September 29, 2020
4 MINUTE READ
You know that your credit is important if you want to buy a car or a house. But how good does your credit really need to be? What is considered a good credit score?
First, consider what your credit score really says about you. Discussing credit can get personal. Please remember that your credit report is simply a record of how well you manage your financial obligations.
It shows if you pay your bills on time and if you manage credit lines in a responsible manner. Credit agencies reward people who handle their financial affairs responsibly with a higher score. And as you know the higher your score the better the interest rates you get on any kind of loan or credit card you might apply for in the future.
Your credit score is serious business and it should be treated that way. Keeping a healthy credit score will save you a lot of money over your lifetime. It’s an asset that you should take care of.
Credit scores can range from 300 all the way to 850. The average credit score is 680 to 700.
In most circumstances, if your credit score is 720 or above it is considered good. Anything above 750 is considered excellent.
If you were the type of person who liked getting grades in school here are the grades you would receive for a given credit score:
In the case of credit scores the line “D’s earn degrees” does not apply. Having a ‘D’ credit score will cost you a lot more money in interest. Having a low score might mean higher down payments to get an affordable monthly payment.
MyFico has an excellent calculator that lets you see how much money you would save if you improve your credit score. Play around with it and see how much you could save just by increasing your credit score by a few points.
So even if a credit score of 720 is considered good you should still try to see what you can do to improve it. The higher your score the more money that stays in your pocket. It’s as simple as that.
While nobody knows the exact method used for determining credit scores there are five big factors that are well known. These are the areas you should focus your time on to improve your credit score.
Payment history – 35% of your score is based on whether you have a history of paying your bills on time. If you fall behind on payments this will have a big negative impact on your credit score.
Amounts owed – 30% of your credit score is based on how much you owe in relation to how much credit you have available. This is called your credit utilization rate and it’s important to keep it as low as possible. Anything above 30% will negatively impact your score. The biggest thing you can do to impact your credit quickly is to pay off credit card debt and ask for credit limit increases.
Length of credit history – 15% of your credit score is based on how long you’ve been managing credit. The longer your credit history the better. This is why anyone who knows anything about credit will tell you not to close credit card accounts once you pay them off in full. Closing accounts can actually hurt your score if you had the account for a long time.
Types of credit used – 10% of your credit is based on the different types of credit you’ve utilized. Revolving, installment and retail. By maintaining diverse types of credit you demonstrate that you are able to manage each one and you understand how they work.
New credit – 10% of your score is based on new credit. How recent was the last time your credit got pulled? A credit report that shows a lot of inquiries in a short period of time is a bad sign. Avoid applying for several lines of credit all at once.
So if you just want to have a “good” credit score then shoot for a score that is higher than 700 and close to 720. If you’re not satisfied with being good then strive to get your score to 750 or higher.
One tool that we absolutely love is Credit Karma. They give you a free way to monitor your credit and see your score. It’s a great way to stay on top of your credit.