Credit scores can have a profound impact on our finances. For example, a good credit score could mean better terms on your loan. It could also be the difference between being approved or denied for a loan in the first place.
When we talk about credit scores, there are typically two significant players, FICO and VantageScore. Each uses similar factors to determine your credit score within their system.
But, what is a credit score, and what is a good credit score to have? Let’s go through all the in’s and out’s of credit and how it can affect your finances.
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Let’s start by first defining what a credit score is. Essentially, a credit score is a number ranging from 300 to 850 to help lenders determine the likelihood that you’ll pay your loan back to them. Lenders will consider your score when applying for a credit card, mortgage, auto loan, or even by a landlord when you are looking to rent a property.
Many factors can impact your credit score. Some more than others, but each aspect is just a piece of the puzzle when lenders look at the risk level associated with lending you their money. Some common factors when determining your credit are:
Paying Your Bills – More precisely, paying your bills on time will have a significant impact on your credit score. In addition, keeping up with all bills, including credit cards, utility bills, cell phone bills, mortgages, and any other bills you might have, will boost your score significantly.
Your Debt – The amount of debt you are carrying will also affect your score. There is more to it than the amount of debt, but the easiest way to think about it is the less debt you have, the better.
Credit Card Usage – Credit cards can be a double-edged sword. Using them will help build credit, but too much will hurt your credit score. You want to continue using and paying off your credit card each month, but try to keep the number of charges well below your credit limit.
Credit and Loan Applications – Applying for credit cards or loans will result in a credit check run on your information. A hard credit check will lower your score, so don’t apply for more than one or two credit cards and keep the loans to a minimum as well.
When determining your credit score, FICO and VantageScore will not take the following factors into account:
- Marital Status
- Salary and Occupation (although lenders may consider these)
- Where You Live
- Soft Credit Inquiries
It is illegal to include race, religion, nationality, gender, and marital status when determining your credit score.
Getting your credit score is a relatively straightforward process. You can get a full credit report from each of the three credit bureaus once per year from AnnualCreditReports.com. Reviewing your credit report each year is an excellent way to find discrepancies or wrong information that may be hurting your credit score.
There are many online options to see your credit score, and many are free. Some of the more popular options include CreditKarma.com, Credit.com, CreditSesame.com, and Wallethub.com.
Having a good credit score can be beneficial for several reasons. Most of these reasons revolve around your ability to secure getting new loans. Having a higher credit score will make it easier, in general, to get a new loan. A higher credit score can also make the terms of any new loan better for you. Better terms could include:
- A higher loan amount.
- Lower interest rates on the loan.
- Lower fees associated with your loan.
Although loans are the most common use for your credit score, landlords also have an important use for your credit score. When you apply to rent a house or apartment, landlords have the option to check your credit score to determine how risky it could be to rent their property out to you. Having a higher credit score could give you a leg up on other applicants for the same property.
A FICO score is typically a score in the range of 300 – 850. FICO (Fair Isaac Corp.) introduced its scoring method in 1989 and used data from all three major credit bureaus. As a result, there are several ratings credit scores can fall into in the FICO rating system: poor, fair, good, very good, and exceptional. These ranges are as below:
Poor: Less than 580
Fair: 580 – 669
Good: 670 -739
Very Good: 740 -799
A “good” FICO score lies between 670 and 739. In 2021, the average credit score was 716, which falls into the “good” range according to FICO.
VantageScore also uses data from Equifax, Experian, and TransUnion to determine a credit score for consumers. Although using similar factors, your VantageScore credit score can differ from your FICO credit score. VantageScore also uses a similar range of 300- 850 with the following categories of credit scores:
- Excellent: 750 to 850
- Good: 700 to 749
- Fair: 650 to 699
- Poor: 550 to 649
- Very poor: 300 to 549
VantageScore also uses Tiers for consumer credit scores:
- Superprime 781-850
- Prime 661-780
- Near prime 601-660
- Subprime 300-600
For VantageScore, a “good” credit score will fail in the 700-749 range.
To improve your financial fitness and credit score, you should focus on the factors the FICO and VantageScore use when determining your score. Here are some steps you can take to help improve your credit score.
Pay All Your Bills On Time: Making at least the minimum payment due on any bill on time is crucial in improving your credit score. Missed or late payments can stay on your credit reports for several years. So even if you can’t pay the bill in full, showing creditors that you’ll pay something instead of nothing is a big help.
Keep Credit Card Balances Low: Another critical factor in your credit score is the amount of credit you have vs. how much of that credit you are using. Keeping your credit card utilization rate below 10% can significantly increase your credit score.
Have Fewer Accounts: When determining your score, FICO and VantageScore will look at the number of accounts you have open and how long you’ve had them. Accounts like checking or savings accounts don’t affect your score. The accounts we are talking about are credit cards, loans, or others debts. Having too many open accounts can be a detriment to your score. Whenever possible, consolidate loans into one lump sum if possible. Newly married couples should make a strategy for merging accounts.
Don’t Apply for More Credit: The simple act of applying for credit can lead to a hard inquiry on your credit which can hurt your credit score. Instead, only apply for new loans or credit cards if necessary.
As mentioned above, too many open accounts can hurt your credit score. You won’t have too many open by not applying for new accounts. FICO and VantageScore will consider the average length of your accounts when determining your credit score. By opening new accounts, you’ll be lowering the average length considerably.
Scores under 630 typically fall in the bad credit range. If your score is in this range, review the steps above to help improve your score.
Typically a “fair” credit score falls in the 630-689 range. However, a credit score in this range can still make securing loans with better terms challenging. Therefore, if your score is considered “fair,” you should consider taking the steps above to improve your score.
Having a score near 700 will be considered to be “good.” Although there is still room for improvement, consumers in this range will typically be able to secure loans relatively quickly with favorable terms.
An “excellent” credit score is any score above 720. Typically, getting your credit score above 800 will get you the best possible terms when applying for new loans or credit cards.
This article by Jeff Cooper originally appeared on Wealth of Geeks and, was republished with permission.
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