In short, a good credit score of 700 or more is perceived as good while above 800 is outstanding. Conversely, a score below 630 is considered poor. The majority of credit scores lie between 600 and 750.
The most common types of credit scores are VantageScore and FICO Score. They both use the 300 to 850 score range and analyze much of the same information. Your financial history, including your credit usage and recent inquiries, is gathered to generate your credit score.
Both VantageScore and FICO provide your base score or their prediction of your ability to make debt payments based on your past tendencies. However, your FICO Score also calculates our industry-specific score. This number (ranging from 250 to 900) estimates how likely you are to pay a particular type of debt, including credit card debt and other loans.
A good (high) credit score is crucial for obtaining loans and other financial resources because it indicates to lenders that you are a low credit risk. Now that you know what your credit score means, it’s essential to learn about the implications of credit, including what affects your credit score and how to improve it.
What Hurts Your Credit Score
Negative information can stay on your credit report for as long as seven to ten years, so you must work to handle your accounts responsibly. Monitoring your credit and making payments in full and on time are critical aspects of maintaining good credit. However, it’s also imperative to know what damages your credit report so you can avoid it.
- Applying for credit. When you apply for a credit card, issuers check your credit report with what is known as a hard inquiry. This review of your credit can decrease your credit score several points, so it’s paramount that you choose your applications wisely.
- Consolidating credit cards. Moving your balances to one card can seem like a beneficial activity. However, it will harm your credit. Doing this increases your balance to limit ratio, or credit utilization, lowering your score.
- Failing to have credit diversity. Using only one type of credit can also reduce your score. Your credit should be a mix of credit cards and other kinds of loans with revolving and installment plans.
- Co-signing credit applications. Agreeing to be a cosigner for a family or friend with subpar credit can be quite the risk. Your credit could suffer the consequences of their delinquency.
- Missing payments. A defaulted payment more than 30 days late can hurt your credit score. The lender can report your delay, thus damaging your credit. What’s more, it can stay on your credit report for seven years.
- Debt charge-off and collections. Should you fail to pay the debt, the creditor can write off your account as a loss or contact a collection agency, both of which will lessen your credit score. Collections can also remain on your credit report for seven years.
- Settling accounts. An issuer can settle your debt, meaning they accept less than you owe, but failing to repay this debt is still shown on your credit report.
- Closing accounts. Closing your credit account diminishes your available credit, affecting your credit utilization ratio and credit history. You want to keep accounts open as long as possible to build credit.
- Voluntary surrender or repossession. Whether you surrender collateral, such as your house or car, voluntarily or it’s repossessed from you, it will become a negative item on your credit report. You will also be responsible for any remaining debt balance.
- Filing for bankruptcy. If you file for Chapter 7 bankruptcy (liquidation), you don’t have to repay any of the debt in the filing, but your credit report will show the bankruptcy for 10 years. In a Chapter 13 bankruptcy filing, or a reorganization of finances, you’ll be responsible for paying some of the debt, and the notation will stay with you for seven years.
How to Check Your Credit Score
You can check your credit score by requesting a copy of your credit report from the three major credit bureaus or credit reporting agencies: Equifax, Experian, and TransUnion. You can only do this for free every 12 months, but it’s a valuable service.
Additionally, you can check your credit score through various websites. Be wary when doing this, though. Few sites offer free credit reports without any gimmicks. Some use it as a ploy to get you to sign up for a paid service inadvertently.
It’s essential to check your credit score and report frequently. This way, you can track your progress to see whether your credit history is improving or not and adjust your actions accordingly.
Furthermore, you should scan your credit report for errors. Mistakes can occur that damage your credit score. If you watch your credit closely, you can dispute any accuracies before too much damage is done.
Why Good Credit Matters
Having good credit puts you at a better financial advantage than those with poor credit. Showing that you’re financially reliable allows you to get approved for credit cards and loans with lower fees and interest rates. You’ll also be more qualified for rewards and perks.
There are some surprising circumstances where good credit matters. Landlords, mobile phone providers, and even potential employers can conduct credit checks to analyze your financial risk level. This means that your credit could refrain you from acquiring housing, a smartphone, or even a new job.
How to Improve Your Credit Score
It takes more than just a few days or weeks to improve your credit score. It often takes several months or even years to repair bad credit. The length of time it takes to get back to good credit depends on how complicated your financial situation was and the steps you’re taking to remedy it.
If your credit is good or at least fair, you can make it even better by focusing on your payments. This includes any outstanding debts in addition to your credit card payments. Work to pay down other debt before focusing on your credit card.
Making full payments early or on time plays a significant role in building your credit. Not using too much credit at one time ensures that you will be able to make monthly payments. It’s advised that your credit utilization, or the ratio of your credit card balance to your credit limit, stay below 30 percent.
If you have poor credit, attempting to repair it can seem like a daunting task. To get it on the mend, you should apply for a credit card for bad credit. After you get said card, follow the steps below to raise your credit score from deplorable to satisfactory.
- Use the credit card – You have to use the card to incur credit debt to turn around and repay to raise your credit score.
- Pay at least the minimum balance on time – A surefire way to start repairing your credit is never to miss a payment. It’s even better for your credit score if you pay more than the minimum amount.
- Monitor your credit report – As mentioned previously, you should check your credit report often to track your progress and look for discrepancies.
- Look for card upgrades – As you rebuild your credit, better credit cards will become available to you. Keep an eye out for cards at your institution with lower fees and better perks.
- Repeat – This step is self-explanatory. Start the credit repair process over again to continue to build your credit.
Even if your credit score goes from bad to fair to good, there’s no reason to stop striving for improvement — challenge yourself to achieve an excellent credit score!
Having a good credit score is essential to receiving financial resources, such as loans. Not to mention other factors, including applying for a lease or financing your car, where your credit report comes into consideration.
Furthermore, building up your credit helps you save money in the short term and the long run. People with good credit are less risky for lenders, meaning they typically pay cheaper deposits, fees, and interest rates.