It is never too early to learn ways to improve your credit score or working to establish it. The first question you may have is “What is a good credit score?” The honest answer is it varies depending on what type of credit you are trying to get, whether it be a revolving line, like a credit card, or an installment loan like a mortgage. By reading this blog, you are taking the first step towards improving your credit score and establishing good credit by becoming informed.
What Is A Good Credit Score?
Your score is the average of your scores from the three credit bureaus: Equifax, Experian, and TransUnion. The FICO model is the one most often used, and the scale ranges from 300-850. A good score to aim for is 700.
When calculating your credit score, the following factors are included:
- Your payment history is 35%
- Total outstanding debt is 30%
- The length of your credit history counts towards 15%
- Recently acquired credit is 10%
- Your mix of credit (revolving, installment, etc.) is 10%
How Can I Check My Score?
The passing of the Fair Credit Reporting Act of 2003 implemented measures to make it much easier for consumers to track their credit. One component of the Act is the availability of one free annual credit report through www.annualcreditreport.com. This report is excellent for reviewing what is impacting your credit, so you can follow up on any potential errors, but it does not give you a score.
Most credit cards provide their cardholders with a quick credit score. Credit check websites are very useful. Most of them not only provide a score, but they also have tools that will illustrate how different actions will affect and improve your credit score. For example, if you take out a new line of credit, it will indicate whether your score will go up or down. It can help you identify which debt is most significantly impacting your score.
How Can I Improve My Score?
Now that you know what your score is and have identified the issues, you can start working on improving your credit score. Remember, this is going to take some time. Let’s use the five score components to compartmentalize your actions.
- Payment History: At 35% of your score, you will want to concentrate on making all payments on time. The effect of paying on time is exponential, so the longer you go with no late payments, the more it will improve your score.
If you are behind on payments, set up a plan to bring yourself current. Do not be afraid to contact the creditor and set up an arrangement with them. This may keep it from negatively impacting your credit score further.
- Outstanding Debt: Having some debt is GOOD for your credit score, but you need to maintain a reasonable balance. Keep your credit card balances at or below 30% of the limit of the card. You should also keep your total debt at or below 41% of your monthly gross income—this is known as your debt-to-income ratio.
- Length of Credit History: As early in life as possible, get some manageable debt in your name. Consider a credit card with a reasonable credit limit and interest rate, or an installment loan to buy a car.
Credit Building loans are excellent for young borrowers. These are low-interest short-term loans, often dedicated to a specific purpose, like a down payment on a mortgage or to purchase a car.
- New Credit: Inaction is kind of the rule of thumb for this facet of your credit score. Do not apply for too much credit all at once. It might be identified as a “spending spree,” and can bring your score down.
- Mix of Credit: If all of your credit is through credit cards, this will hinder your score. Have a good mix of revolving credit, like credit cards, and installment loans to show that you can manage different kinds of debt. Put some household bills in your name, like your telephone or the electric bill.
Improving your credit score can seem daunting, but if you take it one step at a time and set up a manageable plan, you can definitely raise that score and meet your consumer goals. Now that you’ve taken the first step to understanding what is considered a good credit score, you can improve your credit and achieve your financial goals, whatever they may be.