In many aspects of life, lower is better. We are told by doctors to lower our blood pressure, lower our blood glucose levels, and lower our LDL, or “bad” cholesterol. We are encouraged when we hear reports of lower unemployment and lower crime rates.
But when it comes to your credit score, lower is definitely NOT better.
What Is Your Credit Score?
Your credit score, also known as your FICO score, is a number based on criteria developed by the Fair Isaac Corporation, a data analytics company founded in 1956. Most lenders use your FICO credit score to determine whether you qualify for a credit card, mortgage, or other loan. Your credit score can also be used to determine the interest rate and terms you are offered when you apply for a loan.
FICO scores range from 300 to 850, so it is important to know where your credit score falls on this continuum and how it compares to other borrowers. According to Equifax, one of the three leading credit reporting bureaus in the United States, credit scores from
580 to 669 are considered fair
670 to 739 are considered good
740 to 799 are considered very good
cr are considered excellent
In an article published by Experian, another credit reporting bureau, most American consumers have a credit score between 600 and 750.
Where Can You Find Your Credit Score?
Many banking apps report your FICO score on a monthly basis. Check with your bank to see if they offer this free service in order to monitor your credit score regularly. You can also get free score reports from any of the three main reporting agencies: Experian, Equifax, or TransUnion.
It is important to note that your credit score is not the same as your credit report.
A credit score is a number between 300 and 850.
A credit report is a detailed list of the events—positive and negative—that impact your credit score.
It is also beneficial to get a credit report once a year or any time you notice an unusual drop in your FICO score. You have the right to dispute errors that have been filed on your credit report.
What Does Your Credit Score Measure?
Your FICO score is intended to predict your ability to repay your debts. To that end, FICO measures your past credit history to determine how likely you are to repay future debt.
Payment History (35%)
The first and most important thing lenders are looking for is if you’ve made payments to other creditors on time. Every time you miss a payment, pay late, or pay less than the minimum required, points are deducted from your credit score.
Bottom line: Pay your bills on time.
Amounts Owed (30%)
Having debt isn’t necessarily a bad thing. Having too much debt is. Lenders calculate both your debt-to-income ratio (DTI) and your credit utilization ratio to determine if you are overextended and likely to default on a new loan.
Bottom line: Get and keep the balances on your credit cards and other loans as low as possible.
Length of Credit History (15%)
If you have never gotten a credit card, student loan, or other personal loan, do so now (as long as your credit score is at least 580). While the length of your credit history is less important than your payment history or amounts owed, it still plays a significant role in determining your eligibility for credit in the future.
Become an authorized user.
An easy way to start your credit history sooner rather than later is to ask a parent or guardian with very good or excellent credit to add you as an authorized user to their credit card accounts. You don’t have to utilize the credit card; your name just has to be associated with the account to reap the benefits.
Obtain a secured credit card.
You can also apply for a secured credit card that requires a cash deposit to serve as collateral and sets a low credit limit. Use a secured credit card wisely by making only small purchases and paying the entire balance at the end of every month.
Pay utility bills on time.
Not every company reports payment history to a credit bureau, but it’s better to be safe than sorry. Even if your utility companies don’t file reports, you have established good habits that will serve you well throughout your adult life.
Bottom line: Establish credit history as early as possible.
Credit Mix (10%)
Your credit score takes into account the different types of credit you have successfully used over time. Types of credit accounts include:
Revolving accounts, such as credit cards, retail store cards, and gas cards
Installment accounts, such as auto loans, student loans, and other personal loans
Bottom line: Aim to obtain one revolving account and one installment account to diversity your credit history.
New Credit (10%)
Lenders get nervous if you have opened too many lines of credit in a short period of time. Whether or not it is true, it appears that you are in financial distress. Every inquiry and new credit account remains on your credit report for two years, so it is important to weigh the risk vs. the benefit of opening new lines of credit during that time.
Bottom line: Only open a new credit account when necessary or if it will improve your credit score.
So What Actually Lowers Your Credit Score?
Late payments.
Late payments.
Late payments.
High balances on credit cards,
High balances on other loans.
Little to no credit history.
Little credit diversity.
Multiple new accounts in a short period of time.
The repetition of the first three events that lower your credit score isn’t a mistake. It is repeated to make a vital point: The worst thing you can do for your financial future is miss or make late payments on your existing accounts.
Consider setting up an automatic payment plan with your banking institution to ensure your recurring bills are paid on time every time.
You are in control of your financial future. Let the experts at AMG Finance help you establish good credit with a personal loan that meets your needs.
