There’s a lot that is calculated into your credit score. If it’s not where you’d like it to be, we can help you to understand what you need to do to get it there.
The first, and most important, number to understand is your actual score, and where it falls on the scale from “poor” to “excellent.” Scales can vary slightly between scoring models, but the FICO model of 300-850 is the one most commonly used. See below for the general score range:
300-629 – Poor
630-689 – Fair
690-719 – Good
720 and up – Excellent
Now, where do you stand? Higher, or lower than you thought? Regardless, there is always room for improvement – unless your score is perfect at 850, of course.
In order to understand all that goes into this number, you have to understand what is negatively impacting your score. In this regard, there are a few things to consider:
- Percentage of on-time payments
- Credit utilization
- Types of credit
Your percentage of on-time payments will be represented by a number that is most likely in the 90th percentile, which you would think is good, right? Well, not necessarily. If your percentage of on-time payments falls at 96%, many lenders would see that as poor. Anything under 97% is usually considered poor, depending on the credit scoring model you’re using. Ideally, you want to keep it at, or as close as possible to, 100 percent.
Credit utilization is also a large factor that plays into your score. If you have a credit card with a limit of $1,000.00, that doesn’t mean that you can spend the entire amount each month without any negative repercussions. Actually, you want to keep your overall credit utilization at about 20-30%. That number represents how much you are spending on all credit lines altogether; so say you have two credit cards, both with $500 limits, and you want to keep your usage at 20%, that means only spending about $200.00 a month altogether. Paying your balance off in full each month also helps to ensure that you don’t rack up interest, so that’s highly recommended as well.
Finally, it’s best to have different types of credit showing up on your history. It’s best to have a mix of both revolving and installment loans on your history – revolving meaning you keep it going and pay it off each month, like a credit card, and installment meaning you borrowed a large sum and you make monthly payments,like with a mortgage, auto or student loan. It’s always good to have at least two installment loans on your credit, because it shows that you have maturity and responsibility when managing your finances.
Now that we’ve covered the basics in understanding your credit score, you should know a little more about how you can improve yours. Keep your payments timely, your credit utilization down and have a reliable mix of credit types.
Keep in mind, also, that when you are ready to apply for a mortgage or other type of loan, your score will be looked at through three different credit reporting agencies, usually: Experian, Equifax and TransUnion. These scores will be similar but vary slightly. In order to be on the safe side when applying for new credit, do your best to stay away from the “edges,” so to speak. For example, if your score is 690 with TransUnion, it could actually be a couple of points lower when you check it on Equifax, which would cause your score to drop from “good” to “fair.” If you stay well within your range, you’ll have less of a worry.