What is a Good Credit Score?

Many of us loved to achieve a high score in school, as it was proof that we had performed well. It was the score that made a big impact on our early years. 

Similarly, the credit score has a huge impact on your finances. A high score on your credit report is proof that you can handle finances well. 

A credit score is a very important three-digit number for your financial future. It is used by lenders and banks to decide whether or not to extend a loan and what terms to offer. 

There are different types of credit scores which include FICO scores and VantageScore. They are the most common in the industry. For a score that has a range between 300-850, a score of 700 or more is considered good and 800 or above is considered to be excellent. 

Majority scores fall in the range of 600-750.  A high score means better credit decisions and they make the creditors more confident about your ability to make repayment on time. 

FICO Score Meaning

Below is a range of FICO scores to help you understand what they mean.

How Does VantageScore Work?

Scores by VantageScore are used by lenders. This score is built by 3 main credit bureaus including TransUnion, Experian, and Equifax. 

The credit score ranges between 300-850. A score above 660 is considered good and a score above 780 is considered excellent. 

Given below is a range of the scores and what they mean.

Why Are Credit Scores Important?

A credit score helps lenders anticipate how likely you are to repay the loan on time. It is an important decision-making tool for lenders. They are also known as risk scores since they help lenders assess the risk that you might not be able to pay the debt as agreed. 

It is important to have good credit as it will decide whether you will qualify for a loan and if you do, it will decide the interest rate you qualify for. This means you can save thousands of dollars with a good credit score. 

Your credit score is a lot like a report card which you might review time and again. Credit scores are not stored as part of the credit history. Instead, your score is generated every time a lender asks for it, as per the credit scoring model of their choice. 

Whenever you set financial goals like buying a new car, the credit will be a part of the financing and your score will help the lender decide whether you qualify for the loan or not. 

A credit score is not the only thing that the lender will look at when deciding if they should extend credit or not. The credit report also has other details they take into consideration like the total amount of debt you have, the length of your credit accounts, and the types of credit in the report.

Besides the credit score and credit report, the lender will also consider the total expenses you incur each month and will match it with your monthly income, based on the type of loan you seek. 

What is a Credit Score Composed Of?

Different pieces of credit history are given different weights when calculating the credit score. The below-mentioned information is used to compose your credit score.

💰 Payment History

Your payment history has a significant influence on the credit score. 35% of the score is based on payment history. Majority lenders want to know whether you pay the bills on time or not. 

Timely payment of bills says a lot about you. If there are late payments or collections, it will affect the credit score. Additionally, delinquencies can hurt the score. 

🏦 Outstanding Debt

The amount of debt you have as compared to your credit limit is known as credit utilization. It makes up for 30% of the credit score. 

The higher your credit utilization, the lower your credit score will be. It is important to keep the credit card balance at 30% of your credit limit. 

⏱ Length of Credit History

15% of your credit score is based on credit history. If you have a longer credit history, it is favorable for you because it gives detailed information about your spending habits. 

Leave open those accounts that you have had for a long duration. 

🕵️‍♂️ Inquiries

Hard inquiries make up for 10% of the credit score. Whenever you make an application for credit, there will be an inquiry on the credit report. 

If you have several applications for credit, it means you are taking on a lot of debt. The inquiries remain on the report for two years.

💳 Credit Mix

The mix of credit composes 10% of the credit score. When you have different kinds of accounts, it is favorable for your score because it shows that you have experience in handling a mix of credit. 

Factors That Have an Impact on FICO Scores

Payment history on credit cards and loans have the most impact on your score. Further, the total debt outstanding is also considered. The least influential is new credit or credit mix and length of credit history has a moderate influence. 

Factors That Have an Impact on Vantagescore

For VantageScore, the most influential is the payment history. The age and type of credit with the percent of credit limit used are highly influential and total balances have moderate influence. The least influence is of recent credit behavior and inquiries. 

What Has No Impact on a Credit Score?

The below-mentioned information does not have any impact on the credit score.

• Your age
• Your color, race, religion, sex, national origin, and marital status
• Your place of residence
• Your occupation, salary, title, date employed or employer
• Soft inquiries (These are usually initiated by companies that make promotional offers of credit. They can also occur when you check your credit report.)

COVID-19 and Your Credit Score

If you are experiencing financial trouble due to the pandemic, you might be wondering how late payments can impact your credit score. It helps to contact the lender and discuss all the available options. 

You can minimize the impact of coronavirus on your credit score by paying whatever you can. Try to avoid late payments and make the minimum payment on the account.

Additionally, it helps to stay updated on the credit reports. You can get a free copy of the credit report once every year from the three credit bureaus in the nation. 

5 Ways to Improve Your Credit Score

If you have noticed that your credit score is not quite where you would like it to be, you are not alone. There are different ways you can improve the credit score. 

1. Check Your Credit Report

 In order to improve your score, you need to start by checking the accuracy of the credit report. It is possible to have mistakes on the credit report.

Start by checking the credit report from all the credit reporting agencies. You can get a free copy of all three reports once in a year. 

In case of an error, you need to file a dispute with the respective bureau and get it removed. It is possible to get something removed from your credit report by writing to the bureau. 

2. Identify What You Need to Work On

If there are no errors in the report and your credit score is low because of your financial habits, you need to identify what it is that you want to improve. 

Payment history has a good influence on the score and it is something you need to work on. Make overdue payments and try to clear as much debt as you can. 

Meanwhile, stop making any credit applications as they lead to hard inquiries. Every credit application will only lower the score. Alternatively, you can seek help from the leading credit monitoring services to help you improve the score. 

3. Become an Authorized User

You can establish a strong credit score by getting added as an authorized user on the account of your family member or friend. 

You will not need to use the account but their positive credit will be added to your credit report. 

4. Get a Secured Credit Card

You can raise your credit score with a secured credit card. In this type of card, you deposit money in a checking account to get the line of credit.

The payment will be made out of this account and you will not miss any payments. Thus, your credit score will automatically improve. 

5. Dispute Inquiries

A hard inquiry has a significant impact on the credit score and several inquiries can drop your score. If you did not authorize an inquiry on your credit report, you can dispute it. You can get it removed and your score will easily increase. 

What Can Be Achieved With a Good Credit Score?

It helps to have good credit as it determines whether you will be able to borrow money or not. If you do, it will also determine how much you will pay in interest. 

A good credit score can help you with several things but it can help you get: 

• A car lease or loan
• An unsecured credit card with a low-interest rate
• A top personal loan
• A balance transfer card
• A mortgage
• You can manage to pay expenses in a crisis when you do not have an emergency fund
• Pay less for car insurance

Whether you plan to apply for credit or not, a good credit score is very useful. For example, a minimum credit score of 660 is required to buy a car, generally speaking.

How to Maintain a High Credit Score

More than 60% of Americans worry that their credit score will not allow them to achieve a financial goal. It helps to read and understand your credit report from time to time to maintain a high score. 

If you have poor credit or fair credit, keep the below-mentioned tips in mind to raise the credit score. 

Always pay in full: It is important to make the minimum payment but you need to pay the bill in full each month to reduce the utilization rate.

Make timely payments: Your payment history will reflect when you make the payment and it is an important factor for the score. Hence, it is important to always pay on time. 

Do not open several accounts at once: Whenever you apply for credit, there will be an inquiry on the credit report. It will have a temporary impact on the credit score. 

A hard inquiry has an impact of five to ten points. You need to restrict the applications and look for alternatives that do not hurt the credit score. Consider using the top credit repair software to increase the score. 

Minimum Credit Scores

A lot of applicants are concerned about the minimum credit score necessary to apply for a loan. However, there is no score needed to apply for credit cards or loans. 

You are less likely to qualify for a loan with a low credit score. If you do qualify for the loan, you might not receive favorable rates. 

It is best to wait until the credit score improves before you apply for a loan or a credit card so that you get the best rates. You can look for loans for bad credit and check if you are eligible. 

FHA provides general guidelines on credit scores for those who are on the lower end.

• The mortgage loan needs a minimum credit score of 580 or more with a 3.5% down payment. 
• For applicants under 580, a 10% down payment will be required while meeting additional requirements. 

What Can You Do If You Have No Credit Score?

If you have no credit history or a credit score, there are ways you can establish credit. In the case of individuals below 21, you need to have a cosigner or you need to show that you have a source of income to pay back the credit that is extended. 

Many times, parents cosign a credit card to help establish a positive credit history. 

You can also establish credit by working with the bank or credit union to open an account with a small credit limit. You can open a secured credit card to start building credit.