May 19, 2012. Bill Szydlowski
credit: kevindooleyIf you’re asking yourself “what is an excellent credit score,” a little research will tell you that it’s somewhere around 760. Anyone who has a FICO score around that figure can benefit from the best interest rates and the best terms on loans.
The credit bureaus, the banks, and other lenders consider those people to be reliable when it comes to managing money.
But exactly how are these credit scores arrived at? There are various factors that determine them – some are mysterious and some are straight-forward. Let’s take a look.
It can take quite a long time to achieve a good credit score, as it’s created over years. This is one reason why young people have poor credit scores; they simply haven’t used credit long enough. Creditors figure that the longer you’ve been paying bills and handling finances, the more likely you are to continue that pattern, meaning that a good credit score is largely based on past behavior.
One big factor that influences your score is whether or not you pay bills on time. Even one late payment can adversely affect your score so you must be consistent. Many companies today have quick processing times on payments received which means that a payment can be reported as late within a short time after its deadline. Although some companies have a grace period, these are becoming less common. So if you do nothing else to improve your score, paying your bills on time will go a long way towards helping you build a better credit rating.
Your credit-to-debt-ratio is also important when it comes to determining your credit score. The more available credit that you have which isn’t being used, the more the credit agencies like it. That sends your score up the scale. For example, if you have available credit of $10,000 but never come close to using all of it, this will actually help you. Lenders assume that this means you’re managing your debt well and don’t really need to borrow at all; and so your credit score goes up again.
Having a good credit score is essential, having a high credit score is even better. Although it can take a long time to work up to that goal, it’s worth it. You’ll find that out as soon as you apply for a car loan or a mortgage refinance. The amount of money you can save when you have an excellent credit score can be in the thousands.
Updated May 19, 2012. Published July 6, 2011. Bill Szydlowski
