[C]redit scoring is a confusing topic, even to some seasoned financial experts. We commonly receive questions such as, are high credit scores good? A simple way to understand credit scoring is by comparing it to grades in school. The higher those numbers, the better off you are. There is a specific formula used in calculating credit scores, so understanding exactly what financial behaviours affects a rating is critical to generating high credit scores.
Credit scoring scales run from 300 to 990, though most companies now use a scale ranging from 350 to 850. Most lenders will use in-house formulas and also check with a major company such as Fair Isaac Corporation. Fair Isaac is better known as FICO and is the major supplier of credit ratings to the United States market.
You may also want to know what creates a good credit rating. Paying your credit cards and loan accounts on time is a great start but not enough to generate a high score. The amount of money you owe plays a major role in your rating, whether a lender uses FICO to calculate the level of financial risk you pose, or checks with another major credit agency such as Equifax, Experian, or TransUnion.
Hopefully you owe no more than 50 percent of your available credit cards limits – and owing 33 percent or less is even better. In other words, your balance due on a credit card with a $1,000 limit should never exceed $500, and should ideally be around $300. Less is more in this aspect of the credit scoring game.
One way consumers can ensure they receive consistently high credit scores, is to avoid constantly applying for new accounts. Every time you apply for more credit, you decrease your credit rating. Also, new accounts temporarily pull down your credit score. The length of your credit history plays another important role in whether you have a high or low credit rating. Also, some lenders will not issue new accounts to people who recently applied for a lot of new credit.
