Credit score seems to be a buzzword of sorts. You hear people mentioning that you need a good one, and people talking about “building your credit” in casual conversations.
It seems that very few people actually understand how credit scores work. How exactly do you build your credit? What’s a good score? What actually effects your score?
No worries dear reader. I’m here to illuminate the way through this credit score maze we’re in.
Your credit score is a number ranking your creditworthiness. Simply put, it’s a number that lets people see how well you use credit. The higher the better. That’s basically it.
Not so simply, credit scores are an analysis of your credit history and usage. There’s a few things that go under the microscope when figuring out your number. Lenders (banks, credit card companies, student loan companies, etc.) check your credit score to determine how much credit you’re good for and to help determine your interest rate. Low scores equal high interest rates, because you’re seen as a credit risk.
What Influences Your Credit Score?
What type of credit counts?- Any credit types get factored in. Credit cards, student loans, mortgages…they’re all fair game
Length of credit- The amount of time you’ve had a line of credit. The longer the better (10 years as opposed to 2 years), as it shows lenders that you have responsibly used credit for a long time.
Credit inquiries- Any time you apply for a loan or a credit card, the company you’re applying with will check your credit. The fewer inquires you have, the better your score will be.
Current debt amount- The amount of debt you currently have. Your debt-to-income ratio should be on the lower end.
How Much Of Your Available Credit You’re Using- The percentage of use matters. The more of your credit you use, the more of a risk you’ll be seen as.
Payment History- Your payment history really matters. A spotty history of payments is a big red flag. Making consistent payments over time is the best way to bump your credit score up.
With a list of things like that, it’s easy to get overwhelmed or to misunderstand how something is used. Let’s talk about what a good score is and how you can attain and keep one.
What’s the Deal With Good and Bad Scores?
A good credit score is a high credit score. Normal scores range from roughly 500-850, and the closer you are to 850, the better off you’ll be.
Lenders determine how much credit and how high or low of an interest rate you deserve based off of your credit score. A low score means a riskier potential client. A high score means a more secure one. High scores mean you get lower interest rates and higher credit limits.
So when people talk about building a good credit history, they mean doing well at our list above. You should make payments on time, you shouldn’t max out your credit cards each month, and you should keep your debt levels low or have no debt at all.
Following these tips will boost your credit score significantly.
How to Prove You’re Responsible With Credit
To keep your credit score at a high level, you have to be a responsible user. Always make your payments on time. That’s definitely numero uno.
Use about 30% of your available credit (or less). If you have a credit card, don’t max it out each month but instead, use it sparingly and make sure to pay it off each month.
If you have debt like student or car loans, make those payments each month. Some people advise against paying off debt early, because it cuts down on your payment history. The longer you make payments, the better the history right?
I recommend getting out of debt ASAP. Any debt is a succubus on your income and you don’t want that. Paying debt off early doesn’t mean you’re screwing over your credit score by any means! You’ll continue to build payment history if you have a credit card you pay off in full each month.
Besides, paying less money toward interest on a loan is more valuable.
A word of warning: don’t try to open too many credit cards. Lots of inquiries on your credit score can be a major red flag. It can look to a lender like you’re trying to get as many lines of credit as possible, which can mean you’re an irresponsible spender.
Open between one and three cards and keep them open for as long as you can. This will build your history and eliminate the need for credit inquiries.
Credit scores aren’t a scary thing to deal with. If you check yours at least once a quarter and see that everything is in order, and if you use your credit wisely, your score will get high and stay high.
Do you have a good or bad credit score? Do you make all your loan payments on time? Did you know which factors influenced your score?