A good credit score can make it a lot easier to borrow money to purchase a home or car, get a credit card, take out a personal or business loan, secure a student loan, and more. There isn’t necessarily a single credit score that’s considered “good,” however.
Instead, what constitutes a good credit score depends on the credit scoring model that’s used. We will analyze some of these and discuss how to improve your credit score no matter the model.
Types of Credit Score Models
A few different scoring models are used to calculate your credit score, with the Fair Isaac Corporation (FICO) score being a popular standard. Understanding the differences and factors used to calculate your score can help you improve your credit score over time.
FICO Credit Score
The FICO score is considered the most reliable credit scoring model because of its long-standing reputation. The model has been around since 1989 and has undergone numerous revisions during that time.
Currently, FICO credit scores range from 300 to 850. A good credit score is typically between 670 to 739, according to FICO; however, the required credit score to get approved on a loan or line of credit depends on the lender. One lender might offer its lowest interest rate to borrowers with a score above 730, while another lender might require a score of 760 to get approved.
The VantageScore was created in 2006 and is another widely used scoring model, after FICO. VantageScore is used on credit reports across all three credit bureaus. This algorithm uses traditional data, like number of on-time payments, credit card balances, assets, and other factors to calculate your credit score. The VantageScore 4.0 scale is between 300 to 850, with 700 considered to indicate good credit.
This scoring model includes many of the same factors as the FICO score, like past payments and credit utilization, but it weighs each category differently. It also leaves out paid collections and reduces the weight of medical collections, so your score isn’t as dramatically harmed by these marks.
Other Credit Scoring Models
Depending on the purpose of your credit inquiry, other credit scoring models might be used to determine your creditworthiness.
For example, insurance companies use their own credit score to assess your plan premiums. Insurance credit scores range from 0-999, using similar scoring factors that are used for FICO, like your outstanding debt, age of credit, types of credit you have, and payment inquiries. These factors may be weighted differently, however, and the scoring model includes other factors that aren’t included in your FICO score, like homeownership.
How to Get a Good FICO Credit Score
There isn’t a magic solution to raising your credit score to “good” standing. Even maintaining it at that level or improving your credit to “very good” or “exceptional” takes work. Instead, there are a number of financially responsible steps you can take to ensure your credit score is strong enough to get you the credit that you need.
Using the familiar FICO score to determine what a good credit score is, here are a few tips to improve your credit score.
1. Always Pay Your Loans on Time
Your payment history accounts for 35% of your FICO credit score. Showing that you pay your bills on time instills confidence in lenders that you’re a good credit risk. Set up automatic payments or schedule reminders to ensure you do not miss any of your bill payments.
2. Avoid Getting Too Close to Your Credit Card Limits
“Amounts owed” is one of the five categories FICO looks at when it determines your credit score. This factor accounts for 30% of your credit score. Try to keep your credit card balances low compared to your total credit limit. In fact, it’s best to not carry a credit card balance at all by paying off your credit card statements in full every month.
If you must keep a balance on your card, it’s advised to keep your utilization rate (your total credit card balance divided by your total credit limit) below 30%.
3. Establish a Long Credit History
Having a long credit history is a positive mark for your credit score — as long as it’s a good, long history. Credit scores are partially based on your experience with credit cards and other loans — “length of history” makes up 15% of your FICO credit score.
One way you might inadvertently harm your length of credit is by closing out a credit card that you’re not using anymore. Remember, the age of your accounts is a big part of your overall credit score. Fight the urge to close your active accounts, if they’re in good standing.
4. Only Apply for Credit When It’s Necessary
Yes, having an established credit history is beneficial, but you can negate that goodwill with too much credit access to your name — especially if you’ve opened multiple accounts in a short time. Having a lot of new credit in a short amount of time might suggest that you’re in a bad spot financially, and a high default risk.
Plus, every time you apply for a loan or credit card, an inquiry will show up on your credit report, whether you’re approved or not. The inquiry can drop your credit score five points, although this decrease is temporary. Try to keep your credit applications to a minimum and look for prequalification tools that perform a soft credit inquiry so your credit score isn’t adversely impacted.
5. Diversify Your Credit Accounts
Your “credit mix” comprises 10% of your FICO credit score. The more varied your credit mix — such as credit cards, a mortgage, and a car loan — the better your credit score will be, assuming, of course, that you are making all of your loan payments on time.
Student loans are another financial obligation that might be included in your credit mix. Even if your credit isn’t at the “good” level yet, you can still apply. For example, federal student loans do not require a credit check. If you’ve maxed out your federal student loans, scholarship and grant options, private student loans can help make up the difference. Bad credit can make it harder to secure a loan, but getting a student loan with bad credit isn’t impossible.
6. Review Your Credit Report
Your credit report might have items on it that are pulling your score down. Credit score mistakes can happen because of an error on your credit report. It’s smart to regularly check your credit report for any errors, like a misspelled name, incorrect or old addresses, accounts that don’t belong to you, or adverse events that should have been removed. If you spot anything wrong or suspicious, contact the credit bureaus to dispute the errors.
You’re allowed to request a free credit report from each of the three credit reporting agencies (Equifax, Experian and TransUnion) once every 12 months through AnnualCreditReport.com. You can request all three reports at once or spread them out throughout the year.
The Bottom Line
Having a “good” (or better) credit score can open a lot of financial doors for you when you need to borrow money. Not only will your chances of approval increase with a stronger score, but you’ll have access to more competitive interest rates.
If you continue to make timely payments, keep the amount of money you owe low, and minimize your loan and credit card applications, your credit score will have nowhere to go but up.
10 Easy Ways to Improve Your Credit Score
Do you know what your credit score is? Well, did you know that having a ‘good’ credit score can boost your chances of getting a mortgage, a car on finance and even things like a mobile phone contract?
When you apply for finance, lenders look at your credit report to determine how much of a risk you are as a borrower, and therefore how much money – if any – they are prepared to lend you. Credit checks are made for most things today: credit cards, loans, cars, houses, electrical goods, mobile phone contracts and even landlords. Those with low credit scores will be given higher interest rates, or will not be able to obtain credit at all. Those with good credit scores will benefit from the best deals and low interest costs, paying less than those with bad credit scores.
So how can you get this coveted ‘good’ credit rating? To improve your credit rating, Stoneacre Financial Services have created this handy infographic to help you follow the road to good credit!
The Best Ways to Build Credit Fast
Good credit is an important part of life and for those young adults who need student loans for college, their first car, or a new home, the lack of a credit history can be a problem. There are quick ways to build good credit and establish a positive credit history. Responsible financial habits, when established early, can ease the transition to adulthood and financial independence.
Here are the best ways to build a good credit score fast.
Why You Need To Build Credit
As a young adult or recent college graduate you may be wondering why it is important to build credit in your early 20’s. If you needed financial aid and student loans to get through college then you likely had your parents co-sign your debt, meaning the financial institution who issued your funds was willing to overlook your lack of credit history. However, as the real world looms and your parents are no longer offering you a financial cushion, getting credit can prove to be more challenging.
Due to the lack of financial education in the United States, many millennials who are just starting out in the world may not realize how crucial a good credit score history is to financial security and independence. Here are just a few ways your credit score is used and why you need to build your credit fast.
- Credit Card Companies– Credit card issuers use your credit history to approve or decline applications. Once you are approved, a credit score can determine how high or low your interest rates are. Similarly, if you need more credit to purchase higher-priced items, you may need a credit limit increase.
- Home Loans and Mortgages– These are likely the largest purchases you’ll ever make. The interest you pay on your mortgage will amount to hundreds of thousands of dollars, depending on where you live. Because of the amount of a home loan, a higher interest rate due to a low credit score or bad history can cost home buyers tens, if not hundreds, or even thousands more in interest payments.
- Auto Loans– When buying a new or used car, most adults often finance their purchase. The final amount you pay for this depreciating asset should be as low as possible to help you divert extra cash to other activities that actually create wealth, such as investing. Your credit score and history may either earn you a no-interest loan or overburden you with higher monthly rates.
- Getting A Job– Many employers check your credit score to determine your financial habits. The idea is that a financially responsible individual who manages his/her own finances well is likely to be a better employee.
- Car Insurance Coverage– No one likes paying insurance premiums, yet auto insurance is mandatory in the United States. Furthermore, statisticians have found a positive relationship between people with high credit scores and safe driving. For this reason, the best car insurance companies in most U.S. states check your credit score to determine your insurance rates, offering a discount to drivers with strong credit.
- Business Loans– Buying a business tends to be the surest way to financial independence in the United States. However, as a first-time business buyer most purchases require the cooperation of the Small Business Administration (SBA). SBA loans often require a sizable as well as a strong credit history to get approved. Having no or bad credit can be the difference between the ability to buy a business and being forced to pass up an incredible financial opportunity.
Now that you know why you should care about building up credit, let’s discuss how to actually do it!
It Starts With Your Job
In order to build credit and establish a history, an individual must have a stable income and for most people that means getting and keeping a job. Whether the job is part or full time, an employment history is the first step to building credit.
It is important to remain employed at the same job for at least a year unless, in the case of students, the job is temporary or seasonal. Jumping from job to job causes your income to be unstable, making it difficult to get credit.
Open Bank Accounts
High school and college students can establish checking and savings accounts at local banks or credit unions. While having bank accounts will not improve your credit score, it will establish you as a customer and may make it easier to obtain credit through your financial institution.
It is also important to maintain the accounts in good standing since overdrafts can have a negative impact on your relationships with the bank. With a savings account and a decent income most people over age eighteen can obtain a secured credit card or loan.
Apply for Secured Credit Cards
Debit cards, which are issued with checking accounts, do not report to credit bureaus and will not build your credit history. A secured credit card has a credit limit equal to the amount in a savings account that is used to ensure the principal of the loan will be paid if the account holder defaults on the payments.
These credit card companies make regular reports to credit agencies and can improve your credit score and establish a payment history. The money in the savings account that secures the card cannot be withdrawn unless the card is paid off and cancelled.
Like other credit cards, secured cards have monthly payments that must be made on time to build a good credit history. The best strategy may be to use the card only for essential monthly expenses and to pay it in full each month.
Interest rates on secured cards can be high and by paying the card off each month, cardholders avoid paying interest while their timely payments improve their credit score and build a good credit history.
Consider Secured Loans
The first loan many young adults obtain is a car loan which is a type of secured loan. The loan is secured by the value of the car and if the debtor does not make the payments when they are due, the lender repossesses the vehicle.
As a rule, banks and credit unions offer lower interest rates on car loans than finance companies. Plus, being a customer of the bank you get the loan from increases your chances of being approved.
Paying off a car loan is a great way to build a credit history fast, but it is important to keep monthly payments affordable. Include the cost of full coverage car insurance when deciding how much you can spend on a new or used car. Lenders require full coverage as a condition of the loan.
Getting Unsecured Credit Cards
Once you have established a good payment history for about one year you can apply for unsecured credit cards. If you already have a relationship with a bank, you are more likely to be approved for unsecured credit through their credit department.
The credit limit on unsecured cards is based on your credit score, payment history, income, and outstanding debt. Just as with secured cards, it is important to pay these cards in full each month to show responsible spending habits.
Shop around before applying for a credit card. Different cards may have different interest rates and some have rewards programs that offer cash back on everyday purchases. You should also consider the fees that apply to the cards since some have annual fees while others may charge high transaction fees, especially for cash advances.
Choose a card that fits your spending and lifestyle habits. It may be better to apply for a card with a higher interest rate and a good rewards program if you intend to pay off the full balance every month.
Automate Your Payments
If you forget to pay your bills on time it can hurt your credit history. Automating payments insures that all your bills get paid when they are due. There are two options for making automatic payments. You can either:
- authorize your bank to release the funds from your checking account on receipt of an electronic bill, or
- you can charge the payments to a credit card and pay off the credit card bill each month.
Using a credit card will improve your credit score and help build your credit history as you pay your regular monthly expenses.
Do Not Apply for Multiple Loans or Credit Cards
If you apply for several credit lines at once, it will have a negative impact on your credit score and can hurt your credit history. It is better to apply for one line of credit and allow some time between credit applications.
Each time a lending institution pulls your credit report, it lowers your credit score unless you are comparison shopping for a single loan (e.g. auto loan) and apply through all the lenders within a 30 day period. This would be considered a single inquiry for your credit report.
Instead of applying for new credit cards, request an increase of the credit limit on the cards you already use. Nearly one third of your credit score is based on the ratio of your available credit to your actual debt. If you have a high credit limit with a low debt balance, it raises your credit score.
Even if you do not plan to use the additional credit, it is smart to apply for the increase since it will improve your score and credit history.
It usually takes between one and three years of good payment habits to establish a credit history. A good credit score can help young adults who are seeking full time employment and housing for the first time since employers and landlords often pull credit reports when considering applicants. If you build your credit history fast and early, you will have a good head start on your financial future.
6 Ways To Defeat Bad Credit Score
Know in advance: it won’t be easy. Improving credit scores are not immediate, and will require a hefty length of time to fix. This is because lenders, institutions, and issuers evaluate your past years’ behavior and actions, taking your entire credit history into account.
Not everyone has great credit, and there’s no shame in that. Of course, life happens, and there are circumstances some people genuinely cannot avoid. It’s a tragic credit scenario that’s happened to many people.
A typical business scenario is in the construction industry where surety bond come into play when contract price exceeds $100k.
“A surety (insurance company) bond is necessary to make sure that business owners (principal) performing the task follow specific requirements as laid in contract by the oblige (entity).”
Surety will weigh the risks of “taking you on” depending on your credit score – and decide whether or not your credit is worth the hassle of issuing you a bond or not. So, your credit score will determine the fate of your business.
If your credit score is above 750… congratulations! You have excellent credit. Any account below 650 is generally considered to be less-than-appealing to issuers and lenders.
At the lower end of the spectrum, people around the 300-600 mark aren’t doing so well. Where do you fall?
Below are several ways to help you increase your credit score so you can get back in your lender’s good graces.
1. Check Your Score
Not knowing what is happening on your credit reports is like not knowing what you spend your money on. It is simply bad practice, and spells disaster for your bottom line. Be sure to check for free annual credit reports every few months or so and stay up to date.
Something to keep in mind when you’re reviewing your scores is to see how much revolving credit you have, versus how much you actually use. The lower the percentage – the better your credit rating.
Please be sure to see if your credit card issuer accepts multiple payments over the course of a month. Certain issuers report the balance on your statement to the bureau. So, if you pay full balances every month, only one balance will be actually reported.
2. Keep Calm And Relax
No matter how annoying it may be to see negative information every time you get your credit reports, keep in mind that this information often has less impact on your credit scores over time.
Negative information on your reports have less impact on your credit scores the more time passes. Barrett Burns, CEO of VantageScore, states that just because information stays for seven years, doesn’t mean that information is relevant each year.
For example, let’s suggest you miss a payment (which probably happened – it’s sometimes impossible to keep up to date in today’s world). Your score may drop, but will take around a year and a half for you to recover fully – falling far short of the “7 Year Fear”.
In fact, it’s generally wiser to focus on your good debt (that is, debt that you’ve handled well and paid). Focus on your good payments, it will outweigh your bad scores. Keep in mind that bad scores are, well, bad, but they are not a doomsday scenario that many people make them out to be.
Credit card expert John Ulzheimer suggests keeping old debt and good accounts on for as long as they are possibly allowed. The takeaway: do not close old accounts, whether you have a good or bad score.
3. Don’t Open Too Many Accounts
Opening new accounts rapidly destroys your credit. This is because newer accounts lower your average account’s age – widening the overall effect of your scores. Not to mention that it looks risky to credit card issuers (to them, they think you’re a scam artist for opening up new accounts).
Plus, new accounts—in all likelihood—won’t raise your credit score.
4. Don’t Close Unused Accounts
Regardless of your good debt, bad debt, and credit score, closing accounts won’t remove your bad debt. We can equate this to asking your high school to remove your grades from report cards.
Closed accounts still show up on your overall credit report, and do more harm than good, as it shows issuers that you’re unreliable.
Closing unused credit cards accounts is an ineffective strategy for raising your scores. It simply won’t. In fact, many people have had their credit scores lowered by doing exactly that.
5. Go Fully Automatic
One way of doing this is by setting up auto-payment, or payment reminders so that you never miss them. Similar to setting up automatic payment for bills to be withdrawn from your bank account on certain dates.
I personally have a hard time remembering important matters such as these, even in my daily life. I cannot stress enough how important weekend reminders (even daily reminders) via Google Calendar are.
If you’re wary of going fully automatic, build a schedule for yourself using task management software such as Trello or Asana. I recommend Trello, as it’s an intuitive and easy-to-use system for managing tasks and to-do lists. It fits my on-the-go needs and lets me adjust my schedule accordingly.
6. Don’t Be A Risk
For whatever reason, whatsoever, do not risk damaging your score. This means trying your hardest not to miss any payment, or suddenly paying in smaller amounts, or infrequently charging more. Maintain a good score by being consistent with your payment dates and payment amounts.
However, taking cash advances might make your card issuer wary without hurting your score. Know this: charging businesses to your card that give second doubt to your money-handling abilities also paint you as a suspicious client.
Dave Jones, former president of the Association of Independent Consumer Credit Counseling Agencies (AICCCA) warns that you do not, under any circumstance, give the impression that you’re a risk. As with anything in life.
Managing your bad credit scores isn’t as troublesome as many people make it out to be. All it requires is a determination and will to make your payments, consistently, as you agreed you would; not presenting yourself as a risk; adamantly refusing the temptation to open several accounts or close old ones; keeping your sanity as you handle your credit score.