When I think of a credit score, I remember a saying in the neighborhood when I was a kid: “Play the numbers.”
Back then “numbers” was a sketchy neighborhood gambling game that was 100% illegal though some adults thought was their way to easy money. Today, it’s called the lottery.
But another financial numbers game can have a serious impact on your life. Your credit score.
Credit scores are a numbers game based on an algorithm, maintained by credit bureaus, commercial entities that control and manage financial reporting data.
Quite simply, credit scores are a reflection of how much debt you have (finanical guru Dave Ramsey calls them your “I love debt score”), how long you have had debt, and whether you make timely payments on that debt.
Lenders consider credit scores that land between 300 and 579 less than optimal or “subprime.” Scores in this range considered for loans or other credit products will pay loan shark interest rates.
Subprime, second-chance lenders may approve scores in the 580 to 669 range but a consumer will still be paying higher than market rates. And scores between 620 and 669 may snag better interest rates but it’s a roll of the dice..and approval depends on the lender.
Credit scores that land between 670 and 793 will have a much easier time with credit approval and the interest rates will be competitive with credit card companies offering reward programs.
And scores in the coveted 740 to 800 and up range, are considered top tier. Interest rates paid will be attractive and often companies will court those sporting numbers on this end of the scale.
Your credit score is based on a number of factors:
1. Payment history – how often you pay your accounts on time
2. Length of credit history – how long you’ve had credit accounts
3. Types of credit accounts/credit mix – different types of trade lines, such as auto loan, credit card, student loan, mortgage
4. Credit utilization -how much of your available credit you’re using
Credit scoring is a numbers game so learn to play the numbers.
1. Pay your credit accounts by the statement date, not the due date.
2. Keep your credit utilization under 30%. If your credit limit is $200, the balance that hits your credit report shouldn’t be more than $60.
3. Hard credit inquiries hit your score hard. Limit them to two per year.
4. Collection accounts stay on your account for seven years. Avoid them.
Lenders use statistical models to predict the likelihood of borrowers repaying their debts based on these numerical inputs. The specific algorithms used to calculate credit scores can vary slightly between credit bureaus and scoring models (such as FICO and VantageScore), but they all aim to provide a numerical representation of an individual’s credit risk.
