There’s a three-digit number that almost every company you do business with uses to decide whether to approve your applications. And if your number isn’t good, your applications may be denied, or if you are approved, you may have to pay a higher cost.
Each person who’s had some type of credit account, e.g. a credit card or loan, likely has a credit score. The credit score is a number that indicates how well you have handled your past credit obligations. If you have a history of taking on too much debt and paying your bills late, you’ll have a bad credit score to show it. This score will make it harder for you to get approved in the future.
On the other hand, if you have a history of borrowing only what you can afford and paying your bills on time, you’ll build a good credit score. With a good credit score, you can almost always count on your applications being approved. You will qualify for lower interest rates. And, when it’s time to establish certain utilities, companies won’t charge a security deposit.
####What is a Good Credit Score?
The most widely used version of the credit score is the FICO score. Scores can fall anywhere between 300 and 850; higher credit scores are better. You have a good credit score if your score is above 700, excellent if your credit score is above 760. Between 620 and 700, your credit score is considered fair and scores below 620 are poor or bad. Note that some banks and businesses may use slightly different cutoff numbers, but they will generally fall around the same area.
####How to Get a Good Credit Score
Your credit score is calculated based on information in your credit report – which holds your bill payment history. Companies called credit bureaus maintain credit reports and collect information from several companies that you do credit-related business with, the bank that issues your credit card, for example. Each month your creditors update your accounts with the credit bureaus. This information goes on your credit report and is used whenever your credit score is requested.
There are five major factors used to calculate your credit score and they each affect your credit score differently.
#####Payment history – 35%
Because payment history makes up the largest percentage of your credit score, one of the best things you can do to build a good credit score is pay your bills on time. This includes credit cards and loans, which are routinely reported to the credit bureaus, and regular monthly bills that aren’t regularly reported. Bills that aren’t normally on your credit report can eventually wind up there, if you fall behind and the account goes to collections.
#####Level of debt – 30%
It’s also important to keep your debt levels low. More specifically, you should keep your credit card balances low relative to their credit limit, so that it doesn’t look like you are taking on too much debt. Paying down loan balances will also help you achieve a good credit score.
#####Age of credit – 15%
The people with the best credit scores have had credit for several years or more. The longer you’ve had credit, the better your credit score will be. Keep your oldest credit account open and active so it’s continuously factored into your credit score. Minimize the number of new accounts you open, so you don’t lower your average credit age.
#####Types of credit – 10%
The credit scoring calculation likes to see that you can handle different types of credit responsibly, like credit cards and loans. Having more than one type of credit will help boost your credit score. New applications for credit/inquiries – 10% Each time you apply for credit, an inquiry is made into your credit history. All the inquiries you’ve made within the past 12 months are factored into your credit score. Several inquiries within a short period of time can affect your credit score, so spread out your credit applications.
####Overcoming Past Due Bills
Past due bills and collections are one of the biggest obstacles to getting a good credit score. Consider making a payment arrangement or settlement agreement on any accounts that need to be paid off. If your creditor has the SettlementApp, you can easily pay directly through the app and have comfort in knowing your payments have been received.
While paying debt won’t erase it from your credit report – legally, these can be reported for up to seven years – having a zero balance on the account will reduce the impact to your credit score. Then, all the on-time payments you make with your other accounts will get you to the credit score you want.
– HealPay blogger, LaToya Irby.