Everyone knows in order to apply for a credit card you need to have good credit. What is considered good credit? How do you get good credit? What determinants your credit? What affects your credit score? How to keep on top of your credit score? These are some of the topics we will be covering for the next few days.
What is a credit score?
Your credit score is a number that is stimulated by a variety of factors. It ranges between 300 and 850, 850 being the best. A 450 is poor, 650 is average, 750 is good and above 800 is excellent. Most credit cards only need a number is the 750 range to be approved.
Where Do These Numbers Come From?
There is a company called FICO, a acronym Fair Issac Co. This company started back in 1956. They help banks make decisions based on your score. they factor all the things that can have an impact on your credit worthiness, and put it into a 3 digit number.
What is considered good credit?
In order to be approved for the best credit cards like the American Express Platinum or the Chase Ink Bold, you need to have good credit. The banks need to know that they can trust you with a high valued card. These cards have no credit limit. The credit line moves up and down based on your spending habits. They are called “charge cards”. You must pay the balance in full every month. The banks want to make sure that you have a history of paying every month. Good credit is based on a few things.
1) A Good Payment History – 35%
A good payment history plays the biggest factor of your score.
The reason is simple. The credit card issuer cares about getting their money back. If you can’t pay them back you are a risk. They don’t want to lend you money. Keeping a good payment history is also in regards to medical bills, car payments and utilities. If you have an outstanding balance on one of these your credit score will be negatively affected. Delinquencies, accounts in collection as well as late payments are also factored into this category.
2) Credit Utilization or Amounts Owed – 30%
Credit Utilization is how much of your credit line you are using. If you have one card with a $1000 credit line, and you spent $500, you have used 50% of your credit. The lower percentage of credit you are using, the better off you are. The total credit is calculated by all your cards credit line vs all purchases. If you have 5 cards with a credit line of $1000, and made the same $500 purchase, your CU (credit utilization) would drop to only 10%. Never go above 30%, and a credit utilization of under 9% are the best.
When someone is using a large portion of their credit, they are “dependent” on their credit. Banks don’t like that, especially if you are applying for a new card. It makes you look like a compulsive shopper, and a credit risk.
3) Age of Accounts 15%
The longer your cards are open the better. The age of accounts are calculated by means of an average. If you have one card for 5 years and applied for a new credit card today, the age of your cards has now fallen to 2.5 years (2 cards over 5 years and 0 years). Always keep your no annual fee cards open, as they build your accounts age. Additionally never close your first card, as it is the start of your credit history and age. Apply for cards like the Discover It, or the Chase Freedom which are great beginner cards. Read more…
A late payment on a card that you have for 5 years is better then if you only had the account for 1 year. The longer you have a credit history, the more the bank knows about you. When the banks see more information about you, they are grant credit quicker.
4) New Credit – 10%
FICO look at the amount of new accounts as well as credit inquiries on your report. Read here about credit inquiries.
Every credit inquiry you have is a request for more credit. The more credit inquiries i.e applications, limit raises etc. the worse off you are. The more requests for credit, the worse off you are. People try to make multiple credit applications into a consolidated one (3BM). This way you have less credit pulls on your account.
5) Types of Credit In Use – 10%
Not all credit was created equal. A credit card from a acclaimed bank holds more bearing then a Chain store card like Macy’s. FICO considers the debt/payment of these cards more informative towards your credit worthiness.
Credit cards that let you swipe anywhere are called “Revolving Accounts”. They have the most weight in “Types of Credit”, since they are user defined. They show better debt management skills. Student loans, car payments and mortgages are called “Installment Loans”. An installment loan is a loan that is repaid over time, and has a set dollar amount. Therefore they do not give as good credit as a credit card that has no set payments.
What doesn’t have an affect on your score?
Marital status, Age, Receipt of public assistance, Income, pension, Occupation, Employment history, Student, Race, Age, Rental agreements, Participation in a credit counseling program, Money in the bank.
Your Credit Score plays a huge role in your finances. Make sure to keep an eye on it to certain that you are on the right track.
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