Having a high credit score is important. If, until now, you are not aware of this fact, then you might be missing out on a lot of financial opportunities. You need to make time to understand how this three-digit number can influence your financial future.
While having a high credit rating is a great financial position, you also have to understand how you can continue to use debt to your advantage. In a consumerist society such as ours, it is hard not to use credit. It gives us a convenient way of paying for products and services that we need on a daily basis. It allows us to buy expensive purchases so we do not have to wait a long time to save up for it. For instance, if you want to buy a house, it is next to impossible to save for it so you can buy it in cash. Instead of paying rent each month, it is better to just borrow a mortgage. The money allotted for your rent can be used to pay your monthly amortization. Instead of giving your hard-earned money to your landlord, you are putting it towards the equity of your house.
These are probably the reasons why a lot of Americans continue to use debt despite what they went through during the Great Recession. According to the data provided by the NewYorkFed.org, the average household debt increased during the first quarter of 2016. The amount, as of March of this year, is already at $12.25 trillion. It is 1.1% higher than the last quarter of 2015. Although the data revealed that this is still 3.3% below the peak of the debt balance in 2008, the fact remains that it continues to increase.
Most of the time, people associate a high credit balance with a lower credit score. This is not always true. According to the latest data from Fico.com, the national FICO score average is at an all-time high. It is 699 in April 2016. This is a 3 point increase from October 2015 – 6 months before.
What does this mean?
There are a couple of assumptions that we can make about this.
The first is that people are in a better financial position. That makes them more confident about borrowing money. But despite the increase in the use of credit, they have also learned their lesson when it comes to their debt responsibility. They practiced good payment behavior and that probably contributed to the high credit score average that we are experiencing right now.
Can you have a high debt balance and still maintain a high credit score?
These data proves that, yes, it is possible for you to have a high debt balance and still have a good credit rating. However, it is very important for you to remember that this comes with certain conditions.
The truth is, you cannot have a good credit score if you do not use credit. You need to find a balance when using credit because it can raise your credit score but it can also easily destroy it. Here are the conditions that you have to keep in mind if you have a high debt balance and yet you want to have a high credit score.
You should be able to pay your dues on time. While it is okay to borrow debts, you need to pay it off in time to give your credit score a boost. That means creating a payment plan that you will stick to. You should align your payment and budget plan so you can allocate an amount for your debt payments. Take note that your high debt balance can be used to help you build a good credit score. But if you fail to use it wisely, it can cause your credit rating to go down as well.
You should stop taking in more debt until you have lowered your credit utilization to 30%. Another condition is to stop taking in more debt until you have reached a 30% credit utilization. According to the experts, this is the healthy credit balance to limit ratio. It means that if you have a $10,000 credit limit, your debt should never go beyond $3,000. In case you have gone beyond this limit, you should stop accumulating more debt and wait until your debt is lower before thinking about using more credit.
You should avoid closing any credit card account. Finally, you should also avoid closing any credit card account – even if you have no plans of using it anymore. The old accounts are usually helpful in giving you a high credit score. Some people think that they should close their accounts after the last credit card payment is made. This is not always helpful. If you want to avoid the temptation of using your card, simply remove it from your wallet and leave it at home. You do not have to close it because that could lower your credit score.
These are only some of the conditions that you should follow so you can let your debt balance rise without compromising your high credit score. Take note that this increase in debt should be caused by a one-time expensive purchase that you cannot pay off at the end of the month. Ideally, you should look for the best payment terms like a 0% installment plan or something. This should help keep your high debt from bringing your score down.
How does your debt situation influence your credit score?
In an article published on CBSNews.com, it is revealed that Americans should be more conscious of their credit rating. The Federal Reserve increased the interest rate in 2016 and you can bet that everyone else in the financial industry will follow. This means your credit card rate can go up and any loan that you will borrow may be imposed with a higher interest rate. A high credit score can help you avoid the inconvenience because it can help keep your credit interest down.
When you have a good credit score, that signifies a couple of things about you as a borrower.
- You pay your dues on time. Your payment behavior influences 35% of your credit score. You can be trusted to pay back your loan if you show lenders that you have a good payment history.
- You have gone through different types of debt. The type of credit that you have used before is another thing that will speak volumes about your credit management abilities. If you have borrowed student loans, a mortgage and you use credit cards, this will signify that you qualified to open these credit accounts. Not only that, it will also prove that you know how to handle different debt types without encountering problems.
- You can manage your finances well. Finally, a high credit score shows that you know how to manage your finances well enough to avoid debt hell. The lack of debt does not really indicate that you are great with your finances. It could mean the opposite – you do not have the discipline to manage your money well. When you have a high credit rating, that means you are unafraid to use credit because you know that you can control yourself so you will not abuse it.
The fact remains that a high credit score is something that you need to work hard to achieve and maintain. Of course, this is on a case to case basis. There are some instances when it is okay to let your credit score drop – if it means you can improve your debt situation (e.g. debt settlement or bankruptcy). You need to weigh your options based on what you think will benefit your financial future the most. It is possible to improve a low credit score. You just have to think about your priorities.
Common questions about a high credit score
Question: What gives you a high credit score?
Answer: A high credit score can be achieved if you display good credit management behavior. This means you are a responsible credit borrower and you know how to use it to your advantage.
Question: What is a high credit score range?
Answer: A high credit score range will depend on the formula that you will use. Different credit scores have varying ranges. A fair credit score may be a good one to another. In a FICO model, a high credit score means having a score that is higher than 750.
Question: What does a high credit score mean?
Answer: This means you pay your credit dues on time. It also means you have used different types of credits without compromising your finances. A good credit score usually means you can be trusted to borrow money and pay it back.
Question: Why do you need a high credit score?
Answer: When you have a high score, you are considered a low-risk borrower. This means the lender or creditor does not need to protect themselves against the possibility that you will not pay them back. They will give you a low-interest rate on any credit account that you will open.
Question: How high should a high credit score go?
Answer: This will depend on what type of debt you will borrow. Usually, a good credit score is enough – which in a FICO score model is 700 and above.