If the sagging economy is keeping you up at night, make sure your finances are on firm footing.
What is an excellent credit score?
A credit score is a number that is based on a statistical analysis performed by lenders and financial institutions that indicates a person’s ability to repay a loan. FICO scores range from 300 to 850, with a score of 750 to 850 considered excellent. Scores in the excellent range have access to the lowest interest rates and best loan terms.
The complexity of the credit-score system can be daunting. Let’s break it down so that you can see what is analyzed and which aspects of your credit history are given greater weight in determining your credit score:
- Payment history (35 percent): This section includes how faithful you are in making payments on time, whether you have had any bankruptcies or judgments, if payments are overdue, and if so, how far overdue and how much you owe.
- Amounts owed (30 percent): Includes the amounts owed on each individual account and totaled together as a whole. This section also looks at the number of accounts you hold with balances, and how much you owe compared with your credit limits.
- Length of credit history (15 percent): There is not a lot you can do about how long you have been a borrower, but this analysis looks at the amount of time your accounts have been open and how long it has been since they were active.
- New credit (10 percent): Includes the number of recently opened accounts in proportion to your total number of accounts, the number of recent credit inquiries, and the re-establishment of a positive credit history following credit problems.
- Types of credit used (10 percent): This includes the number of various types of accounts, including credit cards, retail accounts, installment loans and mortgages.
You can raise your credit score by doing the following:
- Pay your bills on time.
- Be aware that paying off a collection account will not remove it from your credit report.
- If you are having financial trouble, contact your creditors or see a legitimate credit counselor.
- Keep balances low on credit cards and other revolving credit.
- Pay off debt rather than move it around.
- Do not close unused credit cards in a short-term attempt to raise your scores.
- Do not open new credit cards you don’t need in an attempt to increase your available credit.
- If you have not had credit for long, do not open a lot of new accounts right away.
- Do rate shopping for loans.
- Request and check your credit report.
- Apply for and open new credit accounts only as needed.
- Have credit cards, but manage them responsibly.
- Note that closing an account does not make it disappear off your credit report.
Credit score example
The Consumer Financial Protection Bureau says that you actually have more than one credit score. There are three primary consumer reporting companies, and if the information about you is reported differently to each of them, your credit score from each company will be different. There are a number of ways to get your credit score:
- Check your credit card or loan statement. Many major credit cards and some auto loan companies have begun to provide credit scores to their customers on a monthly basis. It will be listed on your monthly statement, or can be found by logging in to your account online.
- Speak with a nonprofit counselor who will provide you with a free credit report.
- Use a credit score service. While many of these services and websites advertise free credit scores, read the fine print. Some require that you sign up for a credit monitoring service with a monthly fee.
- Pay to see your score directly from the credit reporting companies.
- Request a free report annually.