Mammoth AwardsHow important are those three digits that make up your credit score? Extremely important if you want to save money during your lifetime.
You’ll need good credit to become eligible for a mortgage to buy your dream home. You’ll also need it to secure credit cards with low interest rates and favorable auto loans. To have a good credit score, however, you need to understand how the system works. We’ll discuss just that in this quick guide.
What Is a Good Credit Score?
Your credit score can run from anywhere between 300 to 850. A credit score that is 579 or lower is considered poor. A fair credit score ranges from 580 to 669. Once you sit in the 670 to 739 range, your score is considered to be good. 740 to 799 is very good, while the uppermost range of 800 to 850 is excellent.
What’s the good news if your credit score is currently low? You can always raise it.
The Five Basic Components of a Credit Score
Your credit score is calculated by considering five factors. The first fact is payment history, which makes up 35 percent of your score. Pay your bills on time to keep your payment history pristine, since any mistakes here can negatively affect your score for years.
The second credit score component is credit utilization. It makes up 30 percent of your score and describes the amount of your available credit you actually use. To calculate your credit utilization ratio, divide what you owe on your cards by the total limit on them.
For example, let’s say you have one credit card. It has a limit of $2,000, and you’ve spent $1,000 of that so far. Your credit utilization ratio for this card is 50 percent.
Ideally, your credit utilization ratio should be 30 percent or lower. The lower your ratio, the higher your credit score. In short, maxing out your credit cards is a move that should be avoided.
You can lower this ratio by either paying your balances on time to reduce what you owe, or by increasing your available credit. Doing both can boost your credit score faster.
The third factor that determines your credit score is the length of credit history, which makes up 15 percent of your score. The lengthier it is, the better, since it gives creditors more to look at in terms of your behavior as a borrower.
New credit is the fourth credit score factor. To keep your score from dropping, avoid getting several new credit cards at the same time.
The fifth and final factor that affects your credit score is credit mix. It accounts for the last 10 percent of your score.
How can you make your credit mix look better to boost your score? Take out a personal loan, for example, that contrasts a bit from a conventional credit card.
While this could improve your credit mix, proceed with caution. A personal loan comes with a cost, and it may not impact your score enough to warrant getting one.
