September 20, 2017

Getting the Credit (Score) You Deserve

We all want to be in that sweet spot of 700 when it comes to our credit score. But how can you make sure you’re doing everything right?
By Kerry Lengyel
The average FICO credit score has hit a new milestone — an average of 700 — as the result of falling unemployment and continued economic growth. This is the highest average score since FICO began tracking United States credit scores 12 years ago.

Where does your credit score rank?

A credit score of 700 is considered “good” but is only a few points away from an “excellent” rating. The credit scale usually ranges from a low of 300 (very poor) to a high of 850 (excellent) depending on how you handle your finances. 

300-579: Very Poor
580-669: Fair
670-739: Good
740-799: Very Good
800-850: Excellent
Source: Experian

To make sure your credit is up to snuff, the first thing you need to do is find out what your credit score is if you don’t already know. You should first check with your credit card company or loan provider because some provide their customers with credit scores on a monthly basis. If not, several credit score report services, such as Credit Karma or Discover, will provide your score free of charge.

Next, you need to figure out why your credit score may be falling short and where you need to show improvement. Several things are taken into account when it comes to devising your credit score. (Note that there are three national credit bureaus in the United States — Equifax, Experian, and TransUnion — and each calculates credit scores slightly differently.)
  • Payment History: Making your monthly payments on time and paying more than the minimum due each month will help increase your credit score.
  • Credit Utilization: This is the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. To figure out this rate, divide your credit card balance by your credit limit and then multiply by 100. For example, if you have a total of $20,000 in credit available on three credit cards, and one carries a balance of $10,000, your credit utilization rate is 50% — you’re using half of the total credit you have available. The lower this number is, the better. Experts advise using only about 30% of your available credit at any one time.
  • Debt Load: Add together all your monthly payments except for housing, utilities, and taxes. Then divide your total gross annual income by 12 to come up with your gross monthly income. Compare the two numbers to find your debt-to-income (DTI) ratio. The lower the number, the better for your credit score. Generally, you want to shoot for a DTI less than 36%. If yours is higher than that, you’ll want to increase your income or pay down some of that debt.
  • Account Age: The older the average age of your open credit card accounts, the better it is for your credit score. Therefore, it may be beneficial to keep your oldest credit card accounts open and active instead of closing them. Simply make at least one purchase per year, and pay off the amount due.
  • Account Diversity: You want a mix of the types of accounts you have open: credit card, installment account, mortgage, auto loan, student loan, home equity loan, and other diverse lines of credit. Your credit score will increase if you’re able to handle several account types at once.
  • Hard Credit Inquiries: When you apply for a loan, credit card, mortgage, or apartment, your lender usually checks your credit report. You want to try to make sure this isn’t a common occurrence because it can affect your score greatly. Try to keep these inquiries  to fewer than three over a 24-month period.
  • Collections Accounts and Public Records: Public record information can stay on your credit report for seven years or more — things like bankruptcies, tax liens, foreclosures, wage garnishments, and civil judgments. Having any of these on your report can severely lower your credit score.

Once you achieve a credit score of 700 or higher, you’ll be eligible for perks that you didn’t qualify for previously, such as credit cards with 0% introductory financing, low-rate auto loans, and credit cards from airlines, hotels, or your favorites store.

The good news is that average credit score ratings are still on the rise as the health of the economy steadily improves.

Just pay attention to your finances, make your payments on time and always keep in mind that having a good credit score can save you hundreds, or even thousands, of dollars each year.

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