Credit scores impact many things in life. The most obvious are credit card, mortgage, and loan interest rates and qualifications. Other areas where credit scores are reviewed are in apartment rentals, employment applications, and insurance applications. With the growing use of credit scores as a reference, understanding your credit score is extremely important.
How Credit Works
There are three major credit bureaus: Transunion, Equifax, and Experian. Certain companies (credit cards, mortgage, loan, etc.) will report information to these credit bureaus. That information includes your balance, credit limit, and payments. Other activities, such as getting your credit pulled for new loans or credit cards, are also reported. Each of the credit bureaus will use this information to compile a credit score. The formulas used will vary among the three, so your credit score is often different with each.
Credit Score Ranges
Credit scores are numerical figures ranging from 500 to 850. Your score indicates your credit worthiness. The following are the different ranges and how they are often interpreted.
- Below 500 = No Financing
- 500 to 619 = Poor
- 620 to 679 = Fair
- 680 to 729 = Good
- 730 to 850 = Excellent
Components of Credit Scores
Although the three credit bureaus compile credit scores differently, certain credit factors contribute more to your score than others. Payment history is the most important factor. The balance owed is the second most important factor. Here are some general percentages:
- 35% Payment History
- 30% Amount Owed
- 15% Length of Credit History
- 10% New Credit
- 10% Types of Credit Used
How to Maintain Good Credit
- Keep the balance on each credit card below 30% of the available credit limit.
- Avoid having your credit score pulled too often.
- Make payments on time.
- Have different types of debt (credit cards, installment loans, mortgage, etc.).
- Maintain a lengthy credit history (keep active accounts that you have had for a long time).
Understanding Your Credit Score
Understanding of your credit score (what your credit score is, what makes up your score, and how your scores may be used) is the first step to financial freedom. Individuals with good scores receive the best interest rates and opportunities. Improve your score by maintaining good credit. If you have issues with your credit (such as a low score or errors), contact Financial Investments & Trust for information on how we can assist.