For many of the large purchases in life, such as an automobile, home, or even furniture, you turn to a financing plan for help. Few people walk around with thousands of dollars sitting in the bank that they can use to make an outright purchase of a big-ticket item. If you have to apply for financing, your lender will consider several factors, but a primary area of concern is your credit score.
When it comes to your credit, some people think that ‘out of sight and out of mind’ is the best way to stay to handle it. However, with services like a free credit report, it is better to know how your score is being impacted by your choices with finances and bill payment. Long before you are able to make a purchase, you need to have a credit score that reflects reliability and self-control. There are a few things that affect your credit rating.
Five Primary Areas of Concern
There are five areas that determine your overall score. These include bill payment history, level of debt, length of credit history, types of credit open, and the number of credit inquiries on your history. It’s not just financial lenders that use your credit score for decision-making. Utility companies and some insurance providers have also started looking at your FICO scores to determine how dependable you will be when it comes to honoring your payment contract.
Bill Payment: This history equals about 35% of your overall scores. Meeting your due dates is one way to keep this number on track. For help with scheduling payments, there are many smartphone apps that can give you a hand.
Level of Debt: Your debt ratio makes up 30% of your score and includes items like credit use, number of open accounts, and loan balances weighed against their open amounts.
Length of History: The age of your credit accounts will determine 15% of your overall score. The longer your accounts have been in good standing, the better your scores will read.
Types of Credit: Installment loans and revolving accounts are the two types of credit reported. A sure way to improve your score is to have both types of credit on your account, as it shows you have familiarity with different payment and lending scenarios.
Number of Inquiries: Anytime you open a credit application, it will open an inquiry on your credit account. While one or two throughout the year won’t be a huge problem, the overall impact of inquiries is 10% of your score. Multiple inquiries within a short period of time will do some damage.
Benefits of High Score
Unlike a pinball machine where the high score sets off the bells and whistles, a high credit score gives you a financial edge in life. Credit ratings are divided into ranges of very poor, fair, good, very good, and exceptional. These are divided along a number scale that begins around 300 and ends up at 850. A good score is usually reserved for numbers over the 700 mark. If your score is 800 or above, you are considered to have excellent credit. For the best decisions with creditworthiness and at lending rates and favorable terms, keep your score at 700 or above.
Chances of Approval
Depending on where are you filing an application for credit, a higher score will increase your chances of being approved. A lender is taking a risk anytime they offer you financing, and a higher score offers some proof that your account will be worth the risk. It indicates you have met your financial obligations consistently in the past. There are revolving credit lines designed for those looking to establish their credit, such as college students and retail shoppers, and these companies absorb the risk through higher interest rates.
Lower Interest Rates
For those with a good credit score, lenders both reward and entice your business by offering lower interest rates. Over time, a low interest rate could reduce your overall cost by thousands of dollars. When you have an installment loan, this makes a significant difference. Often revolving credit lines have payments driven by the amount of credit used and then assessed an interest fee. With installment loans, the interest is factored into the overall payment plan at the outset of the application.
Higher Limits and Offers
Because of your financial desirability, many lenders will extend offers or increase credit limits as you maintain your payment plan and deal with your credit responsibly. If you are applying for a new credit line, your good score might initially qualify you for a higher limit or reward program.
Stay in the Know
Even if you aren’t making any purchases anytime soon, staying aware of your credit report can help you stay on the offensive with building a high FICO score. It can also be a way to notice discrepancies and resolve any negative items that appear.