Credit Doesn't Have To Be A Mystery
If you feel like your credit score is a mysterious secret, you are not alone. While the exact number of people who feel this way is unknown, the lack of transparency in how credit reporting agencies calculate scores contributes to this confusion. You may not need to know the precise formula, but understanding how they determine your credit score is essential for taking steps to maintain or enhance it.
If you're unaware of the components that contribute to your credit score, it's difficult to take any action to improve it. Understanding the factors involved and how they are calculated gives you more control over your financial well-being. So, let's break down the composition of a credit score.
1. Your payment history plays a crucial role in determining your credit score, accounting for a significant 35% of the overall score. It may come as a surprise, but this aspect holds immense importance. If you have consistently made timely payments without any hiccups, then you're in luck. However, if you occasionally forget to pay a bill or tend to be a few days late, this could potentially have a negative impact. The reason being, different creditors follow varying policies regarding reporting late payments to credit agencies. Since you're unaware of the specific threshold, it's always advisable to prioritize paying all your bills and loans on time to maintain a healthy credit score.
2. Your credit score is determined by a combination of factors, and your credit blend makes up 10% of that score. It's important to have a diverse range of credit accounts, such as a mortgage, car loan, credit card, and even a store account that you consistently make payments on. This shows credit agencies that you are capable of managing different types of credit responsibly. However, it's crucial to ensure that you can handle all of these accounts effectively, as even a single late payment can have a negative impact on your overall creditworthiness.
3.Your credit score is influenced by 15% based on the length of your credit history. It's important to note that the longer you have managed your credit responsibly, the more positive impact it will have on your overall score. Having a well-established credit history is more beneficial than having a shorter one in terms of credit scoring.
4. Following closely behind your payment history in terms of importance is the total amount of debt you owe. This particular factor makes up 30% of your overall credit score. Your total debt is measured against your income to determine your "debt to income" ratio. The lower this ratio is, the better it is for your credit score. It is recommended to aim for keeping your total debt at 25% or less of your annual income to positively impact your credit rating.
5. Another aspect that can affect your credit score is the number of new inquiries made into your credit history. This accounts for 10% of your total credit score and can serve as a red flag that you might be taking on too much debt. However, an exception is made if you are the one checking your own credit report, as this type of inquiry does not negatively impact your score.
Understanding the breakdown of your credit score is not as mysterious as it may seem. By knowing the importance assigned to each component of your score, you can determine which areas to prioritize when working towards improving your credit score. It's all about gaining clarity and making informed decisions to effectively enhance your creditworthiness.
Now here's a quick question: What is the average U.S. credit score? The answer is 690. So, how close did you get? If you were pretty far off, that's okay. Before you can make an accurate guess, you need to know a few things. You need to have some idea of how the economy is doing. You also need to know what the full range of credit scores is.
On the first point, a declining economy can have a negative impact on credit scores. However, as of now the downturn in the economy has not had as much of an impact...yet. It's possible that it could still affect credit scores, so it makes sense to do what you can to maintain or improve your score, in spite of a sluggish economy.
Now onto the range of credit scores. A perfect score is 850, and the worst possible score is 300. A bit of quick math tells us that the average of those two numbers is 575. That's what the math tells us, but the national average credit score is 690. This is mostly due to the fact that no matter how tough things get, people still do their best to pay their bills, and pay them on time. Perhaps that can be attributed to the American spirit and the desire to keep one's word. Whatever the reason, the actual average of 690 is significantly higher than 575.
More confusion is added by lenders who do not disclose what the cutoff point is for different terms of loans. Not to mention that these points can change at any time, and for a variety of reasons. For example, while you may have had an easy time getting a good loan with a credit rating of 680 (10 points below average) just three years ago, it would be very difficult to get those same terms today.
So what kind of score do you usually need to get the best terms today? Again, each lender is different, but overall you will need a credit score of 720 or better to make sure you will get the best terms. That's quite a leap from 680, and 30 points above average. Lenders may have more stringent standards because the economy is affecting them as well, or it could be because they see everybody as a higher risk than they used to. Of course the reason doesn't really matter if you can't get the best terms for a loan, or if you can't get a loan at all.
You should also know that each state has its own average credit score. This means lenders have different numbers to work with in each area. States where the average score is 700 or higher are Iowa, Minnesota, New Hampshire, Massachusetts, Vermont, Montana, North Dakota, and South Dakota. States with the lowest averages (around 660 to 670) are Louisiana, Texas, West Virginia, Georgia, Michigan, Alabama, North Carolina, Nevada, New Mexico, Alaska, and Arizona.
I help my clients understand how to leverage their credit and income to get funding up to $400,000. This funding helps borrowers to start businesses, invest in real estate, expand their business, pay marketing cost, make big purchases, consolidate debt, and so much more.
Credit is a major factor in getting approved and having a better understand of your credit, you will not have any mysteries of what your credit may be. If you don't know your credit scores, you can check them here for $1 Check Your Credit For $1.
I would love to help you get a no obligation pre-approval. I also welcome referrals.
LaShawnda Robinson
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