When you are considering applying for a loan you first need to know what your credit score is so you can determine how much you will pay. If you don’t already know your credit score you can get your credit score for free, but even when you know your score it can still be confusing to know what a good credit score looks like.
So what makes up a good credit score? Well, credit scores are determined by five factors:
1. Payment history – This makes up 35% of your credit score, so be sure to pay your bills on time. A couple of late payments are no big deal, but more than that will have a negative impact on your credit score.
2. Running a balance – 30% of your credit score is determined by the total value of your outstanding credit balance. If you are near your limits, pay it down as fast as possible or risk the consequences of a bad credit score.
3. Credit history – How long you have had credit accounts for 15% of your overall credit score. The longer you’ve had credit the better.
4. New credit – Every time you apply for new credit it drops your overall score. Lenders think you are piling up more debt.
5. Diversity of credit – A mortgage, a line of credit and a couple of credit cards is fine, but more than that can be viewed as bad.
Generally speaking, the average credit score in the US is approximately 725 out of a possible 850. Although each credit bureau has its own way of calculating your score, they should all be roughly the same.
• Excellent – any score of 700 or above. You should have no trouble getting a loan.
• Good – a score of 680 to 699. Again very little difference between 680 and 700, so most lenders will not worry about that very small difference.
• Okay – a score of 620 to 679. If you are on the lower end of this range you may be required to supply additional supporting information concerning your income.
• Poor – a score of 580 to 619. This is just outside the ‘prime’ range. You should plan on paying a higher interest rate with this score.
• Bad – a score of 500 to 579. It is still possible to get a loan with this score, but you will have to pay much higher interest and the terms will not be as favorable. Be sure to carefully read the fine print. You do not want interest calculated on a daily balance.
• Awful – a score below 499. It may be possible to get a lender to bite, but the rates will kill you. If you find yourself in this category, take the time to pay off your existing credit and work to achieve a higher score.
It takes time to repair a credit score, but the effort is worth it. With a high score you will end up paying thousands less in interest over the life of a loan.