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Why Reach for a Credit Score of 700 and More

By Ruth Racey
Published: Thursday, November 5th, 2009

Financial advisers suggest consumers to work on building a good credit score.  However, what is considered as a good credit score?  To answer this question effectively, we would need to take a closer look at how credit scores are calculated. 

The three major credit reporting agencies (Experian, Equifax, TransUnion) use different scoring models in calculating credit scores.  Experian makes use of the FICO scoring model which is based on five factors.  The FICO score ranges from 300 points (low) to 800 points (high).  Reaching a score of 800 will of course depend on how the person fares with each of the 5 criteria in the system.

What are the factors that can affect your final FICO score?  Thirty-five percent will depend on your payment history, which means paying bills on time can give you a credit score advantage.  Thirty percent will depend on how you use your credit limit, so if you always try to keep your balances much lower than your allowable credit, you can be assured of a better rating.

The other three factors are the length of your credit history, the types of accounts you have, and the number of inquiries in your report.  If you have been building credit for a long time, then that is another advantage for you.  Obviously, creditors would be a lot more confident in your capability to handle credit if you have an older financial history.

The types of account that you have in your financial report also matters in building a good score.  If you already have one or two credit cards, having a variation will boost your rating.  For instance, you may consider applying for a personal loan or a car loan to show your flexibility in managing your finances.

Finally, inquiries in your report can affect your FICO score.  Remember that each time you send an application to a lender or card issuer, an inquiry will be made from the credit bureaus.  These inquiries will also be reflected in your financial report.  Thus, having too many inquiries from different lenders can give a negative impression to a potential lender.  Consequently, this can pull down your score.

Lenders often consider a score of 700 points as a fairly good score.  If you can reach 750 to 800 points, you will have an excellent credit standing.  On the contrary, if your credit score falls at 600 or below, you will be considered as someone with poor credit history.  If you currently suffer from a poor score, it is never too late to work for improvement.

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