounts, like credit cards, should be present – as should installment loans (like a car loan). A good mix of different types of account is seen as desirable.
- Credit Inquiries: When you apply for credit, an inquiry is registered on your credit file, and this can affect your credit score. If you make a lot of attempts to apply for credit in a short period of time, you could see your credit score drop. You should realise that “soft” inquiries – those you make on your own to check your score, or those made for marketing purposes – won’t count against you.
Understanding what goes into your credit score can help you improve your situation, and ensure that you get the best deals possible when you apply for loans.