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Most Searched Finance Question on Google: What's a Good Credit Score?Submitted by Sound Foundation Wealth Advisors on August 7th, 2023
Did you know the most searched financial question on Google is, "What's a Good Credit Score?" Here's our best shot at answering it:
What is a Credit Score?
A credit score is a three-digit number that reflects an individual's creditworthiness. In simple terms, it indicates how likely you are to repay borrowed money responsibly. It typically ranges from 300 to 850, and it is calculated based on various factors related to your financial behavior. These factors include your payment history, credit utilization, length of credit history, credit mix, and new credit applications. The higher the credit score, the more financially trustworthy you appear to lenders and creditors.
What are those factors? And what percent of my score do they make up?
- Payment History (35%): The most significant factor in determining your credit score is your payment history. This includes how consistently you make on-time payments for credit cards, loans, and other bills. Late payments, defaults, or accounts sent to collections can have a negative impact on your score.
- Credit Utilization (30%): Credit utilization refers to the percentage of your available credit that you are currently using. It is calculated by dividing your total credit card balances by your total credit limits. Aim to keep your credit utilization below 30%, as high utilization can indicate financial stress and may lower your score.
- Length of Credit History (15%): The length of time you've had credit accounts impacts your credit score. Generally, a longer credit history is beneficial as it provides more data for lenders to assess your creditworthiness. If you're just starting out, focus on building a positive credit history over time.
- Credit Mix (10%): Your credit mix refers to the variety of credit accounts you have, such as credit cards, installment loans, and retail accounts. Having a diverse credit mix can be positive for your credit score, but this factor has a relatively smaller impact compared to payment history and credit utilization.
- New Credit Applications (10%): When you apply for new credit, it generates a hard inquiry on your credit report. Multiple hard inquiries within a short period may indicate a higher risk to lenders, potentially lowering your credit score. Be cautious with new credit applications and only apply when necessary.
What is a "Good" Credit Score?
Credit scores can be categorized into different ranges, and each range represents a specific level of creditworthiness. While different credit bureaus may have slight variations in their rating scales, generally, a credit score is considered:
- Poor: 300 - 579
- Fair: 580 - 669
- Good: 670 - 739
- Very Good: 740 - 799
- Excellent: 800 - 850
For those starting their financial journey or already in the midst of it, aiming for a good credit score or higher is ideal. A credit score of 670 or above shows that you are a reliable borrower, which can open doors to better financial opportunities in the future. But does it really matter? It does, but it depends. Here's a few places where you'll find you want a better credit score:
- Loan Approvals: When you apply for a car loan, mortgage, or personal loan, lenders assess your credit score to determine your eligibility. A good credit score increases your chances of approval and may even lead to better interest rates.
- Credit Card Applications: Banks consider your credit score when you apply for a credit card. A higher credit score could help you get approved for better cards with more benefits.
- Lower Interest Rates: If you have a good credit score, lenders will view you as a low-risk borrower, resulting in lower interest rates on loans and credit cards. This means you'll pay less money in interest over time.
- Rental Applications: Landlords often check credit scores before approving rental applications. A good credit score can improve your chances of getting your desired apartment or rental property.
- Employment Opportunities: Some employers conduct credit checks as part of their hiring process, especially for positions that involve handling finances. A good credit score may improve your chances of landing certain jobs.
How can I get a better credit score?
Now that we understand the significance of a good credit score, let's explore some tips to achieve and maintain it:
- Pay Your Bills on Time: The most critical factor in your credit score is your payment history. Always pay your bills on time, whether it's credit card bills, utility bills, or loan installments. Even one late payment can have a negative impact on your credit score.
- Keep Credit Card Balances Low: Credit utilization, or the amount of credit you're using compared to your credit limit, also affects your credit score. Aim to keep your credit card balances below 30% of your available credit.
- Establish a Credit History: The length of your credit history matters. If you're just starting out, consider getting a credit card with a low limit and use it responsibly. This will help you build a positive credit history over time.
- Avoid Opening Too Many Accounts: Opening multiple new credit accounts within a short period can lower your average account age, impacting your credit score negatively.
- Regularly Check Your Credit Report: Monitor your credit report for errors and potential identity theft. You can get a free credit report from each of the major credit bureaus once a year.
- Be Cautious with Credit Applications: Applying for too much credit in a short time can make you appear desperate or financially unstable to lenders. Only apply for credit when you genuinely need it.
Although it might not be the most important financial topic, it is important to know your credit score and how to work towards a better one. By focusing on building a positive payment history, maintaining a low credit utilization ratio, and being cautious with new credit applications, you can work towards achieving and maintaining a good credit score. Regularly checking your credit reports from Equifax, Experian, and TransUnion, the three main credit bureaus, will help you stay on top of your credit status and detect any inaccuracies or potential signs of identity theft (just remember, you can only check each one for free once per year!)
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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