In today’s debt-driven economy few things are as important to your financial situation than your credit score. A good credit score makes it easier to buy a car, buy a home, or even rent an apartment. The better your credit rating, the likelier you are to be eligible for special deals – including lower interest rates – on financing of all kinds. A good credit rating can also make your credit card company more willing to work with you when you want to negotiate a lower interest rate or a higher credit limit.
Your Credit Score Matters
While you probably have a basic idea of what your credit score is and why a good score is better, odds are that there is still a bit of mystery about exactly what affects your credit rating. The purpose of this article is to demystify your credit rating so you know how best to maintain a good score, or to raise your score if it is currently poor. To start off, here is a basic list of things that impact your score. The percentages in parentheses show how each item is weighted in calculating your score:
- Payment history (35%)
- Current amount of outstanding debt (30%)
- Credit history (15%)
- Number of new credit applications (10%)
- Types of open credit (10%)
As you can see, the most important factor in your credit score is your payment history. That means, then, that the best way to maintain a good score or improve a poor one is to make sure that you make all your payments on time. That does not mean just payments on your outstanding debts, either. Of course it’s important to your credit rating to pay your mortgage or your car loan or your credit card on time, but it’s also important to pay your other bills on time. A missed payment to your water or electric or cable company can negatively impact your credit rating, too.
Your Debt Matters Too
Second major factor is how much debt you currently have. When you owe money to a bank or a credit card company or some other kind of creditor your income is, in a sense, not your own. You owe at least part of it every month to your creditors. While that’s okay most of the time, it carries a certain amount of risk. The companies to which you apply for new credit know this, and will be reluctant to increase your outstanding debt if you have too much.
Open Credit Makes a Difference
The types of open credit you have can impact your score because of what they tell your would-be creditors about your habits. Certain kinds of debt are seen as more responsible than others. A home mortgage, modest student loans, a car loan, and a credit card or two are taken as evidence that you are more responsible with money (depending, of course, on your payment history) than four or five open credit cards would be.
While understanding how credit works in today’s economy can be a little difficult at times, the reality is that what affects your credit rating is actually pretty straightforward. Hopefully a little basic knowledge – combined with a healthy dose of personal discipline – can help you maintain your good score, or improve a bad one.