A detailed and informative guide that explains what a good credit score is, why it is important, and offers practical tips on how to achieve and improve it.
Many people are unaware of what constitutes a good credit score, despite its importance in their lives. Having a good credit score can save you a significant amount of money, which is always a desirable outcome!
In this document, I will cover the following topics: what is a good credit score, how to achieve a good credit score, how to check your credit score, and how to avoid a bad credit score or improve your current score.
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Payment history accounts for 35% of your credit score. It is crucial to pay your bills on time to improve a bad credit score or establish a good one. Avoid the mentality of making only minimum payments, as this can result in paying significantly more in the long run.
Amount owed accounts for 30% of your credit score. It is advisable to keep your credit card balance below 20% of your available credit. For example, if your credit limit is $1000, aim to spend $200 or less per month. Over time, you may request a credit limit increase, but remember that it should not encourage excessive spending. Strive to utilize less than 20% of your credit limit.
Length of credit history accounts for 15% of your credit score. The longer your credit history, the better your score will be. Even if you don't plan on using a credit card, establishing some credit history is beneficial.
New credit accounts for 10% of your credit score. Opening a new line of credit, such as purchasing a home, a car, or getting a new credit card, initially lowers your credit score. However, consistently making payments on time will ultimately improve your score. It is essential to apply for new credit only when necessary and after thorough research.
Types of credit used account for 10% of your credit score. The variety of credit accounts you have open also impacts your credit score. Examples include mortgages, car loans, and student loans.
You can check your credit score once a year from the three credit bureaus: Experian, TransUnion, and Equifax. It is advisable to spread out these checks throughout the year instead of doing them all at once. Visit www.annualcreditreport.com to review one report every four months. Alternatively, you can use creditkarma.com (provides TransUnion and Equifax scores) and credit.com (provides Experian score) to track all three scores. These sites offer free services, and while there may be advertisements, they should be ignored. It is important not to "hard pull" your credit score more than once a year, as excessive pulls can harm your credit. Using a "soft pull" method, such as visiting the website mentioned above, will not negatively impact your score. A hard pull occurs when a company checks your credit score for purposes such as determining interest rates for a mortgage, car loan, or business loan. Research thoroughly and be certain before allowing companies to pull your credit score, as opening new lines of credit initially lowers your score.
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Achieving a good credit score will save you thousands of dollars when applying for a mortgage loan by securing the lowest possible interest rate. It can also help you qualify for 0% APR on a car loan and may even be considered by potential employers. Insurance companies and other credit offers also take your credit score into account.
By following these steps, you will understand what constitutes a good credit score and how to easily achieve it. The goal is to reach a score of 760 to obtain the best possible rates.