According to Experian, credit is the ability to borrow money or access goods or services with the understanding that you will pay later. Credit score is a numerical expression of a person’s creditworthiness, based on the analysis of open accounts. The lower your credit score, the greater risk you pose to lenders, who may not trust you’ll be able to repay a loan.
Why Is Credit Important?
The ability to buy a home, new car and pay off debt is directly related to credit. A person also needs good credit to obtain lower interest rates on loans.
Your score and credit history will be taken into consideration when you apply for a line of credit. FICO® scores, the most widely used today, range from poor to excellent:
- Below 629 considered poor credit
- 630 – 689 considered fair credit
- 690 – 719 considered good credit
- Above 720 considered excellent credit
Factors That Affect Credit Score
Paying your bills on time is one of the most important factors that influences credit score. In fact, a late payment past 30 days can stay on your credit report for years! Pay at least the minimum balance each month but if you can afford more, this can reduce your credit utilization ratio – how much you owe compared to your total available credit.
On the subject of revolving credit accounts, utilization should be less than 30 percent. If you have $20,000 available, aim to use no more than $6,000.
Although the following factors carry less weight, they can also affect your credit score:
- Credit History: The longer you’ve had credit accounts, the better for your score
- Credit Mix: Having more than one type of credit is also good for your score
- Hard Inquiries: Applying for new lines of credit may cause a temporary dip
More Ways to Improve Credit
Everyone is entitled to a free annual credit report from the three major credit bureaus: Equifax, Experian and TransUnion. It’s important to access these reports and conduct a review, including personal information, accounts, inquiries and public records. If there are errors, dispute the incorrect information right away.
Create a budget that helps you live within – or below – your means. The general rule of thumb is to pay yourself first! Contribute about 20 percent to your savings, including any retirement accounts, then allocate 50 percent to necessary expenses and keep discretionary spending below 30 percent.
To apply for a loan, Ion Bank has a variety of affordable options! To learn more, contact us today.