The proverb “out of sight, out of mind” describes the human tendency to forget whatever is not easily visible or obvious—a saying that rings true for many Americans when it comes to their credit scores. After all, it’s entirely possible to go about your day-to-day business without needing to think much about your rating. It’s not like people’s credit scores float above their heads in neon signage for the world to see! For the most part, you can get along without constantly needing to think about your rating.
But then you inevitably find yourself applying for something—a mortgage, vehicle loan, line of credit, apartment, etc. And suddenly your credit score, that number between 350 and 850 that’s so easy to forget about, comes under serious scrutiny from lenders. They’re using your score to assess how risky it is to loan you money, something that can make or break whether you’re approved or denied.
Take the time now to learn more about how credit scoring works so you can take control of your financial future and know your options when it comes to getting credit-based approvals.
What Factors Affect Your Credit Score?
Credit scores are primarily made up of five weighted factors, each comprising a percentage of the total. According to Investopedia, these five elements count toward your credit score:
- Payment History: 35 percent of your score depends on your track record of repayment, including timeliness and negative events (like charge offs, bankruptcy, settlements, foreclosure, etc.) The more recent your missed payments, the more drastically they’ll affect your history.
- Amount Owed: 30 percent of your score considers the debt you carry, including how it stacks up against the total amount of credit you could carry—also known as your credit utilization ratio.
- Credit History Length: 15 percent of your credit score boils down to how long you’ve been using credit; your longest-held account and the average age of all your accounts will factor in here.
- New Credit: 10 percent of your account examines your recent behavior, including how many new accounts you hold and any new lines of credit for which you’ve applied. Excessive recent activity can point to cash flow issues, raising your riskiness in the eyes of lenders.
- Types of Credit in Use: The final 10 percent of your score looks at the kinds of credit you’re carrying: credit cards, store accounts, installment loans, etc. A healthy mix is desirable, but it’s better to have fewer accounts that you keep up with consistently than many accounts you neglect.
Why Does Your Credit Score Matter?
Credit score comes into play whenever institutions—like lenders or landlords—need to understand consumers’ level of riskiness. In other words, it helps financial institutions gauge the likelihood of an applicant paying back what they borrow. This is why carrying a good or excellent score will help your cause.
Whether or not you ultimately receive approval for financing depends on the type of loan, its amount and the lender. Say you’re one of the many Americans currently searching for their next set of wheels, a big-ticket purchase for which most people require some assistance. Having good credit will certainly make the process easier—and help you get better terms on your loan from dealerships. But having poor credit doesn’t mean you’ll automatically receive rejection. Some lenders like RoadLoans provide car loans to people with a wide range of credit scores.
What helps is understanding the requirements before applying for any type of financing or housing, and keeping a watchful eye on your credit score over time. Anything above a 700 is desirable, though the higher the better. Fair credit ranges from about 640 through 699. Anything below 639 is either poor or bad, so it’ll