Your credit score and in what credit score range your credit score fits is very important.
A great credit score allows you to:
- Get a mortgage with a low interest rate to buy your dream house
- Get a low-interest car loan to get your favorite car
- Borrow money easily in an emergency.
In a nutshell, a good credit score is something that can save you a lot of money and help you in an emergency.
If you are a lender, the likelihood of being repaid is very important to you. This is no different than if you were to give a loan to a friend. There are some friends where you are probably highly confident that they will repay you on time. And there are other friends where you are probably not sure whether you will get your money back.
Lenders don’t know you as well as you know your friends. That is where the credit score comes into play. It is a simplification tool to quickly judge people. Right, wrong or indifferent, until that changes, it is in your own interest to have the highest credit score that you can achieve.
A credit score does not care about your income or your wealth. It only measures how responsibly you have been with your finances in the past. Actually, some wealthy individuals have a bad credit score.
1. Credit Score Range – From Excellent to Bad
Credit scores range from 300 to 850, with 300 being the worst and 850 being the absolute best. Every lender makes his own determination what determines a good credit score range. The credit score ranges as outlined below may change a little bit from lender to lender, but generically the below credit score ranges are correct.
740 to 850 = Excellent Credit Score Range
This is when you get the lowest interest rates possible and the longest repayment terms for loans. If are considering a major purchase, like buying a house, this is where you want to be. This is also when you will get those juicy 0% credit card offers in your mail.
680 to 740 = Good Credit Score Range
You are seen as a good borrower, and you will still get good interest rates. However, your interest rates will not be as low as for borrowers with excellent credit.
620 to 680 = Acceptable Credit Score Range
This is the lowest you can go with your credit score and still get somewhat acceptable interest rates. However, if you are in this range you are not that far away from a good credit score range, and it would save you a lot of money if you took steps to improve your credit score. How, you may ask? That will be explained below.
550 to 620 = Subprime Credit Score Range
You still will be able to get loans at this level but only with high interest rates and extra finance charges. Lenders will loan you money, but it will cost you. The good news is that you can dramatically lower your interest rates once your credit score improves. How? That will be explained below.
300 to 550 = Poor Credit Score Range
Getting a loan at this level is almost impossible. If you can get it, the interest rates will be ridiculously high. It is time for action. The good news is that nothing is forever. That includes a poor credit score. With the right actions as explained below you can be on your way to a good credit score.
2. Credit Score Range – A bad credit score can cost you!
On average, the credit score has proven to be such a good simplification tool to judge the creditworthiness and responsible nature of a person that it is now used in all kinds of situations.
You can expect to be asked for your credit report and thus your credit score, if you want to:
- Rent an apartment
- Apply for a credit card or a loan
- Open a bank account
- Buy a home or a car
- Get a job
- Apply for insurance (homeowners, renters, auto, etc)
It even affects you if you are looking for a partner on some dating websites. Here is a short video from NBC talking about the latest trend in dating websites that use credit scores.
3. Credit Score Range – What is a FICO Score?
When people talk about credit scores, they are really talking about the FICO score. The FICO score is the most widely used credit score in the United States. There are other credit scores, but for the time being, they are not really that relevant.
The FICO credit score methodology was developed by Bill Fair and Earl Isaac in the late 1950s. FICO is an abbreviation for the company they created, the Fair Isaac Corporation.
4. Even little things can ruin your credit score
In this short video, Fox news talks about the credit score in general, but also the little things that can ruin your credit score such as unreturned library books. So watch it and be careful.
5. What Determines My Credit Score? How Is The FICO Score Generated?
As mentioned previously, FICO is the most widely used credit score in the United States. Knowing how FICO calculates your credit score is a great way to better understand what you can do to protect and improve your credit score.
Things that Determine Your Credit Score
35%: Payment history
The first thing any lender wants to know is whether you have paid on time in the past. This is one of the most important factors in a FICO Score. So, ALWAYS pay your bills on time. If you haven’t done that in the past, start doing it now. Just to be safe, pay a few days early.
30%: Amounts owed – “Always have a large gap between what you borrowed and what you could borrow”
If your credit card debt is $2,000, but you have a $10,000 credit line you are not considered to have high amounts of debt. On the other hand, if you credit card debt is $2,000 and you have a credit line of $2,200, lenders will be concerned that you are almost maxed out. As you can see, it is not the borrowed amount that concerns lenders, but how close you are to being maxed out. Lender look at it credit card by credit card, but also in total. So, if you have a credit card with a high limit that you don’t really need or use, you may want to keep it open and just use it infrequently.
15%: Length of credit history
This is based on the length of your credit history. If you have been financially responsible for 2 years, that is more impressive than if you have been financially responsible for 2 months. One mistake people often make is closing older accounts and thus deleting an old credit history. You may want to keep the older accounts open and just use them infrequently.
10%: Types of credit used
A good mix of credit cards and installment loans like car loans or mortgages is best. Stay away from lenders with a shady reputation.
10%: Recent credit applications
If you are frantically applying for credit at various companies, it sounds like something is wrong and that worries lenders.
As you can see, income and wealth is NOT part of the FICO score. In other words, you don’t need to be rich for a high credit score.
6. Credit Score Range Distribution
The table below shows how FICO credit scores are distributed across U.S. consumers with credit histories.
The good news is, with a little effort you too can have a great credit score.
7. Who Is Reporting Your Credit Score?
There are 3 different credit firms (Equifax, Experian and TransUnion) that report your credit score. Each credit firm bases its credit score on information that it has about you, your credit report. That means that you have 3 different credit reports and 3 different FICO credit scores.
Your 3 credit reports usually have roughly the same information, but there is always some information that is not known to all 3 credit firms. Usually the impact is minimal, and your 3 FICO scores should be identical or very close.
8. What’s in a Credit Report?
In a nutshell, your financial history is in your credit report. Did you borrow money? If you did, did you pay it back on time? Did you file for bankruptcy? How many credit cards do have? And so on.
As mentioned above, each of the 3 credit firms has its own credit report about you. That is why it is so important to check the credit report of all 3 credit firms.
9. How to Request a Credit Report
There are a number of companies trying to “help you” with your credit report. They all usually want some money for it, after a free trial period. So be careful. There is however, a completely free source of credit report from each of the 3 credit companies.
That free source is AnnualCreditReport.com, which will get your 3 credit reports from each of the three companies.
Take the time to check your credit report once a year for errors. You would hope that all the information in your credit reports is correct, but while that usually is the case, your credit report can contain wrong information.
Wrong information can result in a low credit score for you, and that error will cost you when you want to borrow money or even apply for a job.
The only thing your free credit reports will NOT show is a credit score.
10. How Can I Check My Credit Score, And More Often?
The free annual service is great, and everyone should at least once a year check his or her credit file at the 3 agencies. If you want to know your credit score or check your credit report more often (say monthly), you will need to sign up for a paid credit monitoring service.
There are multiple companies offering that service, and unfortunately some shady companies. Credit monitoring services from one of the main credit reporting firms is a great place to start.
Experian offers 2 products. A one-time credit report and credit score check, and an on-going credit tracking service.
- 3 Bureau Credit Reports and Scores: You receive the credit reports and credit scores for all 3 credit reporting firms (Experian, TransUnion, and Equifax), for one-time.
- Experian Credit Tracker: Here you get in addition to the Experian credit report and score, an on-going credit monitoring of all 3 credit firms (Experian, TransUnion, and Equifax). This is a great way to protect yourself against any incorrect information that could harm your credit score.
- Like Experian, TransUnion is another credit reporting firm that provides some of the best credit monitoring services. As a member, you have access to triple-bureau credit monitoring alerts, so you will be notified of any suspicious activity.
11. Tips to boost your credit score
Credit scores are calculated by automated systems, and they follow certain rules. There is typically no human being looking over each credit score and checking whether it all makes sense.
For example, if you mail your credit card payment on time but the mail gets lost, a human being may ignore that one late payment.
On the other hand and in reality, under the same situation, a computer will not ignore the late payment because it is programmed to follow certain rules.
This can work against you, but it can also work for you. As long as you understand the credit scoring methods (see tip 5 above), and follow the tips explained below, you can make sure that everything the credit scoring system sees about you looks great.
Deal with Credit Report Errors
The first and most important step is to order all 3 credit reports and check them for errors. Mark each of the errors and dispute them with the respective credit firm. By law, each credit firm MUST investigate valid complaints and remove inaccurate information.
Focus on Paying Off Your Highest Balances First
This goes back to tip number 5, which is always have a large gap between what you borrowed and what you could borrow. You should start by paying down the credit cards that are almost maxed out.
Do Not Cancel Credit Cards
This also goes back to tip number 5, which is always have a large gap between what you borrowed and what you could borrow. So, if you have credit cards that you don’t use anymore, keep them anyway. DO NOT cancel them. That could hurt your credit score. Put small amounts on them each month and make sure to pay them off in full each month.
Make Sure All of Your Accounts are Visible
Not everything that you pay on a regular basis gets reported to the credit firms. For example, your cell phone bill or your utility bill usually does not get reported to the credit firms. If you have been paying those bills on time, contact them and ask them if they would report your payment history to the credit reporting firms. Keep in mind, however, that they have no legal requirement to do that. If they do that, they are doing you a favor. So when you approach companies like those above, you’re asking for a favor, not making a demand.
Blend Your Credit
Potential lenders like to see that you can handle different kinds of accounts. So get credit cards (if you don’t already have one) and always pay everything off on time. Get a short term small installment loan (one with fixed payments and an established due date) for an item like a TV or a computer and pay it back over 12 months.
Ask for a Credit Line Increase
This again goes back to tip number 5, which is always have a large gap between what you borrowed and what you could borrow. For any credit where it looks like that you are maxed out or close to being maxed out, contact your lender and see if they can increase your credit line. While paying off your balance is the best solution, a quick fix that improves your credit score is to ask for a credit limit increase.
12. Protect Your Credit
Be protective of your credit.
If you currently have good credit, protect it. It is an asset, like your house, your savings, or your car. Protect it by following the instructions above.
If you currently have bad credit, don’t worry. Nothing lasts forever. If you follow the instructions above, it won’t be too long before you see your credit score improve. And once you have great credit, the same lenders who would not return your call will be dying to loan you money at low interest rates.