What Is a Good Credit Score? You are probably wondering why a credit score holds such a crucial role in the financial activities. Things like paying for the mortgage or getting a loan depends on your credit score; whether it is considered ‘healthy’ or not. You also probably have heard about people, whose loan applications, are being turned down by financial institutions because of their credit score. So, if you want to dig deeper into your financial facts and learn a thing or two about financial stability, read on.
Credit Score Meaning
Credit score is basically about credit worthiness of a person (or preferably a consumer) that is represented by numbers. The numbers are set from 300 to 850. In technical terms, credit score is your creditworthiness’ statistical analysis. Low score means that your score isn’t very good (it is considered poor), while high score means that you are considered a potential consumer (when borrowing money). There are many factors that would determine a credit score, such as total debt level, repayment history, numbers of open accounts, credit history, and others.
So, let’s say that you have two open accounts with a total debt of around $5,000. Your repayment history has been great so far: You have never been late. You have always paid on time and you have always paid your loans. Your credit score would be higher than those who have a total debt more than $15,000. Your score would look promising that those who have always been late (when repaying) or those who have one or two debts still unpaid. Basically, a credit score is important for lenders. They use the score to evaluate and think about the probability of a person repaying loans within a timely manner. That’s why a credit score can determine whether you can get a loan or not. Lenders simply have a look on your credit score and perform a simple check to learn about your loan repayment history.
How Credit Scores Work
As it was mentioned before, a credit score will affect your financial standing and life. Lenders take the score very seriously to help them decide whether they should lend you or not. Basically, the score affects their decision to give you credit. People having 640 credit score, or lower, would be considered subprime borrowers. Lending institutions or agencies may still give them credit, but they would charge a higher rate for the interest. It’s their compensation for having more risks. The institutions may also require a co-signer or shorter repayment period for these subprime borrowers.
On the other hand, those having good score won’t have to go through these complications. Not only they may enjoy lower interest rates, but the procedures will also be easier. There is no need for co-signer or they are allowed for longer repayment period. In short, those with high credit score have more perks than those with poor score.
How Credit Score Is Calculated
In the USA alone, there are 3 big and major credit reporting agencies whose responsibility is to collect, update, report, and store the credit histories of consumers. They are TransUnion, Equifax, and Experian. The information collected can be different, but when they calculate a credit score, they would do it by considering 5 important factors:
- New credit. It takes 10% of the score. It shows how many accounts an individual has, how many new accounts they have, how many new accounts they have applied for, and when the most recent one being opened, which resulting in credit inquiries.
- Payment history. It takes 35% of the score. It shows a person’s timely manner in paying their debts as well as whether they pay their debts or not.
- Credit history length. It takes 15% of the score. Longer credit histories are thought of to be less risky because they have more data that can be used to determine the payment history
- Total amount being owed. It takes 30% of the score. It is about credit utilization or credit availability
- Credit types. It takes 10% of the score. It will shows whether an individual has installment credit mix, like mortgage loan, car loan, or revolving credit (like credit cards).
Credit Score Ranges
So, what are the ranges for these credit score arrangement, really? In general, people with score at least 700 are considered good. Those with score more than 800 are excellent. So, the score above 800 is considered the perfect credit score. It is FICO score range that is often used to determine the level of score ranges:
- 300 to 579: Poor
- 580 to 669: Fair
- 670 to 739: Good
- 740 to 799: Very Good
- 800 to 850: Excellent
From this list, you can determine the ‘health’ quality of your financial standing. If you are wondering is 750 a good credit score or not, now you know the category. As you can see, your credit score is listed as a ‘very good’ one. What if you are wondering is a credit score of 580 good or bad? As you see from the range list above, it is considered fair. It means that you still need improvement to make it good or very good. What is a perfect credit score? From the list, if you have at least 800 of score, then your record is considered excellent or perfect.
Why Credit Score Is Important
Not many people realize that credit score plays crucial role in their financial health. Good score can give you the ability to unlock many benefits and savings, including access to credit cards and loans. Not only it gives you the access, but you can also enjoy favorable terms and convenient usage. After all, most of your financial activities depend on credits, like buying a home, buying a car, or having insurance. If you have low credit score, your financial access would be extremely limited, and you won’t be able to enjoy all of those financial conveniences.
There are several reasons why you would want to have good credit score; or at least maintain it.
- You can enjoy quite significant saving for loans and interest rates. People with high credit score are able to enjoy low interest rates. Even 2% of difference can be a huge difference in your overall spending. For instance, you have a $250,000 fixed mortgage for 30 years, charged within 5.5%. It will cost you the total of $511,010. If you can get a rate of 4.5% (one percent lower), your total spending would be $456,017. There is a difference of around $54,993. That’s a lot of money!
- You can enjoy better availability, terms, and conditions on loan products. If you have high and strong scores, lenders would want to lend to you. It will affect the credit products. You have the ‘power’ to compare rates. You are given the flexibility to choose a financial product that is more suitable to your preference and style.
- You have better access to the best credit cards. You should be able to get the lowest interest rate, the best rewards, and also other interesting incentives. Good score means that you are qualified for 0% APR purchase and balance transfer offering. In the end, you can save up more.
- You can enjoy insurance discounts. When you have good and high score, you are qualified for lower premiums and other perks (which can’t be offered to those having low score).
- You can get more housing options. When you rent houses or apartments, your credit score will also play a part. Many landlords would need to know your credit score to check whether you are financially trustworthy. The higher the score is, the bigger chances that you will be approved for apartment or home rental. In most cases, you may also save money for security deposit if your score is high.
Can I Improve Credit Score?
Your credit score is always updated. The credit reporting agencies always collect the information related to your score. As a result, your credit score always changes. Based on the new information, it can fall or rise. So, if you are wondering whether you can improve your score or not, the answer is: Yes, you can.
There are several ways for the consumer to improve the score, including:
- Paying the bills on a timely manner. If you continuously pay your bills on time, you should be able to see a significant different in your score, but it would be effective within 6 months; not earlier. So, make a commitment for at least 6 months to improve your score.
- Up the credit line. If you own credit card account, call the provider and ask them about the possibility of credit increase. If you have good standing, your limit can be increased. However, don’t spend this maximum amount, so your credit utilization rate will remain low.
- Don’t close a (credit card) account. Let’s say that you have 3 credit cards, but you only use 1 (or 2) of them. Don’t close the account as it will make your score drops low. Sure, it depends on the card’s credit limit or age, but closing the account can seriously take a toll on your credit score. Consider about stop using the unused card. You can separate that card and put it somewhere that you won’t be able to find (or use). For example, you have 2 credit cards and around $1,000 of debt. You also have credit limit up to $5,000 that is evenly split between the 2 cards. With your accounts, it means that your rate of credit utilization would be 20%. It’s still considered good. However, if you close one of them, your (credit) utilization rate would be 40% and it is negative for your score.
If all of these ways have failed, or you have reviewed them and think to yourself, “I won’t be able to do this”, then your option is to work together with credit repair companies. Yes, there are several professional and the best services to help you with your credit score. This is also a good alternative in the event you don’t have the time to do the repair on your own. This credit repair company would represent you to negotiate with the creditors as well as the 3 credit agencies. Naturally, you will have to pay for these credit repair services on a monthly basis. Along the way, you can also utilize the credit monitoring service to protect your data and information so it will remain secure and private.
In short, you have various alternatives and solutions to improve your score. As long as there is a will, there is always a way. It depends on your personal preference and comfort, really. And it also depends to your own determination and dedication to improve your score.
How Can I Check My Credit Score?
If you think that your credit score is always available with your financial report, then you are mistaken. Credit score is private and confidential. There is no way that you will be given the information about the score as it is.
Here are several ways to get your credit score information:
- Check your loan statement, credit card, or financial institution. These days, many banks, loan companies, and credit card providers have started providing credit score information for their customers. Try checking your statement; you may be able to find it there. Or try logging into your online account. Ask the customer service or customer service how to access the information
- Buy the scores directly. You can always contact one of those 3 credit reporting agencies and buy the information from them
- Use the credit score Credit monitoring providers offer credit score info for their customers, as long as those customers are willing to spend a monthly subscription fee. Some providers even offer a free service for their clients who want to know their score.
Can I get a free score info? Yes, you can. There are several alternatives to do so:
- You can create an account at myEquifax so you can get 6 credit reports (from Equifax) on a yearly basis. If you are thinking about enrolling in Equifax Core Credit, found at your myEquifax dashboard. When you click on the option ‘Get my free credit score’, you should be able to enjoy free (monthly) credit report as well as a free (monthly) VantageScore. It is based on Equifax data.
- If you go to www.annualcreditreport.com, you are entitled for a free copy. You can get a free one every year (12 months) from each of the three credit reporting agencies.
Why Did My Credit Score Drop?
Experiencing a drop in your score isn’t exactly nice or fun, but there are reasons for such a thing. It’s possible that there are changes happening to your (credit) utilization rate or you may experience miss or late payment. It’s possible that applying for new accounts or closing older accounts may affect the score. Inaccuracies in credit report (because of identity theft or mistakes) can also result in a drop.
If you miss or late on your payment, it will definitely take a toll on your report. Don’t forget, payment history takes 35% of the score. If you are only a few days late, it may not show on the report. But if you are late for more than 30 days or you miss a payment altogether, it will definitely show. The provider issuing the card will report it as delinquent. If you have problems keeping track on the payment (especially if you have several loans and credit cards), then you should consider about having auto payments. It can save you a lot of efforts.
Credit Score for Different Purposes
What credit score is needed to buy a house? Well, as it was mentioned before, all kinds of financial activities (especially related to loans) need good credit score. If you are interested in buying a house, the standard and general requirements are:
- Conventional (mortgage) loan requires at least credit score of 620
- FHA loans with 3.5% of down payment require at least credit score of 580
- FHA loans with 10% of down payment require at least credit score of 500 to 580
- VA loans require at least credit score of 580
If you want to buy a house, you want to get the conventional mortgage. It requires low down payment and it sets low interest rate too. The repayment periods are mostly flexible, along with competitive (interest) rates. The repayment periods can last from 15 years up to 30 years.
The same thing also applies to buying a car. If you are thinking of buying a car, your credit score should be at least 661. What if your score is lower than that?
- You can still buy a car but with higher interest rate.
- You can buy the car with a co-signer
- You buy a car from dealerships that specializes themselves in poor-credit customers
The same thing also happens when you want to purchase insurance. Insurance companies depend on credit score data to determine the premium as well as avoiding insurance losses. If you have good or excellent credit score, you can enjoy low insurance rate and wide coverage. If you have a poor score, you can still buy the insurance, but you will be dealing with higher premium.
As you can see, the score holds a huge importance in your financial standing and health. It affects your ability to own a credit card, pay debts, buy a car or a house, and even buy insurance. It’s a good idea to understand your own financial state so you can have (and maintain) good credit score.