Ah, the C word…credit. We’ve all heard it but what exactly is it? And why do you need it?
Your credit score is one of the most important measures of your financial health and plays a key role in a lender’s decision to offer credit.
A credit score is a three-digit number ranging from 300 to 850. Generally speaking, credit scores from 580 to 669 are considered fair, 670 to 739 are considered good, 740 to 799 are considered very good, and 800 to 850 are considered excellent. You don’t need an excellent credit score but the higher the score, the better you look to potential lenders.
Some benefits to having a good credit score include lower interest rates on credit cards and loans, better chances for credit card and loan approval, and easier approval for rental properties. Sounds great, right?
It’s important to understand what factors affect it and how your actions could be helping or hurting your credit.
The goal of credit-scoring models is to assess your credit risk or your worthiness to receive credit. The exact criteria used by scoring models vary, but most agree on these three factors – payment history, amounts owed, and length of credit history.
First, payment history is the most important credit scoring factor and has the biggest impact on your credit score. Your payment history refers to the record of whether or not you’ve paid your bills on time.
Second, amounts owed means the amount of debt that you owe or your credit utilization ratio. Calculate your credit utilization ratio by dividing your total credit card balances on all your cards by your total credit limit. For example, if you have a single credit card with a $300 balance and a $1,000 credit limit, your credit utilization rate is 30%.
Last but not least, credit history length refers to how long you’ve used credit. As you could probably guess, the longer your credit history, the higher your credit scores.
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