The Real Meaning Behind Your Credit Score
One of the most important parts of your overall personal financial health is your personal credit score.
Your credit score can seem like a complicated matter, but it can have a very significant impact on your ability to get a mortgage, auto loan, or other type of debt.
To ensure that you are able to get and maintain a good credit score, you first must understand what your credit score means, how it is used, how it is calculated, and what you can do to improve it.
What Does it Mean?
When you were looking for more information on your credit score, it is important to understand what your credit score means. Your credit score is an aggregation of your historical personal history when it comes to making credit payments on time, how you use your credit, and how long of a credit history you have. The overall range for a personal credit score is 350 to 850.
Generally speaking, people who have credit scores in excess of 800 are considered to have exceptional credit and will never have credit issues when it comes to qualifying for loans. Those with credit scores above 720 are typically considered to have good credit.
Those with credit scores 670 are considered larger credit risks and may require more analysis to receive loan approval. Even if they are approved, they may end up being charged higher interest rates to compensate for the higher perceived credit risk.
How is Your Credit Score Used?
Since your credit score is an aggregation of your historical credit history, it is considered one of the best ways to predict whether you will repay a loan as agreed in the future. Because of this, your credit score will be used by banks, credit card companies, and other finance companies any time they are looking to provide a loan or other form of credit.
During the loan application process, your bank or other lender will pull your credit score before approving a loan. They will not only look at the overall credit score, but will also use it to determine what your outstanding debt is and what your financial obligations are on an ongoing basis.
This will also help a bank to determine whether or not you are able to afford the new loan payment when factoring in all of your other debt. The credit report will not only be used to determine whether you should be approved, but it will also have an impact on what your total interest and fee costs will be.
How is Your Credit Score Calculated?
Your total credit score is the aggregation of your entire history of credit usage. There are five key factors that will influence your total score, each of which are weighted differently based on their perceived importance. The most important component of your credit score is your historical payment history.
This part of your credit score accounts for 35% of your total credit score and looks back seven years. Every time you are more than 30 days late on a payment, it will impact your score.
Another important part of your credit score is your credit utilization. This part of the calculation accounts for 30% of the total score. It is calculated by taking your total revolving account balances, such as credit cards and equity lines of credit, and then comparing it to your total availability. Generally speaking, your score will begin to take a hit if your utilization rate is above 20%.
The credit score will also consider the length of your credit history. It will look back to see how long you have had any credit in your name. Overall, this part of the score accounts for 15% of your score. Once you have had 10-20 years of credit experience, this part of the score will increase.
Your credit score also focuses on how new your credit accounts are and what type of credit accounts you have. Generally speaking, having older accounts on your record that you have a good history with is better than having a lot of recent accounts.
Also, the credit scoring system is more favorable to people that have had mortgage and auto loans as opposed to a lot of credit cards in the past. Each of these factors makes up about 10% of the total credit score.
How to Improve Your Credit
Even if you have a poor credit score today, there are many things you can do to improve your score in the near future. If you are able to pay down credit card balances, it will decrease your credit utilization rate and your score will increase immediately.
If you do need emergency money, but want to keep your credit score out of the picture, try using online car title loans. Its quick and easy to apply for one.
Ultimately, the best way that you can improve your credit score over the long-term is to pay all of your bills on time and limit your use of credit cards. If you do need to use your credit cards, you should try and pay off the balance at the end of each month to avoid being charged interest.
The best way to do this is to build a realistic household budget and stick to it. This will help to prevent overspending and will allow you to avoid getting into more challenging credit situations.