Credit scores are an important part of our financial lives. They are used by lenders and other financial institutions to assess our creditworthiness and determine whether or not they should lend us money. A good credit score is important, as it can help you get the best interest rates and terms when it comes to borrowing money. But what is considered a good credit score?
And how can you improve your credit score if it is not as good as you would like? In this article, we will explore understanding credit scores, what is considered a good credit score, and how to improve it. We will look at the factors that are used to calculate your credit score and provide tips on how to increase your score. By the end of this article, you will have a better understanding of credit scores, and have taken steps to improve your own financial standing.
What is a credit score?
A credit score is a three-digit number used by lenders to determine whether or not you qualify for credit, and what interest rate you may be charged. It is calculated by looking at the information in your credit report, which includes information such as how long you have been at your current address, how many open credit lines you currently have, the outstanding debt amount, and payment history.
Your credit score is used by lenders to decide if they want to give you a loan, and at what interest rate. It is also used by insurance companies to determine what rate you will be charged for your life insurance policy. Your credit score may also be used by landlords when deciding whether or not to rent you an apartment.
Because a credit score is important for so many financial transactions, it is important to maintain a good credit score. A good credit score (700+) will help you get better interest rates when you borrow money, and could potentially save you thousands of dollars in interest payments over your lifetime.
What is considered a good credit score?
A good credit score is generally considered to be anything above 700. Although the specific score varies from one lender to another, generally, a score above 700 is considered good. If your score is below 700, you may have difficulty getting approved for loans, or you may need to pay higher interest rates. You may also be charged a higher deposit when renting an apartment. Credit scores are determined on a scale from 300 to 850. A score above 700 is considered a good score, while a score below 650 is considered a bad credit score. A score between 650 and 699 is considered fair and may make obtaining credit very difficult.
Factors used to calculate credit score
There are many factors that are used to calculate your credit score, including your payment history, amount owed on your credit cards, length of time you have had credit, types of credit used, and the types of credit inquiries you have recently made.
- Payment history – 35% Payment history accounts for 35% of your credit score. This means that it is the most important factor when calculating your credit score. It is important to make consistent payments on time, as this shows lenders that you are a low-risk borrower.
- The amount owed – 30% The amount of money you owe compared to the amount of money you have available on your credit cards is another factor used to calculate your credit score. This is known as the “credit utilization” ratio. The lower the percentage of the amount you owe compared to the amount you have available, the better. For example, if you have a $10,000 credit card balance and a $5,000 credit card limit, you have a 50% credit utilization ratio. This is above the recommended percentage, and will negatively impact your credit score.
- Length of credit history – 15% The longer you have had credit, the better it is for your credit score. If you have been using credit for several years, and have had a consistent payment history, this will help your credit score.
New credit – 10% Credit inquiries are when lenders look at your credit report to determine if they want to lend you money. When you apply for a mortgage, car loan, or other loans, lenders will look at your credit report to see if you are a good credit risk. When you apply for new credit, this will cause a “hard inquiry” to appear on your credit report. This will lower your credit score temporarily, but once the credit report has been updated, your score will go up again.
Understanding credit utilization
Credit utilization is the percentage of the debt you currently have on your credit cards compared to the total amount of available credit. This number is calculated by dividing the amount you owe by the amount of available credit on your credit cards. For example, if you have a $1,000 balance on a credit card with a $5,000 limit, the credit utilization ratio is 20%.
If you have $10,000 in total debt across all your credit cards, you have a 100% credit utilization ratio. It is important to keep your credit utilization ratio below 30% so your credit score is not negatively affected. There are two main ways to increase your available credit without negatively impacting your credit score:
- Increase your available credit limit: Lenders look at the amount of credit that you are currently using. If you have a low credit utilization ratio, and want to take out a new loan, the lender may be more likely to give you a loan. If you want to take out a loan, but have a low credit utilization ratio, you can ask the lender if they would be willing to increase your credit limit. This will increase the amount of available credit on your credit report, without actually taking on more debt.
- Pay off existing debt: When you pay off your existing debt, the amount of debt on your credit report is reduced. This will improve your credit utilization ratio and increase your credit score.
Tips to improve credit score
You may not see huge improvements to your credit score immediately, but it will take time. As you make progress on paying off your debt, your credit score will gradually increase. Make sure you are aware of what goes into calculating a credit score. Make sure you have a copy of your credit report, and review it for accuracy.
Credit reports have a 30-day waiting period before sending you a corrected copy. Once you have a clear picture of your current financial situation, you can begin working to improve your score. Here are a few tips to help you improve your credit score:
- Pay off high-interest debt: The sooner you pay off your high-interest debt, the better. This will reduce your monthly expenses, and help improve your credit score.
- Make consistent payments on time: This is the most important factor when it comes to improving your credit score.
- Take out a credit-builder loan: If you have bad credit, you can apply for a credit-builder loan. Credit builder loans are designed to help people with bad credit improve their financial standing.
- Negotiate payments with creditors: If you have been struggling to make payments on your debt, contact your creditors and negotiate a payment plan. Make sure you keep up with the payment schedule.
- Use less than 30% of your available credit: This helps improve your credit utilization ratio, and will help improve your credit score.
- Use credit wisely: If you have good credit, don’t use too much of it, and keep your credit card balances low. This will help maintain, and even improve, your credit score.
Paying off debt to improve credit score
Not paying back your debt can have serious, lasting negative effects on your credit score. When you don’t pay back your debt, your credit score will take a significant hit. However, if you pay back your debt on time, your credit score will gradually go up.
If you are struggling to make payments, consider making an arrangement with your creditors to pay off your debt more slowly. This will help you avoid bankruptcy, and you can work towards paying off your debt over a longer period of time. If you have a lot of debt, and you don’t pay it off, it can have a significant impact on your credit score. However, if you pay off your debt, your credit score will gradually improve.
It may take a few years for your credit score to go back up to where it was before you had debt, but it will get there if you make consistent payments.