Learning finance

What is a good credit score?

Knowing your credit score is basically the definition of adulthood. Because this mysterious number literally holds the keys to whether you are a grown woman owning her own home or getting a loan for a small business.

Yes, your credit score, which measures your likelihood of paying off your debts, can open important doors for you. It is generated based on your credit reports from the three major bureaus—EquifaxTransUnion and Experian – and is used by banks and lenders to decide if you are approved for a loan.

So yes, it is a kind of BFD. Here’s what you need to know about yours:

What is a good credit rating?

Credit scores range between 300 and 850, says Kimberly Palmer, personal finance expert at NerdWallet.

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Within this range, here is what you can generally expect to be a good credit score:

  • Excellent credit score: 720 or more
  • Good credit score: 690 to 719
  • Fair credit score: 630 to 689
  • Bad credit score: 300 to 629

    What affects your score

    Your banking history and habits primarily determine your credit score. If you always pay your bills on time, don’t have an overdraft in your bank account, and don’t have a ton of outstanding debt, you’ll probably score better.

    Another factor: the amount of debt you carry. Most experts recommend that the amount you owe not exceed 30% of your total credit limit. So if your credit card limit is $2,200 and you have $1,000 in debt, you could see your score drop.

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    How long you’ve had your accounts for and how many accounts you have can also help build your case. In fact, Palmer says 21 or more open accounts is considered excellent.

    That sounds like a lot, but think about how many credit cards, store cards, checking accounts, and savings accounts you have. Factor in student loans, car payments, mortgage payments, and you probably have a lot of open accounts.

    Although late payments can significantly affect your score, don’t panic if you’re a day behind on your credit card bill. You must be more than 30 days late on a payment before it is added to your credit report.

    That said, just one late payment can really drop your score. According to research conducted by FICO, a mortgage payment submitted 30 days after the due date could cause a person’s score to lose 75 points. More points could be withdrawn depending on how late your payment is (for example, 60 days after the due date) or if you have a low score to begin with.

    Ironically, if you’ve recently applied for credit (for example, to start a business or to sign a new lease), it may actually hurt your score. This can send the message to lenders that you are living beyond your means and could be a high risk loan.

    What does not affect your score

    Don’t worry, you don’t necessarily affect your credit score every time you splurge on Sephora (as long as you pay your bills). Factors such as your spouse’s credit history, income, work history, age and gender also don’t directly affect your credit score, Palmer says.

    Why is good credit so important?

    Look at it this way: if you have bad credit, it can affect your ability to qualify for personal loans, mortgages, credit cards, apartment rentals, car loans, whatever. you have to do as an adult.

    On the other hand, maintaining a high credit score comes with many benefits, like eligibility for premium and rewards credit cards. It will be easier to qualify for the loans and services mentioned above, and you’ll likely get better rates too.

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    How to check your credit score

    Checking your score is a great way to track your progress and point out any mistakes (and contrary to popular belief, checking doesn’t affect your score, says Palmer).

    You can request a free credit report once a year from each of the three major credit bureaus: Equifax, Experian and Transunion. You can get this information at AnnualCreditReport.com. No more than once a year, and they’ll charge you a fee (usually around $20).

    There are also a variety of other tools to check for free, like NerdWallet and CreditKarma. Some financial institutions also offer free scores to their customers. Check your bank’s website to see what they offer.

    How to improve your credit score

    The easiest way to improve your score is to pay your credit card bills on time and in full each month. It’s basic, but it works.

    And if you have debt above the recommended 30% of your overall credit limit, try to minimize it by foregoing new credit cards (as tempting as that GAP discount is) and focusing on paying off your existing debt.

    On the other hand, if you apply for a new credit card and easily pay those bills on time, you could undo some of the damage you’ve done and improve your score. Sometimes it’s worth the risk.

    And a bad score doesn’t last forever. Anything that can seriously alert lenders, like bankruptcy, will stay on your file for about 10 years, Palmer says, while late payments typically take seven years to clear. It may seem like a long time, but better late than never.

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