Your credit score affects key areas in your financial life, including loan approvals, interest rates, repayment conditions, and more. Many credit card companies and banks now include a free look at your credit score as part of their mobile apps, but few explain what you really want to know, starting with “How is my credit score calculated, and how can I improve my score?” The more you understand about your credit score, the better you will be equipped to get your credit in shape. Here are answers to some common credit score questions to get you started.
How is my credit score calculated?
FICO credit scores, which are the most widely used to determine credit worthiness, range from 300 to 850. Scores are calculated using data from the top three credit reporting agencies: Experian, Trans-Union, and Equifax. A formula is used to analyze your credit behavior, then compare that behavior with other borrowers to determine how likely you are to make payments in a timely manner. Generally, FICO scores of 670 or above are considered “good” by lenders. Scores that fall between 740 and 799 are considered “very good,” and any score over 800 is deemed “excellent”
What factors affect your credit score the most?
There are five main factors that affect your credit score the most. These factors, along with their weighing percentages, include:
- Payment history – 35%
No matter which credit score you look at, payment history is the factor that affects your credit score the most. Credit scores predict how likely you are to pay your bills on time, so your past performance in this area is considered to be the best indication of your credit worthiness.
- Amounts owed – 30%
This part of your credit score looks at the total amount of credit you have available versus how much of that credit you are using. Ideally, you should be using between 10% to 30% of your available credit.
- Length of credit history – 15%
Lenders are looking for an established record of paying your bills, so the longer you have had credit accounts, the better it looks.
- New credit accounts/ inquiries – 10%
Every time you open or request a new credit line, it is considered a “hard” inquiry that will temporarily lower your credit score.
- Credit mix – 10%
The type of credit you have matters to lenders. Higher scores are awarded when you have a mixture of installment loans (mortgage or car loan) and revolving loans (such as credit cards).
What’s the best advice on how to improve credit scores?
A low credit score may keep you from buying or renting a house, cause you to pay higher rates for credit cards and insurance, and may even prevent you from getting certain jobs. There are several steps you can take to improve your credit score:
- Correct errors-Start by getting a free copy of your credit reportand correcting any mistakes.
- Lower debt- Pay down your debt to lower your debt to credit ratio.
- Establish a positive payment history – Paying your accounts on time is one of the best ways to improve your credit score. Set up auto-pay or payment reminders to make sure accounts are paid on time going forward.
- Get a secured card- If you don’t qualify for a standard credit card or loan, getting a secured credit card will help you establish a positive record of paying on time.
- Establish a financial plan – Create a financial plan to pay off debt.
How long does it take to increase your credit score?
The length of time it takes to increase your credit score varies, depending on what factors lowered your score. Higher credit scores generally take longer to recover from negative events. It can take anywhere from 9 months to 10 years for your credit score to recover completely, but if you follow a solid financial plan and make regular payments, your score can make incremental gains every month.
If you would like help understanding or raising your credit score, talk to financial planner Matt Logan. We can examine your finances and spending habits, and work with you to develop a financial plan that will allow you to meet your life goals.
Learn more about financial and other economic-related topics at www.MattLoganInc.com Matt Logan is a Representative with Matt Logan Inc. and Summit Brokerage and may be reached at http://www.mattloganinc.com/, 336-540-9700 or [email protected].
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