A Simple Rule Behind a Strong Credit Score
Your credit score can greatly impact real-life situations, such as getting approved for an apartment, the cost of your car insurance, and the amount you'll pay for a future loan.
Think of it as a quick snapshot of how you’ve managed borrowed money in the past. It doesn’t define you, but it does affect how lenders assess the risk of lending to you.
Factors Behind Your Score
Most scoring models focus on a few key areas. Here’s a typical breakdown from myfico.com.
Payment history (35%): your consistency in making payments on time.
Amounts owed (30%): the portion of your available credit being used or the total balances due for each loan type.
Length of credit history (15%): how long you’ve kept your accounts open and in good standing.
Credit mix (10%): whether you’ve managed different types of credit, such as a credit card versus a student loan.
New credit (10%): how often you apply for new accounts.
The “3 C’s” Lenders Think About
Beyond the score, lenders often consider the “3 C’s.” Capacity refers to your ability to repay, which is shown by your income, job stability, and monthly expenses. Collateral is an asset that can support a loan (like a car for an auto loan), which might sometimes lower your interest rate. Character reflects your reliability, often indicated by your overall credit score, such as whether you’ve paid bills on time and kept balances manageable.
Utilization Percentage Example
Imagine you have a credit card with a $1,000 limit. If your balance is $100, you’re using 10% of your available credit, which is generally considered low and manageable. If your balance is $900, that’s 90%, which could signal a higher risk and might hurt your score, even if you’ve never missed a payment.
According to Experian, credit ratings typically are:
Exceptional: 800-850
Very Good: 740-799
Good: 670-739
Fair: 580-669
Poor: 300-579
Keeping usage under 30% is good, and under 10% is ideal.
Bottom Line
The key to maintaining a good credit record is to pay everything on time. Stay aware of your debt level, avoid owing more than you can repay, and recognize that digging yourself into a deep financial hole can make it very hard to get out.
Disclaimer: Creek & Lyells Financial Literacy Foundation does not provide financial services, nor does it recommend or advise visitors to open accounts or buy or sell securities. All content on this blog is for educational purposes only. While we strive to provide accurate, relevant, and well-vetted information, visitors should consult a licensed financial professional and carefully evaluate the risks of any financial decision before taking action.