Posted on
June 12, 2024
by
Kristyn Rost
Have you checked your credit score lately? Since all credit scores range between 300 & 900 points, with a number between 660 and 750 considered to be “Good”, and 760 or higher rated as “Excellent”. It’s important to know where your number is rated and how you can potentially achieve a top score.
Quite simply, building a great credit score begins with understanding the 5 W’s that impact your personal number.
Who decides your credit score?
The numbers are generated by two reporting companies, Equifax and TransUnion. Each credit bureau uses its algorithm to score your performance based on its specific indicators and your recorded history of borrowing and repaying creditors on time. Therefore, your credit score can be marginally different between the two companies. While it doesn’t happen often, errors and omissions can occur. By reviewing your report with both agencies, you’ll have the opportunity to address any information that was considered in their scoring process.
What determines my credit overall score?
30% Rule of Credit Utilization – this is the amount of available credit on your credit cards and other lines of credit vs how much you owe. You want to keep that number below 30%, in general, a lower utilization rate is best
Payment History (includes repayment schedules, public records, and foreclosures)
Number of years your credit accounts have been open and active (the longer the better)
Frequency of Inquiries made to open credit accounts (avoid multiple credit applications within a short period as this negatively affects your score) This does not apply when shopping for a mortgage
Variety of credit options you manage; Revolving credit (ie: credit cards, lines of credit), Installment loans (ie: a car loan), and Mortgages.
When to use credit? To establish a good credit score it’s important to use a variety of credit options.
“Installment loans” allow you to repay the creditor over a specific length of time and may include an interest component. (ie: car loan)
“Buy now, pay later offers” provide a specific time frame for the total amount of the purchase to be repaid and are generally Interest-Free. This form of credit requires the total purchase amount to be fully paid before a pre-set date, otherwise, interest will be incurred for the entire purchase amount for the term of the agreement. (ie: The Brick/Leons and box store cards such as Home Depot)
“Revolving credit accounts” include Credit cards or personal lines of credit. These provide the option to repay a pre-calculated minimum based on the total owing within a set billing cycle. However, while the option of making a minimum payment is available, it is always best practice to pay the total account balance each month to avoid high-interest charges. Carrying outstanding balances for a long period while paying only the interest or minimum payments, or going over your credit limit, negatively impacts your credit score.
“Service Credit” is established when accounts are opened to pay for monthly services (ie: cell phone & internet)
Mortgages
Where do I find my credit report?
Why is my credit score important?
It matters because your credit score says a lot about you and it can either positively, or negatively, affect your business relationships with potential lenders like banks, home and auto Insurance companies, retailers, and even landlords. A high credit score tells them that you’re very good at paying back your bills/debts on time and establishes you as a “reliable” borrower they’ll want to work with. While a lower score indicates you may be in a “high-risk” relationship, which is one they’ll be more likely to avoid.
To sum it up, building a great credit score takes time. It requires excellent budgeting habits that allow you to consistently manage multiple creditors, stay within the 30% rule, and repay your debts as arranged with specific lenders.
Once achieved, a top credit score will not only encourage businesses and lenders to work with you, but to offer you their best products and interest rates as well.
Sincerely,
The Rosts
