If you are new to the credit market arena, it's not unusual to ask: "What's a good credit score?" After all, if you expect to receive the best interest rate possible, it's helpful to know how lenders view this most important factor in your financial life. Let's start by acknowledging that your credit score is a calculation of your credit worthiness and represents the level of risk a lender is willing to take when lending you money. The lower your credit score is, the higher the risk you are to the lender. Credit scores range from 350 to 850 with most ranging between 500 and 700. Lenders have different standards, but generally a "poor" score is usually between 500 to 600, an "average" score is between 600 to 680, and a "good" score is above 680. If you want the best consideration when applying for a loan, scores of 720 and above will probably get a person the best interest rates on a home mortgage. It takes time to build a good credit score because a big part of the calculation depends on the length of time you have been using credit responsibly. But one false move, like missing payments, can undo all the good history you have built up. You are therefore better off having made at least some payment on an account, even if it is only the minimum payment, rather than missing a payment. Missed payments can put you in a hole regarding your credit score. But you should also be aware that there are factors other than missed payments which can adversely affect your credit score. Over-extending your credit (that is, taking on more debt than you can reasonably manage) will also negatively affect your credit score. Another thing to keep in mind is that there are three separate areas that credit scores address: mortgage credit, auto loan credit, and personal or consumer credit (credit cards). The credit score for the same borrower may differ by as much as fifty points or more for any of these three areas. It is also helpful to understand that the credit score offered to consumers by the credit agencies when a person requests information about their credit record is their consumer credit score, not their mortgage or auto loan credit scores. As important as knowing what a good credit score is, it is also important to know how you can affect your credit score in a positive way. If there are errors on your credit report, it is important that you begin to address these errors with the credit agencies and companies reporting them. There are other actions you can take which will help you to increase your credit score, but be prepared to spend some time building your score back up. One important option is to pay what you can on your debt rather than moving it around. Consolidating your credit card debt may be tempting, but it could lower your credit score. Here's why: keeping your account balances between 25% and 50% of your available credit signals a responsible borrower. For example, if you have a credit card with a $2000 limit, you should keep your debt below $1000. The ratio of your credit card balance to your credit card limit will increase if you pile all of your debt into a couple of accounts, rather than keeping it spread out over several. For example, if you have three credit cards with limits of $2000 each, and you owe a balance of $1500 on all three combined, you have a total credit limit of $6000 on which you owe a balance of $1500. That's a debt to credit limit ratio of 25%. But if you consolidate your $1500 debt onto one card with a $2000 limit, you increase your debt to credit limit ratio to 75%, an unfavorable factor in your overall credit score. For this reason, the best solution is to simply pay off your existing cards as quickly as possible. Paying off your debt in a timely manner, building a solid credit history over a lengthy period of time, and erasing errors from your credit reports can all help you make the most of your credit score and, in the end, make the most of your money.
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