What Is Excellent Credit?

Fran
Lucy Lazarony
October 7, 2020

Borrowers with excellent credit have the absolute, tip-top credit scores. What is a credit score? A credit score is a three-digit score based on information in your credit report. A credit score helps lenders determine how likely you are to repay a loan. The better your credit score the lower the interest rate you’ll pay on the money that you borrow. A borrower with excellent credit would get rock-bottom interest rates when applying for a loan.

How is a credit score calculated? There are five main credit categories. Your payment history counts for 35 percent of your credit score, how much you owe counts for 30 percent, your length of credit history counts for 15 percent and new credit counts for 10 percent and credit mix counts for 10 percent. A borrower with excellent credit would sail through each of these categories with flying colors. Let’s take a closer look at what makes excellent credit.

What Makes Up A Credit Score

As mentioned above, there are five main credit categories that are used in calculating credit scores.

Payment History. Your payment history makes up 35 percent of your credit score. People with excellent credit pay their credit bills on time and have been doing so for years. Credit cards, retail accounts, installment loans, finance company accounts and mortgage loans are all checked in this category. People with excellent credit have no past due items and all accounts are in good standing.

Amounts Owed. The amount you owe accounts for 30 percent of your credit score. This credit category looks at the amounts owed on all accounts, amounts owed on different types of accounts, how many accounts have balances and the percentage of credit you are using. Having low or no balance is good for your credit score. People with excellent credit are not bothered by high credit card balances. Their balances are low if they exist at all.

Length of Credit History. Your length of credit history accounts for 15 percent of your credit score. This credit category checks how long credit accounts have been open including the age of your oldest account, age of your newest account and average age of all accounts. In addition, how long specific credit accounts have been opened is reviewed and examined. People with excellent credit have a very long and positive credit histories. They have been paying their bills on-time for a very long time.

Credit Mix. Your credit mix makes up 10 percent of your credit score. What is a credit mix? A credit mix is the types of credit that you have. Your mix of credit accounts can include credit cards, retail accounts, installment loans, finance company loans and mortgage loans. Lenders like to see your ability to manage different kinds of credit. If you do a good job managing different kinds of credit then you are seen as a lower lending risk. People with excellent credit would have a variety of credit accounts that were paid off on-time.

New Credit. New credit accounts make up 10 percent of your credit score. Opening several new accounts in a short period of time looks risky, especially if you don’t have a long credit history. People with excellent credit don’t open accounts too rapidly. They built up their credit slowly over the years.

Categories of Credit Scores

The most well-known credit score is the FICO score, which was created by Fair Isaac Corporation. FICO scores range from 300 to 850. Scores ranging from 300 to 579 are considered very poor. Scores ranging from 580 to 669 are labeled fair. Scores ranging from 670 to 739 are considered good. Scores with a range of 740 to 799 are labeled very good. And finally scores from 800 to 850 are excellent and people in this category receive the best rates from lenders.

Impact of Credit

As mentioned, your credit score will help to determine the rate that you will pay on a mortgage or car loan. It may even have an impact on the amount you can borrow. The best rates are reserved for borrowers with the best credit, those folks with excellent credit, and they’ll be approved for big cushy loans as well if they want them

But it is not just lenders that look at your credit, auto insurance companies look too. Potential landlords, potential and current employers, utilities companies, smartphone providers all check your credit reports. Good, bad, excellent credit it all makes a difference in these areas as well. Let’s see which companies are taking a look at your credit.

Auto Insurance Companies. In most states, auto insurance companies use consumer credit data for assigning risk pools and to set insurance rates. Drivers with excellent credit records get the best auto insurance rates. And drivers with poor or no credit pay the highest insurance rates. Only in Hawaii, California and Massachusetts are credit scores restricted from being used by auto insurance companies. Everywhere else your credit is being scrutinized for your auto insurance rates. So pay those bills on-time, keep balances low, avoid getting over-extended with your credit and only borrow what you need. All these things will help to build up your credit score, which will help to lower your auto insurance rate.

Potential Landlords. Looking for a place to live? Your potential landlord may be looking at your credit report. They may want to see evidence that you’ll be able to make your rent. And a strong payment history and lots of paid on-time accounts would help to prove it to them.

Potential and Current Employers. A potential employer may check your credit report before making a hiring decision. So if your credit is bad, they may think twice about hiring you. And someone with good credit would get the green light. A current employer might review your credit report before giving a raise or a promotion. So your credit can have quite the impact in your work life.

Utilities Companies. Before you establish utilities, the company will check your credit report and they may charge a security deposit if you have any negative information such as a bankruptcy. So moving to a new place just got more expensive if your credit is not good.

Smartphone Providers. Most smartphone providers will check your credit before approving you for a contract. Like lenders, smartphone providers pull your credit in order to evaluate your risk. They want to see how likely it is that you’ll pay your bill on-time.

How To Read a Credit Report

We’ve heard a lot about credit reports and lots of people are out there looking at them. Here’s how to read one.

Credit reports have four sections: personal information, credit history, public records and credit inquiries. Let’s look at each.

The first section has your personal information. Your name, current and past addresses, Social Security number and date of birth are all here.

The second section has your credit history. You’ll see all your open and closed credit accounts and your record for paying them.

The third section is public records. You’ll find property liens and any bankruptcies listed here.

The fourth section is credit inquiries. Everyone who has checked your credit in the past two years such as employers, landlords and lenders will be listed here.

Ready to check your credit report? Visit AnnualCreditReport.com for your free annual report from each of the three major credit reporting bureaus. Review the contents carefully, especially the credit history section. Do recognize all the accounts? Is your payment record accurate? If you see an error, you’ll need to reach out to the credit reporting bureau and the company that reported the error. Under the Fair Credit Reporting Act, both these parties are responsible for correcting errors on credit reports.

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