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Credit is something that we all need. The problem with it is that most people don’t understand how it works or realize what they need to have in order to be considered good.
I was once in your shoes. Confused and in the dark, I didn’t know what I needed to do or how to even get started with credit. All I knew was that it was essential to surviving as an adult.
In this post, I hope to break it down in a simple way so that you walk away with a better understanding of credit.
What are the Credit Ranges?
First, you need to understand that a credit score is a 3 digit number that estimates how likely you are to pay back your debt to a potential lender such as a mortgage or a credit card company. The higher the score, the more access you have to credit amounts and lower rates.
Having a low score can keep you from many things and cause you to pay a much higher interest rate. You could even be required to put money down on purchases.
There are 4 different credit ranges and you want to strive to be in the top 2.
- 720-850 is Excellent
- 690-719 is Good
- 630-689 is Fair
- 629 or lower is Poor
I have worked hard over the past 19 years to get mine above 800. If you want to read how I got both mine and my husband’s scores above an 800 you can check out this post.
What a Good Score can get You
Having good credit can get you approved for a mortgage, unsecured credit cards, personal loans, and a loan or lease for a car.
Lenders will check your credit score before extending any type of credit to you. Its a scary thing if you are needing to purchase something and you aren’t sure if you will get approved.
This happened to us when we bought our first house. There was a negative report on my husband’s credit that kept him from being able to be on our mortgage note. It was going to make our interest rate lower so we had to put it in my name alone.
After that happened I began working hard to re-gain his score.
What affects your Score?
The number one thing that has a negative effect on your score is paying your bills on time. This is what happened to my husband’s score. He had a credit card bill that was still being mailed to his dad’s house and it went 3 months without getting paid.
Another thing that affects your score is the age of your credit. If you haven’t had a history for very long, it is yet to be determined if you can be trusted so your score will be lower.
The different types of credit you have will affect your score. Lenders want to see a variety of things so that it shows you are trustworthy. Examples would be a loan and a credit card or those plus a mortgage. This will show variety.
Recent inquires will affect your score. You don’t want to have too many inquires showing up at once. It will cause a dip in your score.
How much you owe is another thing that will negatively impact your score. As a general rule, you only want to owe 30% of your available credit. The amounts of your balances are just as important as paying them on time.
There is good news though when a lower utilization is reported on your credit, the higher one goes away.
Ways to Improve your Score
As we mentioned before, paying your bills on time and making sure you keep the balances at 30% or below is huge.
Keeping your accounts open, even if you pay them off is important because you want to keep it open if it has a long positive history. It can affect your FICO score. This score is just a formula that evaluates all the information in your report and translates it into a 3 digit number that lenders can look at without having to skim through your entire history.
Make sure you monitor your credit to ensure the information is accurate. You are entitled to a free report according to federal law from all 3 bureaus. AnnualCreditReport.com is a quick way to check them out.
You can always make disputes if you find information that is incorrect or looks suspicious.
Minimizing the amount of inquires can boost your score because each time your credit is accessed by a potential lender it makes the score dip. So if you must have it checked, try and keep it to a minimum or space them apart.
In conclusion, Its very important to make sure you do everything in your power to keep your score in the good or excellent range. Credit is a beast that we all need to learn how to tame because it just makes life easier to live.
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