Having a good credit score is the gateway to obtaining affordable interest rates, and thus more affordable payments. Our ability to take out a mortgage, or get a loan for a new car, hinges on credit reports and overall scores. It’s the equivalent of having a good grade point average in school, your future qualification and acceptance depend on it. Which is why it’s even more puzzling how few people pay attention to what their score is, or even understand how it is calculated.
The credit score range is quite vast, it ranges from 301 to 850. Most lenders consider a score of 750+ to be stellar, and the top echelon of low-risk borrowers. Anything between 650 and 699 is typically considered to be an average credit score. An average credit score is usually the threshold for obtaining affordable interest rates, if anything at all. While there are some less risk-adverse lenders out there that are more than willing to provide capital to these borrowers, just know that they charge exorbitant rates and upfront fees to mitigate that risk. For all intents and purposes, you want to keep your credit score at 700+ for affordable credit.
So, what exactly affects my overall credit score? People have a common misconception that if they pay all of their monthly bills on time they will have A+ credit, and that isn’t always true. For example, say you have the ability to borrow $10,000 in credit based on revolving loans and open credit cards, and you currently have $9,000 in outstanding debt on those accounts. You may be paying the monthly bills like clockwork, but your credit score will be adversely affected because you are utilizing your available debt at 90%! Lenders will see that borrowing need as risky every time.
Another factor to take into account is the age of your open accounts. If you have 3 credit cards that have all been open less than 1 year, there isn’t much history of on-time payments for the credit rating agencies to pull in. Having newer accounts, and closing out older more established accounts, can actually hurt your score. Consider that before you go out there opening and closing credit cards in order to take advantage of upfront bonus awards.
Lastly, the type of accounts open can affect your score a great deal as well. Mortgage and student loan debt is seen as being more consumer friendly. Whereas, credit card borrowing is seen as more toxic since the rates tend to be higher and there aren’t any tax benefits from paying interest on those.