Good credit is essential to building wealth.
It may seem obvious, but most people take their credit score for granted without understanding what a good credit score is and how can you build one.
In this article, you’ll be able to answer the frequently asked questions: what is a good credit score, how is my credit score determined, and how to build or improve my credit score.
You will also learn that a good credit score is vital for financial freedom, how you can build your credit to achieve a good score, and what you can expect once you have a good score.
Good Credit Score FAQs & Ways To Improve It
1. What is a Good Credit Score?
Credit scores generally range from 300 – 850, but industry specific FICO scores can range from can range from 250 -900.
Auto Lenders, Mortgage Companies or Credit Card issuers use industry specific scores.
The higher your FICO score, the lower your credit risk and the lower your FICO score, the higher your credit risk.
The national average FICO score is 695.
Your FICO score can impact your loan interest rates, terms, approvals and more.
2. How is My Credit Score Determined?
Your credit score is determined by FICO, a publicly traded company.
Your FICO score is used to gauge your creditworthiness to potential lenders.
Your score is calculated from many different pieces of credit data found in your credit reports.
FICO works with the three credit rating agencies: Transunion, Equifax and Experian to come up with your composite rating.
Each of these consumer credit rating agencies is a for-profit company and operates differently.
What is listed in one report is typically listed in another, but not always.
It’s a good financial habit to check your credit report from one of these companies every four months.
You can download your credit report from each of them once per year for free.
Checking your credit report regularly helps keep your credit clean and ensure that only valid accounts are listed.
Here’s how your credit score is composited:
35% Payment History
As you would expect when lending someone money, how a person has paid their bills in the past is very important.
Whether a payment was on time or missed is the largest determinant of a credit score.
The more severe, recent, and frequent the late payment information, the greater the impact on a FICO score.
30% Amount of Debt
The amount of credit you’re using and how much debt you owe are important factors of your FICO score.
The total balance owed, the number of accounts with balances, and how much available credit you’re using are some of the specific factors your FICO score considers.
Here are some common characteristics of a High Achiever related to the amount of debt according to FICO:
- Average revolving credit utilization ratio of less than 6%
- Have an average of 3 accounts carrying a balance
- Most owe less than $3,000 on revolving accounts (e.g., credit cards)
15% Length of Credit History
Your FICO score takes into account how long your credit accounts have been established, including the age of your oldest account, the average age of all your accounts, and the age of specific types of accounts (student loans, car loans, etc.)
10% Credit Mix
Your FICO score considers the different types of credit accounts you use or that are being reported including credit cards, retail accounts, installment loans and mortgage loans.
Credit mix will be important if your credit report doesn’t have a lot of other information to base your score on.
10% New Credit
The number of new accounts you’ve recently opened and whether you’ve been rate shopping for a single loan or applying for new credit lines are considered with your new credit.
3. How Do You Build or Maintain Credit?
Having a good credit score can help lower your auto insurance premiums, your cost of borrowing, and ability to qualify for credit.
It’s common in certain industries to have to provide your credit score when applying for a job.
There are also a host of common risks today due to data breaches at many of the companies we use.
While it’s easy to understand why your credit score is so important, it’s important to remember that it can’t be built overnight.
The biggest step you can take to making sure you have good credit is to make your payments on time.
If you don’t have it set already, put your monthly credit bills on auto-pay.
Making your payments on time will help ensure that you’re taking care of the biggest factor to your credit.
Next, review the total amount of credit outstanding and see how it measures with the FICO high achiever characteristics mentioned above.
You can build a strong credit score, but it’ll be up to you to keep the right balance of accounts and credit types.
Finally, be sure to check your credit reports regularly.
There are numerous reports to consumer reporting agencies about the struggle of trying to remove an error from a credit report.
The last time you want to find an error is when you need credit.
Just like with your health, maintain your credit by checking it regularly and taking action where necessary.
What are your credit struggles? What would you like help with?
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