Credit scores can have a huge impact on our finances. For example, a good credit score may mean better credit terms. It can also be the difference between approving or denying a loan in the first place.
When we talk about credit scores, there are usually two important players: FICO and VantageScore. Everyone uses similar factors to determine your credit score in their system.
But what is a credit score and what is a good credit score to have? Let’s take a look at all the ins and outs of a loan and how it can affect your finances.
What is a credit score?
Let’s start by defining what a credit score is. Basically, a credit score is a number between 300 and 850 that helps lenders determine the likelihood that you will pay them back. Lenders will consider your score when applying for a credit card, mortgage, car loan, or even from a landlord when you want to rent a property.
What factors affect your credit score?
Many factors can affect your credit score. Some are bigger than others, but every aspect is just a piece of the puzzle when lenders look at the level of risk involved in lending you their money. Some common factors in determining your credit are:
Paying your bills More specifically, paying your bills on time will have a significant impact on your credit score. In addition, keeping track of all bills, including credit cards, utility bills, mobile phone bills, mortgages, and any other bills you may have, will boost your score significantly.
Your Debt – The amount of debt you incur will also affect your score. This is more than the amount of debt, but the easiest way to think about it is that the less debt you have, the better.
Using a credit card – Credit cards can be a double-edged sword. Using them will help boost your creditworthiness, but too much will hurt your credit score. You want to keep using your credit card and make monthly payments, but keep your charges well below your credit limit.
Loan and loan applications – Applying for a credit card or loan will result in a credit check of your information. A hard credit check will lower your score, so don’t apply for more than one or two credit cards and keep credit to a minimum as well.
Factors that do not affect your credit score
In determining your credit score, FICO and VantageScore will not take into account the following factors:
- Age
- Race
- Religion
- Nationality
- Floor
- Family status
- Salary and occupation (although lenders may consider this)
- Where do you live
- Soft loan requests
It is illegal to list race, religion, nationality, gender, and marital status when determining your credit score.
How can I get my credit score?
Getting your credit score is a relatively simple process. You can get a complete credit report from each of the three credit bureaus once a year from AnnualCreditReports.com. Reviewing your credit report annually is a great way to find inconsistencies or misinformation that could hurt your credit score.
There are many online options to see your credit score, and many of them are free. Some of the more popular options include CreditKarma.com, Credit.com, CreditSesame.com, and Wallethub.com.
Why is it important to have a good credit score?
Having a good credit score can be beneficial for several reasons. Most of these reasons revolve around your ability to secure new loans. Having a higher credit score in general will make it easier to get a new loan. A higher credit score can also make the terms of any new loan better for you. The best conditions may include:
- Higher loan amount.
- Reducing the interest rate on loans.
- Lower fees associated with your loan.
While loans are the most common use of your credit history, landlords are also important to your credit history. When you apply to rent a house or apartment, landlords have the opportunity to check your credit score to determine how risky it might be to rent out their property to you. Having a higher credit score can give you an edge over other applicants for the same property.
What is a good credit score – FICO
The FICO score is usually a score between 300 and 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 credit ratings in the FICO rating system: poor, fair, good, very good, and exceptional. These ranges are:
Bad: less than 580
Fair: 580 – 669
Good: 670 -739
Very good: 740–799
Exceptional: 800+
A “good” FICO score is between 670 and 739. In 2021, the average credit score was 716, which is in the “good” range according to FICO.
What is a Good Credit Score – VantageScore
VantageScore also uses data from Equifax, Experian and TransUnion to determine consumer credit scores. Although similar factors are used, your VantageScore credit score may differ from your FICO credit score. VantageScore also uses a similar range of 300 to 850 for the following credit score categories:
- Excellent: 750 to 850
- Good: 700 to 749
- Fair: 650 to 699
- Poor: 550 to 649
- Very bad: 300 to 549
VantageScore also uses levels to evaluate consumer credit:
- Super Premium 781-850
- Prime 661-780
- Almost prime 601-660
- Substandard 300-600
For VantageScore, a “good” credit score would not be in the 700-749 range.
How to improve your credit score
To improve your credit score, you should focus on the factors that FICO and VantageScore use in determining your score. Here are a few steps you can take to improve your credit score.
Pay all your bills on time: Making at least the minimum payment on any account on time is critical to improving your credit score. Missed or late payments can remain on your credit reports for several years. So, even if you can’t pay your bill in full, showing your creditors that you will pay something and not nothing will be of great help.
Keep your credit card balance low: Another important factor in your credit score is the amount of credit you have versus how much of that credit you use. 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 take into account the number of accounts you have open and how long you have held them. Accounts such as checking or savings accounts do not affect your account. The bills we are talking about are credit cards, loans or other debts. Having too many open accounts can negatively affect your account. Whenever possible, combine loans into one lump sum, if possible.
Do not apply for additional credit: The simple act of applying for a loan can lead to a complicated investigation into your credit, which can damage your credit history. Instead, apply for new loans or credit cards only when necessary.
As mentioned above, having too many accounts open can damage your credit history. You won’t have too many open accounts unless you apply for new accounts. FICO and VantageScore will take into account the average length of your accounts when determining your credit score. By opening new accounts, you will significantly reduce the average length.
Frequently Asked Questions About Credit Scores
What is a bad credit score?
Scores below 630 usually fall into the bad credit range. If your score is in this range, review the steps above to improve your score.
What is a fair credit score?
Usually a “fair” credit rating is in the range of 630-689. However, a credit score in this range can still make it difficult to get a loan on better terms. Therefore, if your grade is considered “satisfactory”, you should consider taking the steps above to improve your grade.
Is 700 a good credit score?
A score around 700 would be considered “good”. While there is still room for improvement, consumers in this range can generally get credit on favorable terms relatively quickly.
What is an excellent credit score?
An “excellent” credit score is any score above 720. Generally, getting your credit score above 800 will give you the best conditions when applying for new loans or credit cards.
This article originally appeared on Wealth of Geeks.