How Important Is Your Credit Score?
Having a low credit score or no credit history can be devastating. Loans and credits are the best ways to materialize our dreams. Our future homes, cars, and businesses depend on credit and you must keep your credit score in check all the time.
Homes, cars, and businesses demand a huge amount of money and the banks & lenders are always suitable options. However, banks and lenders are the best options for those who have a good credit score, and more importantly strong credit history.
The problem with the credit score is the fact that you can screw it up really fast by making bad decisions and with bad practices. We need to worry about things that can be fixed, and you can easily improve your credit by following basic rules.
What is a Credit Score?
A credit score is not more than just a track record of all your payments. This credit score is an accumulative number that will increase or decrease depending on many factors which we are going to explain further.
People are passionate about their FICO score ( method used to calculate your credit score in U.S.A ) because it can not only affect your financial status, but nowadays many employers pull your credit score before making a decision weather or not to hire you. The idea behind this is, if you are responsible with your personal finances, you will be a responsible employee. Even insurance companies use credit score to determine your monthly rates. As a top-classified formula, we don’t know exactly how it’s calculated, but what we do know, is the elements which FICO evaluates when determining your score.
The score managed by FICO is between 300-850. Scores above 720 are considered excellent by FICO. Anything above 700 should be everyone’s goal.
Factors that impact your Credit Score.
People think that personal debt is the only factor that FICO’ software evaluates. However, many other factors can impact your credit score. Each factor has a different “weight” and not all factors are created the same!
Credit Card Utilization ( Very Important )
The total available credit used is an important factor when it comes to calculating your credit score. Every person must track his own personal finance because lenders are not attracted to people with high utilization rates. Usually, a high utilization rate represents higher chances to not being able to manage the payback terms. The ideal credit card utilization is under 30%, meaning if you have available credit of $1,000.00, one should never use more then $300.00. Keeping the credit utilization low also improves your chances of receiving credit limit increases in the future.
Inquiries ( Somewhat Important )
Inquiries are complicated, they are used to calculate your credit score but only the ‘‘hard inquiries’’ actually are looked into. But, what are hard inquiries? This kind of inquiries happens when a potential lender is reviewing your credit because you’ve applied for a credit or a loan. On the other hand, if your lender is not reviewing your credit to issue the actual loan, that won’t affect your credit score at all. “Soft Inquiries” are not used to determine your score. When a soft inquiry occurs the lender or a bank is not actually reviewing your entire credit history, they are just doing a general overview of your financial situation.
Debt to Income Ratio ( Very Important )
Your debt to income ratio is a fundamental aspect you need to keep as low as possible if you want to have a healthy credit. This ratio help lenders and online lenders determine how much additional debt you can actually face and how much risk it represents. Proving that you can handle any additional debt without being an important risk might dramatically improve your credit score. For example, an individual with a $50,000 income can easily take on a new credit card if their other obligations are under $10,000.
Available credit ( Important )
The available credit is the limit amount of money you can spend at any given time using your credit card. Experts and lenders recommend keeping the available credit below the 30% of your credit limit. Having enough available credit and using it wisely means you have your credit card balance low, and It might increase dramatically your credit score.
Age of credit history ( Important )
The age of credit history simply reflects how experienced you’re with the credit system. In brief words, how responsible and reliable you’re when it comes to credit cards, loans, and personal finance. This is the reason to always keep your oldest line of credit open even if you do not utilize it. Once you close the oldest line of credit, your age of credit will decrease and lower your score.
This illustration below allows you to see a visual of how each of the factors we described above affects your credit score. Study this image to get a better understanding of that magical number called credit score!
How To Keep Track of your Credit Score?
Below you will find a link to Credit Karma. It is hands down the best free credit monitoring service which does not require a credit card. Even though nowadays most credit card companies offer this service with your account, it is a good idea to use Credit Karma as there is no strings attached, no cost, ever!
Join Credit Karma Today!
Can I Improve My Credit Some Day?
Improving your credit score is more possible and achievable than you thought. As many other things in life, it’s all about practices and habits. If you can make a change towards your lifestyle, and adopt useful/simple tricks, then you’re on a good path to an excellent credit score.
To put it into perspective, your payments represent up to 35% of your credit score, your debts represent 30%, 15% represents the length of your credit history, types of credits used other 10% and finally a 10% for credit inquiries.
In fact, many people reach that excellent credit score in just few months. Keeping that strong score is another story. You just need to adopt new habits and be cautious with your personal finance. A poor credit is always reversible, it is just a matter of being very responsible with your financial choices.