A good credit score is important.
A good score helps you get better rates on loans and credit cards. Plus, potential employers, landlords, and even cell phone companies might look at your rating before doing business with you.
What’s not important? Chasing after the perfect score.
How does the rating system work?
Credit scores can range anywhere from 300 to 850 – and any score under 620 is typically considered “high risk.”
Why? In a nutshell, your credit score shows potential lenders if you’re capable of paying your bills on time.
The higher your score, the more trustworthy you’re considered to be.
There are 3 major credit bureaus that provide this information: Equifax, Experian, or TransUnion.
Each of the bureaus uses your borrowing history to calculate a credit score, but they’re all not necessarily the same. Lenders don’t usually provide information to all 3 bureaus.
That means you could have a 575 with Experian and a 625 with TransUnion, depending on what’s been reported to them.
What affects your credit score?
Here’s what plays a role in your credit rating:
- Bankruptcy – Declaring bankruptcy will get you blacklisted from many lenders. If nothing else, your interest rates will be sky-high.
- Late payments – Some credit cards will give you a “grace period,” but if you’re late too many times, they’ll report you to the credit bureaus.
- Collection accounts – When you’re more than a few months late in paying your bills, you’ll get sent to collections. This is a no-go as far as credit is concerned.
- High balances – Best bet? Pay off your credit cards at the end of every month.
- Too little credit history – If you’re just out of high school and you’ve never borrowed before, you may have a tough time. Lenders like you to have a few years of consistent payments under your belt before they give you money.
- Not enough credit – This is one of those tricky ones. You would think that having too many open accounts would be bad. Lenders actually want to see that you have a lot of credit available and that you don’t use it all.
On the naughty list? It’s easy to improve your rating: just pay your bills in a timely manner and keep your debt to a minimum. It can take time, but it’s doable.
Do you really need an 850?
To put it simply: no. Credit is one of those things where good enough is good enough. Once you’ve reached 760, you’re golden. You’ve maxed out.
As far as lenders are concerned, there’s no difference between you and the guy who slaved away to get an 850.
Bottom line? A perfect credit score isn’t necessary to get the best possible lending rates or terms.