You may not have thought very much about your credit score before it came time to apply for a credit card or loan, but once you do you know how important it is. A good credit score makes your financial life easier in a number of ways. Not only do you have an easier time qualifying for loans, but you also have a better chance at getting a good deal on an interest rate.
Getting a low interest rate means you’ll pay less every month in interest, which means you’ll pay less and save more over the life of a loan. Especially on a long-term loan, like a 30-year mortgage, the amount of money you save with a good interest rate is quite significant. The most basic thing you need to understand is how credit scores work. The credit score is a three-digit number representing your financial profile. Lenders use this figure to determine your credit worthiness and judge how responsible you will be once they extend a loan to you.
Credit scores fall between 500 and 800, with a higher number being better. Lenders usually group people in ranges, classifying a credit score as ‘poor,’ ‘below average,’ ‘average,’ ‘good,’ or ‘very good.’ So what is the credit score highest level? In general, a ‘very good’ credit score is 750 or above. People with a score about 770 can expect the very best there is in terms of interest rates on their loans and mortgages. There really is no difference between what is offered to a person with an 800 score and a 770 score, so shooting for 770 is a good idea.
To get your score to that level, there are a few common sense suggestions. One, pay down your debt. Credit scores are increased when people use less than 8% or 10% of their overall lines of credit. Here’s an example. If you have a $5,000 limit on your credit card, you should not use more than $500 of it in a given month. Either spread payments out on several cards or make more than one payment per month to keep the number low.
Lenders like to see people with more credit than they regularly use, rather than people who live dangerously close to the edge of their credit limits. For another, establish long-lasting lines of credit. These broaden and deepen the financial picture that lenders see from your credit score. Don’t close credit cards just because you don’t use them anymore. Lenders like to see long standing credit relationships, even if you don’t typically do much with a particular account.
