Credit Scores

What Is a Credit Score?

This is a number that tells lenders how likely you are to pay back loans. As you pay off or accrue debt, your credit score will fluctuate. The higher the number, the more chances you have to accrue debt.

Why would I want to accrue debt?

There are several things considered a necessity that would be considered debt. Some examples include a mortgage on a house and buying a car. Even student loans can be considered good debt.

Good debt vs Bad debt

Good debt is any debt with low interest rates that will help you achieve your financial goals. It can be viewed as an investment that will help improve your financial situation.

Student loans are considered good debt as they have lower interest rates and typically allow for you to earn more money over your career. This can be looked at as an investment towards your financial future.
House Mortgages also have lower interest rates and can work to increase your equity as you make payments.

Bad debt provides no value towards you. These purchases typically lose value over time and come with higher interest rates.

While credit cards can be a helpful tool to use to make purchases, as soon as you find yourself carrying over a balance each month, you cross over into bad debt category. With higher interest rates, you often end up paying more than what you initially spent, making it a bad investment.

What is a good credit score?

Between 670 and 739 is considered good, 740 – 799 is considered very good, and 800 - 850 is considered excellent.

How do they determine credit scores?

FICO uses a formula to calculate your score. The formula consists of paying your bills on time (35%), debt to credit ratio (30%), length of credit history (15%), new credit (10%), credit mix (10%).

Paying your bills on time (35%) – Paying your bills on time can hurt your score and paying on time helps raise it.
Debt to credit ratio (30%) – This looks at the ratio of credit card balances to credit limits. The lower you keep your outstanding balance, the higher your FICO score will be.
Length of credit history (15%) – The longer you can show that you are able to pay back your debts and manage your credit wisely, the better your credit rating will be.
New Credit (10%) – While you should keep credit lines to a minimum, adding a new credit line can add to your portfolio. FICO scores do distinguish between applying for one loan and applying for multiple loans.
Credit Mix (10%) – A mix of forms of credit can also add to your credit score. A mix can include mortgages, car loans, school loans, e.t.c.