Although most American adults don’t give it a second thought, but your individual credit influences a number of factors that affect your day to day life.
A credit score, which is commonly referred to as a FICO score, is traditionally associated with one’s ability to secure a new car loan or a mortgage. However, did you know that your credit score has a direct impact on your ability to secure a rental property or employment? Prospective landlords and employers alike will request your permission to review your credit history because it serves as a hallmark of how financially responsible you are. If you can demonstrate fiscal responsibility, it can help you out in more ways than one.
What goes into calculating a FICO score?
Your personal credit score is calculated using five specific components. Although the specific formula is a closely guarded secret, here is a brief look at the elements that matter most:
- Payment History. Payment history is defined as your ability to pay your bills on time, and it accounts for 35% of your FICO score. An occasional late payment will not be that harmful, but multiple delinquent accounts will.
- Credit Utilization. Credit utilization is defined as the amount of available credit you have that you are using. Most sources believe that credit utilization accounts for about 30% of your credit score. Credit reporting bureaus favor candidates who use less than 30% of their available credit.
- Credit Age. Nearly 15% of your credit score is comprised of your credit age, which is the average length of time that you have had all of your credit accounts. Old accounts in good standing will go a long way in improving your credit score.
- New Credit Accounts. 10% of your credit score is comprised of the number of new credit accounts you have. Your credit score can take a short term hit when you open a new line of credit because it requires a hard inquiry.
- Credit Mixture. Lenders like to see an even mixture of installment and revolving accounts in good standing. Credit mixture accounts for about 10% of your total credit score.
Average Credit Limits, By Credit Score
Your credit score directly affects the amount of credit you are able to obtain from a credit lender when you apply for a new line of credit. The higher a person’s credit score is, the higher your credit limit will be and the better your interest rates. If you have a lower credit score, your credit limits will be significantly lower, and your interest rates will be higher.
Here is a look at the average credit limits for American adults (per financial data from Experian in the first quarter of 2015) based on their credit score:
- 781-850 (Super Prime) – $9,543.00
- 661-780 (Prime) – $5,209.00
- 601-660 (Near Prime) – $2,277.00
- 500-600 (Subprime) – $966.00
- 300-499 (Deep Subprime) – $509.00
How to Boost Your Credit Limit By Improving Your Credit Score
If you want to boost your credit limit, the most straightforward method will be to improve your credit score. While this is often difficult because we do not know the precise formula used to calculate credit scores, there are several steps you can take to begin improving your score.
First and foremost, you should examine your credit report. Every American adult over the age of 18 is allowed to access one free credit report each year – from each of the three primary credit bureaus. What you need to look for on your report are any errors or inconsistencies between the three different reports. Unfortunately, errors are not uncommon. If you happen to notice an error and are able to rectify it in a timely fashion, then you will boost your credit score, and consequently, your credit limits.
Next, you need to concentrate your efforts on credit utilization, particularly if it is over 30% of your currently available limit. Using credit is to pay for bills and other necessities is popular because of the convenience it affords; however, if you are trying to make a dent in the amount of money that you owe, consider switching to cash to pay for the items you buy – at least temporarily.
In a similar fashion, you should carefully devise a budget to follow. This significantly increases your ability to pay down debt and save money because it acts as a safeguard against discretionary spending.
Last, but not least, for individuals who need quick improvement for subprime credit scores, consider discussing a potentially unpayable balance with your credit lenders. Pride often keeps people from admitting that they cannot pay a bill; however, most lenders are more than willing to work with a borrower and formulate a repayment plan rather than have their account sent to a collection agency. In the long run, doing so will be much better for your credit score.