By Gary Meeks, RICP®
Most adults have a credit score; however, many people have some misconceptions about what affects a credit score. Also, there are a few myths regarding credit scores and how they are determined. Below are some interesting facts about what makes up a credit score and some tips for improving it.
• What is a credit score? A credit score is a three-digit number used by lenders to evaluate your ability to repay debt on time. When it comes to your credit score, higher is better. You may have multiple credit scores because there are several companies that provide them, each with varying calculations and ranges. FICO scores tend to be the most common and their base scores range from 300 to 850. A score around 750 or higher means you‘re more likely to get approved for new credit with better (lower) interest rates or terms.
• Always pay on time. According to FICO, one of the most well-known providers of credit scores, paying late or on time has the biggest impact on your credit score (about 35% of it).
• Too much debt can hurt. The second-largest factor, about 30%, is how much debt you have so leave yourself some wiggle room. Lenders will be nervous about extending you credit if you’re at or near your credit limit. Keep your credit usage to about 30% of your credit limit if possible. Paying off credit cards as soon as possible after large purchases will help.
• Give it some time. The length of your credit history is the third-largest component of your credit score (15%). This includes the age of your various accounts and how long it‘s been since you used some accounts; however, you can still have a high score even if you‘re relatively new to using credit, assuming you use credit regularly and make payments on time.
• Being too new. 10% of your score can be affected by being too new. Opening too many credit accounts in a short time can raise a red flag; however, shopping around for the best rate on a single loan generally won‘t affect your credit score. All the activity in a short time in this case is ultimately considered one event once you settle on one loan.
• Can you manage a mix of credit types? For the final 10% of your credit score, creditors like to see that you can manage a variety of credit types responsibly. Having a mix of some of the following categories of credit can help; revolving (credit cards), retail accounts and installment loans such a mortgage or a car loan. Keeping informed about your credit score and responsibly managing your debt can pay dividends for you in the future when you need a loan or credit. You may be able to obtain your credit score for free through services such as Credit Karma and Credit Sesame. You can also request your credit score through credit bureaus such as Experian, TransUnion and Equifax, likely for a fee.
FICO Credit Score Ranges and Corresponding Categories:
800-850 Exceptional 19.9% applicants with scores in this range are at the top of the list for the best rates from lenders.
740-799 Very Good 18.2% applicants with scores here are likely to receive better than average rates from lenders.
670-739 Good 21.5% Only 8% of applicants in this score range are likely to become seriously delinquent in the future.
580-669 Fair 20.2% Applicants with scores in this range are considered to be subprime borrowers.
300-579 Very Poor 17% Credit applicants may be required to pay a fee or deposit and applicants with this rating may not be approved for credit at all.
Data sources: Experian and Hartford Funds, as of 3/19.
Gary D. Meeks, RICP®, is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC,m ember FINRA/SIPCa, broker dealer and Registered Investment Adviser. Cetera is under separate ownership from any other named entity 90 W 100 N STE 6, Price, UT 84501 (435) 637–8160.