Throughout your adult life, you’ll often hear people talk about how you need to have a good credit score. But what exactly does that mean, and what kind of a credit score range is required to qualify for great loans and rates? In this article, we’ll explain what a credit score is and what you can do to improve your score.
How do credit scores work?
Your credit score, or more specifically your FICO Score, is a number between 300 and 850 that quantifies your creditworthiness. Lenders will use your score to make decisions about whether you’re a good candidate for a loan and what interest rate should be used. Simply put, the higher your credit score, the better rates and terms you may qualify for.
FICO is the company that calculates this score, and they do so by pulling data collected by the three major credit reporting bureaus: Equifax, Experian, and TransUnion. Every positive action you make like paying a bill on time or in full helps to improve your score. At the same time, negative actions like being late or missing a payment altogether will result in lowering your score.
What are the credit score ranges?
According to Equifax, FICO Scores can be grouped together into one of five categories:
- 850-800 Excellent
- 799-740 Very Good
- 739-670 Good
- 669-580 Fair
- 579-300 Poor
Generally speaking, many people with Excellent and Very Good credit will have no problem qualifying for many loans and getting the best rates. People with Good, Fair, and Poor credit can still qualify for loans but may not get the best rate available.
What factors determine my credit score?
FICO Scores use five main pieces of criteria to calculate credit scores:
- Payment History, 35% – Have you made consistent on-time payments of at least the minimum amount?
- Credit Utilization, 30% – How much available credit is being used?
- Length of Your Credit History, 15% – How long have you had credit?
- Credit Mix, 10% – How many different types of credit lines do you have?
- Recent Inquiries, 10% – How many times has your credit history been pulled over the last 12 months?
How to improve your credit score
The great thing about your FICO Score is that you’re never stuck with a low one. You can always improve your number by using the following tips:
- Always put your bills on auto-pay – This will ensure they will be paid on time and at least the minimum every month.
- Watch how much you spend – Keep your credit utilization at less than 30 percent. Try not to carry a balance since this will count toward it.
- Have a mix of debts – Besides credit cards, feel free to apply for other types of loans like a mortgage or auto loan. They will make you look more rounded to lenders.
- Leave old cards open – The older your credit lines, the more established you appear.
- Don’t apply too often – Keep your applications to a minimum. Too many in one year can make it appear to lenders that you’re in financial distress.
The bottom line
The better your FICO Score is, the more likely you will be approved for a loan and offered a great interest rate. To get a great credit score, build a solid credit history by practicing good financial habits such as paying your bills on time, in full, and keeping your credit utilization low.
Name: Michael Bertini
Job Title: Consultant