Unless you can afford to pay for your Jersey Shore home in one lump sum of cash, you’ll need to borrow some money. Credit scores factor heavily in whether or not your bank approves your loan. Higher scores receive better interest rates. Have you ever wondered what exactly goes into determining your credit score? Here’s what you need to know.
How High Can You Go?
Not all credit scoring models are equal. Basically, lenders tend to utilize one or more of six different scoring models: FICO, Equifax, Experian PLUS, TransUnion, VantageScore (1.0 & 2.0), and VantageScore 3.0. For most scoring models, 850 reigns supreme. Experian Plus reports a top score of 830 while versions 1.0 and 2.0 of VantageScore top out at 990. Many lenders pull your scores from the top three reporting companies (Equifax, Experian, and TransUnion). Then, they throw out the top and bottom scores and use the middle score to determine where you fall on the credit ranking scale. With 850 as the highest score to achieve, 750 and above is considered excellent. Good credit falls between 700 and 749. Scores of 650 to 699 fall in the “fair credit” category. A score of 600 to 649 is considered “poor”. Anything below 600 is bad.
What Influences Your Credit Score?
While Experian Plus and VantageScore 1.0 & 2.0 top out differently than the others, each scoring method uses the same general formula to create your score. It helps to know which scoring model your lender works with. By concentrating on improving specific areas, your overall score should come up no matter which model they use.
By far, your payment history makes up the largest portion of your credit score. Approximately 35% of your total score is based on your payment history. That’s why it’s so important to make all your payments on time. And you definitely don’t want to pay 30 days or more late.
How Much Available Credit You Use
The amount of available credit you use makes up 30% of your credit score. Maxing out your credit cards hurts your score. Experts believe you should ideally keep your usage at 25-30%, but definitely no more than 50%. For example, on a credit card with a $5000 limit, your balance should never rise above $2500. But, it would be better to stay below $1500. Lower balances help drive your credit score up quickly.
How Long You’ve Had Credit (15%)
Now, you can’t do much about this one: length of credit. Approximately 15% of your score comes from how long you’ve had credit. Newly acquired credit accounts rank lower on the scale than other, more seasoned accounts.
Variety of Accounts Held & Inquiries Made (10% ea)
The final factors influencing your credit score come from the variety of accounts you hold and how many inquiries have recently been made on your account. They make up 10% each. It’s good to show consistent payments on different types of accounts, such as installment loans (cars, student loans), mortgages, and revolving credit (credit cards). Every time you apply for credit, your score takes a hit. However, that is only temporary. Keep inquiries to just one or two a year to minimize the damage.