How to build and maintain a strong credit rating
From Metro Creative Services
A strong financial history benefits consumers in myriad ways.
Individuals with a history of paying their bills on time and avoiding significant consumer debt may be eligible for lower interest rates on big ticket items like homes and automobiles, potentially saving them tens of thousands of dollars over their lifetimes.
Though there are many ways to build a strong financial history, avoiding debt is always part of that equation. Credit scores are used to determine consumers’ creditworthiness in the eyes of lenders and can affect eligibility for loans and the terms of those loans.
Understanding credit scores and how to build and maintain a good credit rating can be vital to individuals’ financial futures.
What is a credit score?
A credit score is a three-digit number between 300 and 850. The higher the number, the better an individual’s credit rating is. The lower the number, the less creditworthy consumers become in the eyes of lenders.
What is the average credit score?
According to Equifax, which along with Experian and TransUnion is one of three credit reporting agencies, the average credit score in the United States in February 2021 was 698.
Is 698 good?
There’s good news and bad news for American consumers. The average rating falls into the “Good” range. However, consumers should aspire for scores that are higher than the average. A credit score above 720 is considered “Excellent,” and the online financial resource Nerd Wallet reports that individuals with scores above 750 are in even better shape. Such individuals may have access to financial products or be eligible for loan terms that people with lower scores are not privy to. Making the most of those advantages can save consumers considerable sums of money over the course of their lifetimes and may help them build the type of generational wealth millions of people aspire to.
How can individuals achieve high credit scores?
The best way to build and maintain a high credit score is to understand the factors that influence that score. FICOTM is a data analytics firm that provides credit scoring services. Equifax notes that FICO scores consider five categories from individuals’ credit histories:
• Payment history
• Amounts owed
• Length of credit history
• New credit accounts
• Mix of credit used
Each of these categories are weighted, and none bears more significance than payment history. Consumers who have demonstrated an ability to pay their bills on time and limit the amounts of debt they carry at any given moment are doing themselves a favor as they look to achieve and maintain a high credit rating.
Is all debt the same?
It’s important that consumers distinguish consumer debt from student loan debt. Though each type of debt will be reported to the three major credit bureaus, student loan debts that are paid on time each month are generally considered “good debt” because they demonstrate an individual’s ability to make installment payments on time over a significant length of time. That’s what consumers will need to do if they hope to purchase a home in the future and finance it with a mortgage loan.
Unlike student loans being repaid in installments, consumer debts like credit card balances must be paid in full each month for consumers to avoid potentially hefty interest charges. Consumers who can’t pay those balances in full each month are not demonstrating creditworthiness in the eyes of lenders, and that will have an adverse effect on their credit ratings.
Understanding credit and how to build and maintain a strong rating is vital to individuals’ financial futures.