Your credit score is a crucial piece of information in your life. Unfortunately, polls suggest that about a quarter of all adult United States citizens do not understand that lending institutions use that number to determine whether or not they will lend to you! So, what’s a good credit score, you ask? The answer to that question depends on a number of factors…
What do you want to do with your loan?
Whether or not you have actually checked your credit score yet, your interest in the subject probably indicates your need for a loan. Obviously, not are loans are equal in size or importance. The size and purpose of your loan will tell you a lot about the kind of credit score you need.
In general, the better your credit score, the lower your interest rates are going to be. Banks are only going to be willing to give a large loan with low interest and a relatively long payback period to people who have demonstrated (via a good credit score) the ability to consistently pay back their creditors. Need to buy a used car? An average credit score will suffice. Want a loan for a big, new house at a great interest rate? You’re going to need a great score!
How is the score determined?
Here’s the breakdown:
35% has to do with your payment history. This history includes bankruptcies, missed collections and payments, etc. The old an infraction, the less it matters.
30% concerns utilization. In short, the less of your available credit you have used, the better. Whether your credit card limit is 500 or 500,000, use it sparingly!
15% is based on your credit history. This is essentially the time you have sustained a credit account. Don’t go opening and closing different accounts willy-nilly; creditors want to see reliability.
10% has to do with inquiries. Unfortunately, every time you apply for credit, a denial will negatively impact your score. Banks will run for the hills if they see that other lending institutions have already found you to be unreliable!
10% is based on the types of credit you have used. Make sure to maintain a track record of applying for loans for “important” things only – homes and automobiles, among others.
The bottom line
Obviously there is no one right answer to this question. However, if you’ve got a credit score around 700, you’re doing well and will probably be approved for most important loans. If your score is 760 or above, you’re doing great! Whatever the case, make sure you check your credit score before doing anything else in your financial planning.
