What Is a Good Credit Score and Why Is It Important?
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Credit scores can be confusing, especially with so many different models and algorithms available. Plus, it’s easy to mess up your credit rating and end up with bad credit without even realizing you’ve done anything. Here’s what you need to know about credit scores and increasing your credit rating. (See also: How to Rebuild Your Credit in 8 Simple Steps)
How Important is a Good Credit Score?
Credit scores don’t usually get the attention they deserve and we don’t realize how important they are until we go to get a loan and realize we’ve somehow ruined it. Because credit scores are one of the only ways for lenders to assess a borrower’s risk and can mean the difference between not just qualifying for the loan, but also paying hundreds to thousands more in interest, it’s important that you diligently work on keeping a clean credit file.
The most crucial role that credit ratings play in finances is in the interest rate. If you have a poor or bad credit rating, you are going to pay a much higher interest rate than someone with an excellent rating, if you are approved at all. When it comes to settling down and buying a house, your credit score can become one of the most important numbers in the process. A good credit rating can help in other situations including:
Employment. Not all employers require credit checks, but if you are in finance or a position requiring that you handle the company’s money, bad credit can end up hurting your chances of landing a new job. The idea behind checking credit for certain positions is that if you can’t manage your own finances, you may have difficulty managing other people’s money as well.
Lower Insurance Rates. Bad credit can cost you in other areas besides higher interest rates on loans and credit cards. It can also affect your insurance rates and cost you hundreds more than if you had a better credit score.
Qualifying for Rentals. If you have poor credit, it isn’t just difficult to qualify for home mortgages. You may also be denied rental opportunities simply because your credit file shows that you may be at risk of not paying your rent.
Utilities. Unfortunately, you may not be able to get your utilities hooked up in your name with bad credit. Although this doesn’t happen all the time, credit problems can prevent you from getting necessary utilities turned on in your new home.
What Is a Good Credit Score Range?
Although generally “good” is sufficient for most things like kicking ability in kickball or rating the flavor of an apple pie, in the world of credit scores, it’s not exactly ideal. A good credit score is often considered within the range of 700 to 749, but the goal if you want the best credit cards and lowest interest rates, is to strive for an “excellent” credit rating, which is 750 and higher, according to FICO and VantageScore.
What Is a Bad Credit Score?
On the other end of the credit scoring model are bad credit scores, which can make it difficult to qualify for credit cards or loans. Bad credit ratings are typically 600 or below. This, however, doesn’t mean you are doomed never to have a credit card. There are lenders and credit card issuers that provide financial products for those in the “bad credit” range. However, in addition to high APRs, you can expect to pay extra fees that you won’t find on higher-credit products. (See also: Good, Bad, or Excellent: What Does Your Credit Score Mean?)
In short, the credit score range from bad credit to excellent credit is usually:
Bad Credit – 600 and lower
Poor Credit – 600 to 649
Fair or Average Credit – 650 to 699
Good Credit – 700 to 749
Excellent Credit – 750 and higher
Where to Get Free Credit Scores
Many financial companies provide services which allow you to check and monitor your score for a monthly or annual fee of approximately $29.95 per month, depending on the scoring model. There are also a number of agencies and credit card issuers which offer this service free to its customers and cardmembers. You can get your credit score free with some of the following companies:
Credit Sesame. Score pulled from the TransUnion database.
Credit Karma. VantageScores from the three major credit bureaus.
Discover it. Provides cardmembers with access to free FICO scores.
Chase Slate. Includes access to FICO score.
FICO and Vantage: Types of Credit Scores and Scoring Models
Another point of confusion when discussing credit scores is which score you are measuring. The score used by most lending institutions is the FICO score, which means if you want to see what your card issuer is seeing, this might be the score to keep your eye on. However, there are those that use other scoring systems, and you may check and monitor those scores with any of the following agencies as well:
FICO score: Provided by FICO and also allows you to track and monitor your score with all three credit bureaus. MyFico.com provides services for restoring your identity in the event it is stolen and detecting threats through identity theft monitoring as well.
VantageScore: This score is more often the free version offered by different financial services and is among the most popular scores as well. The VantageScore has some differences such as how it scores paid-off collections, alternative data like rent and utility payments, and how it rates how recently a credit account was used. This score was created by the credit bureaus, TransUnion, Equifax, and Experian.
In addition to FICO and VantageScore, each credit bureau provides its own scoring model as well, which is one of the reasons they joined forces to create the Vantage scoring model in the first place. The scores for each bureau includes the following:
PLUS score: Experian’s scoring model usually not used by any lenders. It ranges from 330 to 830.
TransRisk score: TransUnion’s score based on its own credit reports. This score ranges from 100 to 900 and is used to predict risk.
Equifax score: The Equifax version ranges from 280 to 850 and like the PLUS score, isn’t used by lenders but is designed for educational purposes only.
The range of scores will vary depending on the scoring model, but as an example, may include FICO scores from 300-850, Experian scores from 330-830, Equifax and TransUnion from 300-850, and VantageScore 300-850. Although they are all different scoring models, they are close enough that no matter which one you prefer, you can get a general idea of what the lenders see when they check your creditworthiness. And, if you’re working on increasing your score, you can monitor any of them and assume that if one increases, all of them will typically adjust in a similar manner. It’s important to note that whether it’s a loan, mortgage, or credit card, the FICO scoring model is the most widely used.
What Affects Your Credit Rating the Most?
Because credit scores are intended to gauge your risk and the ability to repay your loans and credit cards, it’s important to make sure you pay on time and manage the accounts responsibly in order to maintain a positive credit rating. However, there are other factors involved in calculating your credit score, depending on the model you use. For example, FICO scores are calculated according to the following activities: (See also: What Impacts Your Credit Score the Most?)
35% Payment History – the number of times you make late payments on your accounts.
30% Amounts Owed – how much you owe. Could be an indication you are overextended.
15% Length of Credit History – how old your accounts are and the last time you used certain accounts.
10% Credit Mix in Use – whether you have a mix of different accounts like credit cards, retail, installment loans, and mortgage loans.
10% New Credit – if you have a number of new accounts, it could indicate a higher risk.
How VantageScore is Calculated
In comparison, VantageScore 3.0 is calculated similarly with some minor differences, with more focus being placed on recent credit than payment history or credit utilization:
30% Recent Credit – whether you have multiple new accounts.
28% Payment History – late payments and payments made on time.
23% Credit Utilization – how much credit you have versus what you owe.
9% Credit Balances – how much you owe.
9% Depth of Credit – your credit mix and length of your credit history.
1% Amount of Available Credit – the total amount you have available among all credit accounts.
Vantage Scores also include a letter grade which rates your likelihood of a charge off or paying your accounts on time. For example, 901 to 990 is considered an “A” grade, equal to 1 charge off for every 300 consumers who pay on time. The grades lower to “F”. which is 501 to 600 and equal to 1 charge off for every 1 consumer paying on time.
Increase Your Credit Score by Checking Your Credit Reports
One of the most shocking and frustrating things that can happen when you check your credit score is that you find it is lower than you expect. More shocking is if it happens to be due to an error on your credit report or a mistake that you didn’t even know existed. This is just one of the many reasons it’s important to regularly check your credit reports and address any errors or changes immediately. This is also one of the first places to start if you’re going to begin your journey to improving your credit score. You can get your credit reports free in any of the following ways:
- One free per year from each bureau through annualcreditreport.com
- Denial of credit, insurance, or employment
- Unemployed and planning to look for a job within 60 days
- On welfare
- Inaccurate because of fraud or identity theft
If you don’t qualify for free credit reports, you’re probably going to pay either a monthly or annual fee to access one, depending on the credit bureau. Because paying for credit reports from all three bureaus can become costly, it’s best to set an alert or reminder to get your free reports online each year with annualcreditreport.com so you can check them all for any errors. You can then notify each bureau online of any errors or corrections that need to be made to your credit reports.
Ways to Increase Your Credit Score
Once you’ve become aware of the importance of your credit score, you’ll likely want to work on increasing it. While the most common ways to get your numbers up into the excellent credit score range involve making your payments on time, there are other ways to get the boost you’re looking for if you want the best credit rating possible. Some of the easiest ways to increase your score include the following:
- Check credit reports for errors and submit corrections
- Catch up any late payments or missed payments
- Pay down balances so that you owe 30% or less of your total credit available
- Get a secured credit card (if you have bad or no credit) to start a new, clean line
If you have a number of problems on your credit reports, it’s best to work on the ones damaging your credit the most, according to the percentages of the scoring calculations. For example, in most cases catching up late payments and missed payments can make the biggest difference in your credit rating. Once payments are caught up you can work on decreasing your credit utilization.
Keep Your Excellent Credit Score
When you have increased your credit rating, you’ll need to make sure you practice other tips for maintaining excellent credit. These tips for keeping a good credit score include paying every bill on time (set up reminders and alerts if needed), using credit only when you need to, limiting your new accounts, keeping old accounts open, and mixing up your types of credit with a combination of credit cards, loans, retail, and mortgage accounts. Also, make sure your credit mix includes revolving, installment, and open lines of credit.
Improving or increasing your credit rating isn’t an easy task, and it will take some time. However, as long as you know what you’re working with, you’ll be able to say you have a great credit score and qualify for the best rates available, in no time.