Your credit score can make or break many situations in your life. From renting an apartment, to getting a job, to buying a car, to getting a mortgage, your credit score is incredibly important. Last time I checked I had a credit score of 800, which probably helped me to get my current rental over some of the other potential tenants. But what what determines the score that you have, and what number makes for a good credit score? Let’s take a look.
Your credit score is based upon five major criteria set forth by Fair Isaac, the creators of the scoring system called FICO, which TransUnion, Experian, and Equifax use to tabulate your score:
Payment History – Your payment history makes up 35% of your total credit score. Make too many late payments, and this can drastically cut in to your overall score.
Outstanding Balances – Your outstanding credit balances make up 30% of your total score. When you are constantly near your limit on your credit, your score can drop. The more open credit you have available, the better this part of your score will be.
Credit History – This is the amount of time you have had credit, and it makes up 15% of your overall score. The longer you have had credit, the better off you look to potential lenders. This is why most people will tell you not to cancel old accounts, even if they have a $0 balance.
Applications For New Credit – 10% of your score is determined by how often one applies for new credit. Each time you apply, your score drops a little bit, especially if the applications are close together. (One exception is when you are shopping the best rate for a mortgage. If done within a few weeks, it is reported as only one application.)
Types Of Credit – This is the last 10% of your score. You want to have a mix of different types of credit if you can, such as a few credit cards, maybe an installment loan, and maybe a mortgage. Being able to manage those helps your score.
According to Fair Isaac, the average credit score in the U.S. is currently around 680, which isn’t too bad of a score; but it’s not fantastic. Considering the state of our economy right now, I kind of imagined it to be a lot less, so it’s good to see that it isn’t. Credit is scored between 300 to 900, with the majority of people falling in the 600 to 800 range. Here is a look at how those scores and ratings break down:
- 760 and above – Excellent. You will be able to get the very best rates and loans.
- 700 to 759 – Still excellent. You will have no problem getting great rates.
- 660 to 699 – This is considered “Good”. You will still get very good rates.
- 620 to 659 – Still OK, but your rates will be slightly higher for scores in this range.
- 560 to 619 – You are getting into “Poor” territory here. You will still get a loan, but your rate will be pretty high.
- 500 to 559 – Very poor. You can still get credit, but expect to pay a very high interest rate.
- 499 and below – You may still get credit, but you will pay a ridiculously high interest rate on any loans. If your score is this low, work on increasing the number before applying for credit.
So, how do you increase your credit score? Well, there are a few steps you can take:
- Pay your bills on time. This is key, and makes up 35% of your overall score.
- Pay off balances. By keeping balances low, you open up more credit.
- Don’t close unused credit cards if your score is already low.
- Don’t open a lot of new accounts.
By being responsible and diligent about your credit, you can keep your credit score up to the point that you will always get the best rates on any loans. It’s not about how much money you make, but it’s about how well you manage your finances.