A Credit Score is a rating between 300 – 850 that shows consumer’s credit worthiness. This number is used by lenders to assess the probability that the borrower will repay the credit on time.
The information used to create a credit score includes:
- Credit payment history
- Total debt levels or amounts owed
- Length of credit history
- Types of credit (mortgages, personal loans, credit cards)
- New credit (recently opened credit accounts)
The higher your credit score is, the more likely you will be offered credit with better terms and lower interest rates.
What is considered a good credit score?
Generally, a score greater than 670 helps to ensure that you can receive a credit offer at a lower interest rate, which means you will spend less on repayment over the life of the loan.
Here are the Credit Score Ratings Breakdown:
1. Low scores (300-579)
Maybe refused a loan/credit
Charged higher than normal interest rates to offset the riskiness of the borrower
2. Fair scores (580-669)
Likely to receive loan /credit
Interest rates will likely be average, but not low
3. Good scores (670-739)
Will receive offers with better terms and lower interest rates
Spend less on repayment over the life of the loan
4. Excellent scores (740 and above)
Will receive offers with the best interest rates
Saves most/spends least in the long run
What can hurt my credit score?
Many factors go into determining a credit score, causing it to increase or decrease. Below are just some examples of events that can lower your credit score.
Missing payments - Repayment history accounts for over a third of your credit score - not making timely payments will lower the score.
Maxing out credit cards - Spending too much on your credit limit raises your credit utilization rate, making you a riskier borrower.
Your credit utilization rate is a percentage of credit used compared to the credit available. For example, if you spend $50(credit used) on a card with a limit of $1000 (credit available), your credit utilization rate is $50/$1000=5%
For multiple cards, if you spend $50 on Card A with a limit of $1000, and you spend $300 on Card B with a limit of $3000, then your credit utilization rate is:($50 on Card A + $300 on Card B)/($1000 on Card A +$3000 on Card B)=8.75% Ideally, you should only use 30% of the credit available to you. For an excellent score, you should strive to use less than 10%.
“Maxing out” means using all the credit available to you. This bumps up the credit utilization rate to 100% - a major red flag for lenders.
Bankruptcy, Collections, Foreclosures
Bankruptcy, a debt in collections, and foreclosure are very serious issues that will have substantial negative impact on your credit score. These items can be reflected in your score for up to 10 years.
Hard Inquiries
Hard inquiries are lender/company requests to review your credit report as part of a loan application process. These can cause a dip in your credit score because they are directly tied to a loan application process. Soft inquiries (such as a potential employer checking your credit report) are not tied to a loan process and do not negatively impact your score.
What can I do to improve my credit score?
Improving your credit score is within reach, but the results will not come over night. Diligent attention to your debt and repayment are key. Once you reach a satisfactory credit score, it is important to practice good credit habits that will keep your score healthy.
Always make payments on time
Set a recurring date (earlier than your payment due dates) on which you will repay your bills. If you are forgetful, make a physical or electronic reminder in your calendar or email to ensure you do not miss deadlines.
Up your credit limits, but do not spend more
Be sure to tap into the credit limits offered to you, but do not overspend. Your credit utilization rate (credit used / credit available) will decrease as your credit limit (available credit) grows. However, make sure to increase limit without opening many new credit accounts –that path makes you a risker borrower.
Keep unused credit cards open with no balance
Closing credit cards reduces the credit available to you and can cause a dip in your credit score. Instead, keep them open and spend less – make your monthly payments and do not to overextend yourself.
Check your credit report
Each of the three major credit reporting bureaus have resources available to help you take control of your score and maintain your credit reports. Checking your credit report regularly will give you an opportunity to spot fraud before it impacts your credit score.
If you need help or have questions, reach out to our team!
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