If you don’t know much about credit scores, chances are you’re making a few credit mistakes. A high credit score comes in handy when you’re ready to buy a house or apply for other financing. Credit might seem like a difficult topic to grasp, but it’s not rocket science. With the right education, you can learn what it takes to improve your score and master the credit game.
Here’s a look at four things everyone should know about credit scores.
- Credit score range
Credit scores range from 300 to 850. The higher your credit score, the easier it is to qualify for credit cards or loans and receive a low interest rate. Banks and creditors vary, so there are no hard or fast rules regarding what number is considered good or excellent. One bank may offer its best rates to applicants who have at least a 700 credit score, whereas another bank offers its best rates to applicants who have a 680 or higher score. According to NerdWallet, a score in the 690-720 range is considered a “good credit risk.” Aim for a minimum score in this range.
- Factors that determine your credit score
Before you can improve your credit score, you need to understand factors that play a role in scoring. Your payment history makes up 35% of your credit score and the amounts you owe make up 30% of your score. Therefore, it’s important to pay your bills on time and keep your debt balances as low as possible. The length of your credit history makes up 15% of your credit score. You can improve your credit score by keeping older accounts open, even if you don’t use these accounts. The types of credit you use and new credit both make up 10% of your credit score. To improve your score, diversify your credit and don’t submit too many credit applications. Only apply for credit when necessary.
- Checking your personal credit
Before applying for any type of loan or credit card, it’s important to check your credit score and credit report. Knowing where you stand provides some indication of whether you’ll qualify for financing. By checking your own credit report, you can identify problems early and dispute erroneous information. Applying for credit triggers a credit report inquiry, which can hurt your credit score. However, checking your own credit report and score doesn’t hurt your credit. You can request your personal information as often as you like.
- Credit scores and interest rates
Even if you have enough income to afford a loan you’re applying for, banks use your credit score to determine the loan rate. Interest is how banks make money off of loans. Since applicants with a high credit score have a history of paying their bills on time and managing credit well, these individuals typically qualify for the best rates. As a result, they pay fewer financing fees than someone with poor credit. With that being said, your credit score can either save you money or cost you money. Let’s say you apply for a five-year, $20,000 auto loan. If you have excellent credit, you might qualify for a low interest rate of 1.9%. But if you have less-than-perfect credit, the bank might charge an interest rate of 5%. In this scenario, a higher interest rate increases the monthly payment by $30, and you’ll pay an extra $1,665 in finance fees.