What Really Affects Your Credit Score?

If you read my last post on the basics of credit, you already know that good credit can save you money on things you were already wanting to buy.

Credit is a crowbar that you can use for leverage. It is a coupon with no expiration date that can get you huge discounts on homes, cars, and even the stuff that goes inside of them. A “prime” FICO score above 700 and reap can get you everything from the best mortgage rates to 0% financing on new cars.

But if your FICO score like that of 80,000,000 consumers in the United States—aka, your financial report cards—falls short of 700, then you might could use some no-nonsense tips for getting better credit.

What is the goal?

Here are some approximate credit score ranges and what they get you:

  • Excellent (751 & Higher) — Approved at lowest interest rates
  • Good (711-750) — Approved at competitive interest rates.
  • Fair (651-710) — Approved at moderate interest rates
  • Poor (581-650) — Approved at high interest rates
  • Bad (300-580) — Denied credit or approved only for the very highest rates

Fair Isaac Corporation, which created FICO scores, estimated in 2010 that one half of one percent of consumers achieve a score of 850. What does that mean for the rest of us who have an 849 or below?

You can have an imperfect score and still get excellent interest rates.

So how does FICO calculate your creditworthiness?

Unfortunately, reporting bureaus like TransUnion aren’t forthcoming with the exact process and formulas that they use to calculate creditworthiness. Your score will fluctuate from month to month, and here are the factors that affect it and their approximate “weights”:

35% – How You Pay Bills (Payment History). How you have paid bills over the course of your credit history is the most important factor in your score. The FICO scoring formula emphasizes the past 2 years. To state the obvious: on-time payments improve your score. Consistent late payments damage it. In fact, few factor hurt your score worse than delinquent payments, except for accounts sent to collections. Bankruptcy is worst of all.

30% – Credit Utilization. The second most influential factor is how much money you owe on credit cards, credit lines, car loans, and mortgages, to name a few. The ratio of your total debt to your total available credit matters too. If your brother had 10 credit cards, $30,000 in total available credit, and $20,000 in credit card debt, would you want to give him a loan? Doubtful. People with high utilization tend to be more risky and less attractive to lender.

15% – Length of Credit History. The longer you’ve had credit, particularly if you’ve had consistent history with the same creditors, the more your credit score will thank you.

10% – Credit Mix. Excellent credit scores have a mix of installment credit, such as a mortgage, and revolving credit, such as credit cards. The more variety in your credit report, the greater the likelihood, at least from lenders’ point of view, that you will be fiscally responsible.

10% – New Credit. This final factor has the least impact, and it is designed to cut some slack to people who are shopping for mortgage and car loans. 10 credit card applications in 10 days will temporarily lower your score. But what you really want to avoid, as I mentioned prior, are delinquent payments and 10% collections records.

Boosting Your Credit Score

In my next post, I’ll share 7 ways to get better credit.

If you want to go ahead and get started now, grab a copy of Better Credit in 30 Days. The guide gives you a step-by-step process for boosting your credit score with the help of 64 better credit tips.

Better credit can save thousands (if not hundreds of thousands) on things that you were going to buy anyway. What’s not to love?

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