With our economy on shaky ground, it’s easy to feel like many factors in life are beyond our control. The good news is that you do have some control over the three digits that define your credit-worthiness: your credit score. To make sure you qualify for the credit you need, take a look at your credit score. For prime loans and interest rates, it should be between 720 and 850 - and standards keep getting higher as more bad debt gets written off by card companies.
So how is this score determined? There are a few different methods, but most lenders look at the FICO model. Here’s the breakdown by percentage:
Payment History - 35%
Do you have a history of timely payments, or do you tend to fall behind? Either way, your payment history is recorded in your credit report and reflected in your credit score. To improve your rating, you’ll need to make all payments on time for at least a year.
Outstanding Debt - 30%
This is where the all important debt-to-credit ratio comes in. If you’ve charged up most of your available credit, it tells lenders that you might be a poor credit risk. On the other hand, if you keep your debt below 30% of your total available credit, you’ll improve your credit rating.
Established Credit - 15%
This factor is simply a measure of how long you’ve had credit. Lenders use it to determine how accurately your payment history represents you, since longer histories give them better insight into your credit-worthiness.
New Credit - 10%
This factor can be annoying. When you open a new credit account, your score will temporarily drop. Hard inquiries have the same effect. If you’ve maxed out several lines of credit and then applied for new ones, lenders will question your ability to manage your spending.
Credit Variety - 10%
For the best results, you’ll need to have installment credit (such as student loans and mortgages) as well as revolving credit (like credit cards) on your report.
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