Everyone has heard the term credit score. Not everyone really understands its purpose or why they should try to have a good number. Most people only know they should have a good number; they just don’t know what it is.
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Let’s get the immediate question out of the way. A good credit score is considered as any number over 720. There are a lot of things that are considered for a credit score, and since each agency seems to do it different, you could have a good credit score at one and not the other. That’s why it’s always good to get your free credit report annually via the federal government’s agreement at the site Annual Credit Report, which we’ve just linked to.
At best you can see what your balances are all in one place, see how the 3 major organizations see your credit, verify if there’s anything outstanding that you didn’t know about or that you might need to refute, and most importantly, see if there’s something on there that doesn’t belong to you. In this day of credit card numbers and social security numbers being hacked, it pays to know.
Even though it’s hard to discern all the factors, there are some key factors that are easily tracked, that you probably already know about to some degree.
First, late payments. Many creditors will report if you’re more than 30 days late with a payment. Not all of them will do this however; many creditors won’t report a late payment as long as it’s under 60 days, and health care entities will usually wait at least 120 days before reporting you, which most people don’t know about. Luckily, medical debt stopped showing up on credit reports on July 1st, 2022, so that’s one less worry to deal with.
If you’re late with a credit card payment, it’s getting reported. If you’re late with a car payment or mortgage payment but you call them, they’ll usually give you a short break. Actually, if you know you have money coming for a credit card payment and you call them ahead of time, they’ll usually give you an extension of 7-10 days as long as you’re not a repeat offender.
Second, too many outstanding credit balances. Most of these concern credit card debt, so if you have a lot of credit cards with high balances that will bring your score down, even if you’ve never missed a payment. Mortgage balances aren’t always taken into account; the same goes for car payments.
The problem is that credit reports don’t often know what a person’s income is unless they’re ultra rich. If you purchased a house that’s around $500K, the assumption is that you’re probably wealthy enough to be able to carry high debt and multiple credit cards easily, even with high balances. For everyone else, it’s a bit dicier, and without the proper information it could hurt your overall credit score.
Third, not having enough credit for a credit history. As strange as this one seems, if you’ve only had one credit card in your entire history and want to get a loan for anything else, your credit score might not be all that high because you don’t have a proven history of paying a lot of bills. In general terms, this doesn’t make sense, but credit scores are built and estimated based on how you’ve maintained credit you’ve had to pay on versus how well you’ve handled your finances overall.
This is why you see a lot of financial experts saying that you should have at least two credit cards in your history, even if you only use one of them all of the time. Their belief is that if you buy something with the other card and pay the entire amount the next month, at least you’re building up a portfolio of activity that allows them to get a better read on how trustworthy you might be if you want some other kind of loan.
Fourth, paying your balances off each month. We touched on this one above, but it’s something that a lot of financial advisors recommend that you do, and it comes with a problem as it pertains to credit scores.
If you immediately pay off your balances all the time, credit agencies feel they can’t predict how you’ll react if you suddenly have to carry a balance on something because you might not have a history of paying down accumulated debt over time. So, they’ll penalize you by not giving you a great credit score; isn’t that petty?
With that said, the last one is still preferable if you can do it. If you need to get a loan for a house or car, those types of companies won’t hold your lack of borrowing against you. As a matter of fact, it’s possible that mortgage companies will be more willing to give you a better rate, especially if you can put down at least 10 – 20% of the down payment on your home at the time of purchase.
Adding to this, if you have a car or mortgage loan, it mitigates almost anything you do with your credit cards, even if you don’t have one, because almost no one buys a house or car without a loan, and making monthly payments on those items work great on your credit score. Of course, it’s also why we advocate weaning yourself off credit cards as much as possible, so you’ll have the money available for monthly payments of either of the two things above.
These are the biggest factors that can affect your credit score. In any case, it’s always better to know where you stand, so be sure to get your free credit report.