- 1 What is Considered a Good Credit Score?
- 2 FICO credit score range
- 3 How Does the FICO Credit Scoring Model Works?
- 4 Why Do You Need a Good Credit Score?
- 5 Factors That Affect Your Credit Score
- 6 Elements That Do Not Affect Your Credit Score
- 7 How to Maintain or Establish a Good Credit Score?
- 8 How to Improve Your Credit Score?
What is Considered a Good Credit Score?
There is no standard to determine the exact credit score that is widely accepted as a good credit score. It usually depends on what you are applying for. If you are applying for a mortgage, the credit score requirement is different from the one that is required for loans. Although there is no standard, people with credit scores above 700 are usually considered to have good credit scores.
The standard credit scoring model is the one introduced by the Fair Isaac Corporation popular called the FICO credit scoring model. There are several other scoring models, you may have come across some of them. We will, however, discuss the FICO model since that is what is widely used. The FICO credit score ranges from 300 to 800, the higher it is, the better your score. FICO has a guideline that can help you to interpret your score.
FICO credit score range
850 – 800: Exceptional
799 – 740: Very good
739 – 670: Good
669 – 580: Fair
580 and below: poor
How Does the FICO Credit Scoring Model Works?
Although the actual formula for calculating the credit score has not been revealed, these five categories make up the credit score. They are:
The payment history talks about how you make payments for loans and credit cards. If you make payments on time, you will build a good credit history that will improve your credit score. In the same way, missing payments will harm your credit score. The payment history contributes to 35% of your credit score.
This is the next largest category that influences your credit score. This is about the total amount you owe in relation to your credit limits. It accounts for 30% of your credit score.
Length of your credit history
This talks about the age of your accounts. They look at the age of your oldest account as well as the average age of your accounts. This accounts for 15% of your credit score.
This includes your newly opened credit accounts. Your new credit applications are also included in the calculation. If you make several new inquiries, it will affect your credit score negatively. This category accounts for 10% of your credit score.
The credit mix talks about the several different types of credit on your report. Lenders what to see how well you manage several different credit facilities. The credit mix includes mortgage, auto loans, credit cards, personal loans and several different types of credit. The higher the credit mix, the better it is for your credit score. Your credit mix accounts for 10% of your credit score.
Why Do You Need a Good Credit Score?
Your credit score helps lenders to make decisions concerning your loan applications. They will be able to decide if you can pay back the loan or not. Your credit score will help the lender to know the risk involved in offering you a loan. If you have a higher credit score, they can easily offer you a loan since the risk involved in lending to you is low. You will have many loan facilities available to you if you have a good credit score.
The credit score can also determine the rate that will be charged on the loan. Many lenders determine interest rates based on the risk involved in offering the loan. If you have a good credit score, you will enjoy low interest rates. This can mean significant savings. In the same way, borrowers with bad credit scores may access the loan but they will be charged higher fees.
Credit scores also influence rents and cell phone services. If you have a good credit score, you can rent the apartment you really want. You will have options of choosing what you prefer. Unfortunately, people with poor credit scores have limited options.
The truth is that anytime you make a huge financial decision such as getting a car, a house, or a loan, your credit score gets pulled out. Although there are lenders who consider your income instead of your credit score, you have a higher chance of accessing the loan if you have a good credit score.
Factors That Affect Your Credit Score
Although we have already discussed the categories that are used in calculating your credit score, it is still important to discuss the factors that affect your credit score. If you have a better understanding of how the FICO credit scoring model works, you can avoid the things that harm your credit score. Your credit score is affected by the following elements. They are all in your credit score.
Every payment you make will be recorded in your credit report. When you make payments on time, it is recorded in your report. In the same way, making late payments are also recorded. If you default on your loan for a long time, it will show on your report. The severity of the late payment will also show on the report.
Credit Utilization rate
The credit utilization rate also called the credit utilization ratio is the total amount available to you as your credit divided by remaining revolving credit. This is expressed as a percentage. For instance, if your credit limit is $5,000 and you use/ borrow $2,500, your credit utilization is 50%.
This ratio is based on your line of credit only. Usually, your credit limits for your credit cards is what is usually calculated. The credit utilization ratio accounts for 30% of your credit score. That shows how important it is. If the ratio is low, it means that you are using less of your available credit. This means that you are managing your credit very well and it will have positive impacts on your credit score.
If you have a high credit utilization ratio, you can do something about it. You can pay down your credit card balance to reduce your ratio. You can also ask credit card companies to increase your credit card limit. You can also open a new credit account but you do not need to make several payments with the card. You can also pay your balances in full at the end of every month.
If you want to improve your credit utilization ratio, do not delete your old credit accounts even if you do not need them. Generally, a good credit utilization ratio should be less than 30%. When you make payments to improve your utilization ratio, you will need to wait to see the results on your report card. The company will update your report and that is when you will see it on your credit report. Usually, credit card companies update accounts every 30 days. This depends on your billing cycle.
Type, age, and number of credit accounts
Old credit accounts that are used responsibly impact your credit score positively.
If you have a lot of debt on your credit score, it will affect your credit score negatively. That is why one of the most important things to do to improve your credit score is to pay down your debts.
Public records such as bankruptcy
Filing for bankruptcy is a big financial decision. Even though it will absolve you of your debts, it will also impact your credit score negatively. Bankruptcy stays on your account for 7 to 10 years.
Number of inquiries made
Your credit inquiries also affect your score. If you make several inquiries, it will harm your credit score. There are two types of inquiries; soft and hard inquiries. The soft inquiries do not show on your report. You can tell lenders to perform soft inquiries when you apply for credit. You can also decide to apply for all credit within a short period. If you do that, all the inquiries will be counted as one since it will be considered as credit shopping.
The number of new credit accounts also account for a part of your credit report.
Elements That Do Not Affect Your Credit Score
Although certain things may appear on your credit report, they will not affect your credit score. your color, religion, marital status, age, or national origin will not affect your credit score. According to the laws of the United States, no credit scoring model is allowed to use any of these in calculating credit scores.
Your employment status, salary, employment history, and your job title does not impact your score. Lenders may request for these details when you are applying for a loan but it does not impact your score in any way.
Not all inquiries impact your credit score. The scoring model does not consider the inquiries you make on your credit score. When you want to check your report, you make this inquiry. This inquiry is often called the consumer disclosure inquiry. Also, it does not include inquiries made by lenders to check if they can make pre-approved offers to potential borrowers.
How to Maintain or Establish a Good Credit Score?
It is obvious that a good credit score is very important, especially if you want to get a credit facility. As mentioned earlier, a credit score shows whether you are financially healthy or not. It also determines how much you will pay as the rate on loans and mortgages.
Your credit score will also determine how easy it will be for you to get a car or home. It sometimes even influences the kind of home or car you will get. It is, therefore, important that you maintain your credit score if your score is good. If you do not have one, it is necessary that you establish one.
If you are getting started on building a credit history, the best way is to open a credit card. This can help you to get a line of credit and then you can begin building your credit history. When you get a credit card, it is important that you make payments on time.
Make sure you pay off all your balances at the end of the billing cycle so that you can save on interest rates. Sometimes, you may not be allowed to get a new card for yourself. You may need to share someone’s card with him or her. This process is often called credit card piggybacking.
The owner of the card will need to add you as an authorized secondary user of the card. That person must have a good score so that you can enjoy the benefits of a good credit card. The person’s good credit history will become part of your credit history. You should note that once you begin sharing the credit card with the card user, any negative action on your part will negatively affect that person.
You can also maintain a good score by ensuring that you pay off your loans on time.
How to Improve Your Credit Score?
If you have a poor credit score, there are a number of ways through which you can improve your score.
- You can begin by paying down your debts. If you struggling to pay your debts, it can be because you are spending more and you are not leaving enough cash to pay your debts. You will need to draw a budget and stick to it. Your budget should include only necessities. At this point, you need to make cutting down cost your goal. You should cut down on your trips to luxury restaurants, numerous eating outs, and impulsive shopping. If you are able to cut down on all the things that you can live without, your payments will be high and then you can pay down your debt quickly.
- Even as you try to pay down your debts, make sure you make regular payments. Do not miss any due date. This will help you to build a healthy credit history. Keep track of all your due dates. If that will be a problem, sign up for the automatic payment schedules. With this, your payments are paid automatically if you have the cash in your account.
- If you have several high interest credit cards and loans, you can consider consolidating them. This will put all of them together. You are likely to pay a lower rate on them as well. It is important that you make your calculations and confirm that you will save on interest rates before you consolidate your debt. There are instances where the fees involved will make the consolidation rather expensive.
- Check your credit report regularly and make corrections if necessary. You can access one free credit report from each of the three credit reporting bureaus. You can access this report on annualcreditreport.com. Since you have one free report for each of them, you can check one of your credit reports every four months. For instance, you can check the Experian report in January, and then check the one for TransUnion in May, and then finally check the Equifax report in September. This will help you to keep track of your credit report. You will need to carefully review your report to make sure that everything on the report is correct. Make sure that you recognize all the accounts on your credit report. Make sure that all payments are correctly reported.
If you spot an error, you will need to file a dispute to have it corrected. You can file a dispute via the credit agency’s website. You can also call for more directions on how to file a dispute. You can also send a mail to the agency. It is recommended that you file a dispute via mail because it is a straightforward method. With this method, you will need to send a certified letter describing the error.
The credit reporting agency will contact the firm involved and then they will conduct an investigation into your case. The firm will inform the agency about the results of the investigation. If there are errors, the agency will correct it and then it will eventually reflect in your credit report.