Credit is an important metric not just for your financial health, but for opportunity overall, but what does it mean to have “good credit”? How do you get it? And if you’re looking to improve your credit, what steps can you take to get there?
Let’s start from the beginning.
When we talk about good or bad “credit” what someone is really trying to assess is the likelihood a loan will be repaid. Often, this gets expressed as a numerical score. In the US, most lenders use a system developed by the Fair Isaac Corporation you may have heard of called the FICO score. There are other types of credit scores too, like the Vantage Score, which operate similarly. Think of these scores as your credit letter grade, but instead of A through F you’re graded on a scale of 850 to 300.
850 - 800: Exceptional
799 - 740: Very good
670 - 739: Good
580 - 669: Fair
Under 580: Poor
In addition to getting approved for credit, consumers with higher credit scores will often qualify for better loan terms, like lower interest rates, that can be big money savers.
Your credit score is developed from data available in your credit report. Credit reporting agencies collect and maintain information about you to develop these reports. They contain information on where you live and work, if you’ve filed for bankruptcy, as well as current credit factors like your debts or any payments you’ve made. Each credit reporting agency maintains its own information about you, and they may not be the same. Lenders use both your credit score and your credit report to make credit decisions.
Your credit score is calculated by weighing certain pieces of data in your credit report. Some factors carry more weight than others. In the case of FICO, it looks like this: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
Payment history - The single most important factor in determining your credit score, lenders want to know if you’ve made past credit payments on time.
Amounts owed - What is cared about here is the credit utilization rate, or the sum of all your balances divided by your credit limits. If you’re using a larger amount of the credit available to you, it can reflect negatively on your score.
Length of history - Having an established history of paying your bills will help your credit score. Lenders will also look at your oldest and newest accounts, and how long it’s been since you used certain accounts.
Credit mix - Lenders will consider your ability to manage different credit accounts, such as revolving credit, like a credit card, and installment credit, like a student loan. Managing various types of accounts can positively impact your score.
New credit - If you open a lot of accounts all at once, research has shown it can negatively impact your score, especially if you have a short credit history.
https://www.myfico.com/credit-education/whats-in-your-credit-score
https://www.usa.gov/credit-reports
https://consumer.gov/credit-loans-debt/using-credit#what-to-do
https://www.consumerfinance.gov/about-us/blog/common-errors-credit-report-and-how-get-them-fixed/
You know what a credit score is, and why it’s important, so how do you improve it? Here are few ways you can make an impact on your score, some of them right away.
It’s disappointing to hear: your application for a loan, whether it’s a credit card, mortgage or auto loan has been denied due to poor credit. The first thing you should know is you’re not alone. Each year, millions of Americans will find themselves in the same situation, and it’s not just access to financing. According to the Society for Human Resource Management, around 47% of organizations use credit as a part of their hiring decision process.
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