Your credit score is an important number, and the higher it is, the better. A high credit score helps you qualify for the lowest interest rates on loans and the best credit cards with the most perks. In most states, it could even get you lower rates on home and auto insurance.
Technically, your credit score is a simple way to rate your creditworthiness — how likely you are to repay money you borrow. So it might seem like your net worth or income will factor into your score. Luckily, that isn’t the case.
You don’t need to be rich to have a high credit score
Your net worth, income, and how much money you have in the bank aren’t factors that affect your credit score. The credit reporting agencies that calculate your credit score have a scoring system they follow. They look at how you’ve managed credit, not how much money you have.
You could have an excellent credit score on a low salary. For a firsthand example, I had a score of 780 even when I was making a below-average income and had hardly any savings. Because of that, I was still able to get approved for travel credit cards that helped me save some money on vacation costs.
It’s also possible for wealthy people to have bad credit. No matter your financial situation, you need to manage your credit well to have a high credit score.
What impacts your credit score
Credit scores might seem mysterious at first, but how they work isn’t too complicated. Your FICO® Score, which is the most widely used type of score by lenders, consists of five factors. FICO has provided information on each factor online, including how heavily weighted they are.
Payment history (35%)
The No. 1 factor in your credit score is your payment history. If you consistently make credit card and loan payments on time, that’s good for your credit. If you pay late or have any accounts that have been sent to collections, that can cause a huge drop in your credit score.
The good news is that payments aren’t considered late on your credit history until they’re at least 30 days past due. If you miss your credit card payment by a couple of days, it won’t hurt your credit.
Amounts owed (30%)
Your amounts owed are your credit card and loan balances. For credit-scoring purposes, what matters most is your credit card balances, and specifically your credit utilization. That’s the percentage of your credit limits that you’re using each month.
For example, if you have one credit card with a $500 balance and a $1,000 credit limit, you’ll have 50% credit utilization. That’s on the high side. To avoid hurting your credit score, it’s generally recommended to keep your credit utilization under 30%.
Length of credit history (15%)
A longer credit history is better for your credit score. FICO says that it specifically considers:
- How long you’ve had your credit accounts, including the age of your oldest account, newest account, and the average age of your accounts
- How long specific credit accounts have been established
- How long it has been since you’ve used certain accounts
Credit mix (10%)
Your credit mix is the type of credit you’re using, such as credit accounts and installment loans. A more diverse credit mix is better.
Keep in mind that you don’t need a mix of different credit products to have a high credit score. This factor doesn’t have a huge impact, so you shouldn’t apply for a loan and pay interest charges just so you’ll have a diverse credit mix.
New credit (10%)
New credit refers to how many recent credit inquiries you have. A credit inquiry is put on your credit file when you apply for credit. People who open credit accounts often are considered a higher risk. For that reason, new credit inquiries can have a small negative impact on your credit score.
How to get a high credit score
There are only a few steps you need to take to build your credit:
- Always pay your bills on time.
- Avoid overspending on your credit cards — try to keep your credit utilization below 30%.
- Don’t apply for credit cards or loans too often.
Being financially stable can help you better manage your credit. It will be easier to make payments on time, and you won’t need to borrow money to make ends meet. But you can get a high credit score at any income and level of wealth.