A credit score is a numerical value between 300-850 that someone is assigned to show a potential lender how likely one is to honor their debts. The higher the credit score is, the more trustworthy they appear to the lender. This is also called Creditworthiness in the lending industry. But what is a good credit score?
Creditworthiness is calculated from several factors, all based on one’s financial history. The key factors and their contribution to one’s credit score are credit mix (10%), new credit (10%), length of credit history (15%), credit amounts owned (30%), and the payment history (35%).
A credit report is generated by a credit reporting agency such as Equifax or TransUnion, which documents an individual’s credit activity as well as their current credit situation. Through the report, a lender can decide whether to trust an individual with their financial resources.
What Is A Good Credit Score?
On average, a credit score of above 700 is considered good. For most of the population, the credit score ranges from between 600 and 700. Depending on where one currently is in life, a good credit score may vary, but it is always advised to keep the number above 700.
FICO Score VS. Credit Score
In comparison to a credit score, a FICO score is just one type of credit score. Though there are other models for calculating an individual’s credit score, a FICO model is the industry standard used by most lenders.
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Like every other credit score calculation model, a FICO score is a three-digit number generated based on the information on an individual’s credit report. Most lenders regard it as a fast and consistent way to determine whether an individual is worthy of a credit facility.
Why A Credit Score May Have Dropped
1. Cancellation or closure of old credit cards
Closure or cancellation of old credit cards lowers one’s credit score, since it in effect, brings down several of the markers used in the calculation. If the canceled card is one of the oldest ones, this will significantly take away from an individual’s length of credit card history, which makes up 15% of the credit score. Through proper credit counseling, one would easily get to understand how these changes can effect their score. Advantage CCS provides free and confidential credit counseling here: Free Online Credit Counseling Services | Advantage CCS
2. Overdue payments on credit cards and loans
Missing out on credit card and loan payments is probably the most significant cause for a drop in an individual’s credit score. Since payment history makes up 35% of the credit score, missing out on even a single payment will have a significant adverse effect on one’s credit score.
3. Errors on a credit report
Though relatively uncommon, errors in an individual’s credit documentation may result in a drop in their credit score. Human errors such as entries to wrong accounts or late reporting may result in an untruthful report that harms the credit score.
With this risk being ever-present, an individual must keep proper documentation of their credit facilities, which can then be used as a defense in disputing the errors.
4. Application for a new credit card or line of credit
Whenever a new credit card application is made, the card issuer must inquire or reference the applicant’s credit report to check the risk they pose. Since new credit inquiries make up 10% of an individual’s credit score, this will undoubtedly harm the credit score.
Credit inquiries conventionally remain on one’s credit report for two years, but the FICO model only refers to the last year of inquiries when calculating the credit score.
5. Paying off loans early (sometimes) and other credit facilities
While paying off loans is a good thing, it lowers one’s credit score by taking away from their credit mix and credit amounts owned. This negative effect on credit score is so because it takes away from the proof that one can handle different types of debts. Though it lowers one’s debt score, paying off credit facilities and living debt-free helps one’s overall financial health.
Why Do You Need A High Credit Score?
Lack of proper money management and budgeting may set one up for a bad credit situation and have them miss out on the perks of having a good credit score. Here are some of the benefits enjoyed by those with a high credit score:
• Great rates on car loans or mortgage loans.
• Higher credit card limit approvals, as well as lower interest rates.
• Relatively better insurance rates.
• Ease in getting rental approvals for a house or apartment.
• Leverage on negotiations on credit cards and loans.
• Lower interest rates on loans as well as high approval rates.
• Skip out on security deposits on utilities.
Building a good credit score takes time, but it’s entirely possible for people to do this by making on-time payments, lowering their debts, and making sure they’re able to keep track of their scores. It’s the best habit to get into, and it’s one that affects someone’s entire financial future.