You must have a credit score to buy a home, lease an apartment, or take out a private loan. Credit scores indicate how responsible you are with credit. Even if your credit isn’t the best, you need to understand how it works. And you need to understand how to improve it. One, to understand why bad credit lets lenders know you’re a risky investment. Two, to understand how to improve your credit. And three, to know why good credit opens the doors to more opportunities. This guide will walk you through all facets of credit and help you improve your credit.
Everyone wants a good credit score. Good credit scores allow you to have the best rates on interest for significant purchases like a house or a new car. Conversely, bad credit keeps you from making those purchases. It is possible to rebuild your credit if you have bad credit or no credit, but it takes time to go from bad to good credit. And it takes even more time to go from good credit to excellent credit. Don’t be discouraged though, because the more you improve your credit, the better your opportunities will be for loan options.
Lenders consider a 670 or higher to be a good credit score. Good credit scores are important because they give you better access to credit cards and different financial products you wouldn’t have access to otherwise. However, anything above 800 is considered exceptional. According to Shift Processing, 21% of the population has an excellent credit score. Having an excellent credit score should be your goal, because you’ll be able to access almost any financial product you want, within your income level.
According to Equifax, there are many different versions of FICO scores, depending on how the scoring model is set up. But the general principle is the same. FICO scores take information in your credit report and determine whether or not you will pay your bills on time.
The purpose of a FICO score is to predict similar types of risk. For example, if you didn’t pay back your car loan, that would impact your FICO score negatively, and lenders might not want to work with you because you have a lower FICO score.
Remember that your FICO scores from different companies might be different. That’s because each company uses slightly different algorithms. So if you use companies like Credit Karma or Credit Sesame to track your FICO score, it might not be the same score the bank will have when processing your credit report.
That said, FICO scores use relative percentage weights to determine how much specific factors come into play with their scores. The main categories are as follows:
All of these things together make up your FICO score. If you’re trying to increase your score, you’ll want to make sure you’re paying attention to where you are on each of these metrics. See our section about improving your credit for more specific information.
Understanding the different credit score tiers lets you know where your credit is. FICO scores range from 300 to 850, with higher scores indicating a more negligible credit risk.
Poor credit generally keeps you from being able to apply for credit at reputable institutions. You can still find places that will lend you money – but at subprime interest rates. Fair credit starts to give you better access to more reputable companies that lend. Good credit is a great place to be. You won’t get the best rates on the market, but you’ll start to see better rates come your way. Great credit opens the door to better-than-average credit cards and lowers interest rates. Finally, excellent credit will grant you access to almost any credit you need at excellent rates.
While these range for credit scores, there isn’t a specific number that means you’ll be approved for a credit request from a lender. Higher credit scores indicate you are responsible for your credit. Nothing is guaranteed.
There are plenty of places you can get your credit score online at no cost to you. Experian, one of the credit reporting agencies, will track your credit score for free. You just have to make a free account. Another place you can get your score is Credit Karma, which again is free. Be careful with sites like these though because they will peddle you different credit cards as part of their business model. You want to ensure that you’re only using them to check your credit score and not being sucked in with the different card offers.
Everyone is able to build their credit score up a little bit. There isn’t a secret sauce to make your credit score magically jump up, but you can do things to help improve it.
One of the best things you can do to ensure your credit is increasing is to pay off your loans on time, and in full, every time. I did this with my car note and was able to increase my credit by 100 points in a few months. Just by making sure all my payments were going through on time.
A huge boost to your credit is staying under your credit utilization. Credit scoring models check to see if you’re maxed out on your credit. If you are, you’re not going to get the best credit scores available. Experts advise you to keep your credit utilization, how much credit you’re using, down to 30 percent or less than your total credit limit.
A lot of getting better credit is just waiting and continuing to practice good credit habits. More experience and time you have on your credit report means that you will eventually start to build stronger credit scores. That’s because you’re slowly increasing the information to determine whether or not you can handle your credit. Open a fee-free credit card and make one or two purchases on the card a month, pay them off in full, and slowly watch your credit score increase over time.
This piece of advice is two-fold. You don’t want to get over your head with excess credit that you don’t need and be unable to pay it off. But you also don’t want to make lenders think that your economic circumstances have changed for the worse. Applying for only the credit you need keeps you in check financially and keeps creditors from assuming you don’t have any money. It also keeps your debt-to-income ratio low, which is something that creditors look for when administering credit checks.
Fact-checking your credit allows you to see what is being put into your credit score. If you see a suspected error, you can refute it. You can also use credit scores to check and see if you have any old cards still active. If you do, use the reports to monitor for fraud. Credit fraud can negatively affect your credit score.
If you already have a good score, it’s going to take some finessing to make that good score better. This is because you have less room for improvement. But that doesn’t mean that it’s not possible to increase your score. Plenty of people have scores in the excellent range. If this is your goal, then you can do the following steps.
But first, you’ll have to understand that your score isn’t being compared to anyone’s. The lender uses your score to determine your creditworthiness. So if someone has a good score, that doesn’t mean that you can’t also have a good score.
You’ll want to keep in mind the risk factors that affect your score. Payment history (35%), Amounts owed (30%), Length of credit history (15%), New credit accounts (10%), and types of credit used (10%) all affect your score.
The first two things that you can do is pay your credit on time, and in full, and lower the amount of money you owe. Those two things affect your score the most. And are the quickest to change your score for the better. The next thing that you can do is keep old accounts open and open maybe one or two accounts to build your credit mix. Consider opening a personal line of credit instead of a credit card to increase the diversity of your credit.
It’s going to take time and devotion to get to a high score, but it is very possible. Keep in mind your credit mix, debt-to-income ratio, length of credit history, and payments. The more on top of your credit that you are, the more your credit score will increase.
Don’t get discouraged if it takes a while. Getting from good to amazing isn’t going to happen overnight. Keep at it and slowly your score will improve.
According to Experian, less than 1% of consumers with an 850 credit score are likely to become delinquent in the near future on their bills. So, yes, it is worth it if you want lenders to think that you’re in the top tier of credit holders. However, anything above 800 is considered exceptional, and you’re not going to get much better deals from 800 to 850. At some point, it becomes a vanity metric and you don’t need a score that high. It just means you’re exceptional with your credit.
Minnesota at 709 average was the highest, followed by Vermont at 702.
Mississippi had the lowest average credit score at 647, followed by Louisiana at 650.
When you’re starting out, a score that’s about 650 is considered a good start. However, it’s always best to aim for a better score. Anything above 800 is considered exceptional. If you’re rebuilding your credit, 580 is considered fair and is a great goal. It doesn’t matter how old you are, you can build your credit.
Lenders want you to have a credit score of 661 or higher to qualify for a conventional car loan. But that doesn’t mean you should strive for a score that low. The higher your score is, the better interest rates you’re going to get.
Most conventional loans need a credit score of 620 or higher to approve an application for a loan. But that’s not the best score for a house. In order to get a more attractive interest rate and save on private mortgage insurance, you want a score of at least 740, but ideally, above that. This could also allow you to make a lower downpayment than lower credit scores.