Credit makes the world go round. Good credit can unlock so many opportunities, while mediocre or poor credit can be a barrier to entry.
As you’re reading this, you likely have a few questions. Among them is probably what’s considered a “good” credit score.
To answer this question, it’s important to have some context. The nation’s three large credit rating agencies collect personal-finance data from numerous sources and crunch those numbers to arrive at a number, called a FICO score. Consumers are assigned a number ranging from 300 to 850.
Generally speaking, any score above 750 is a sign to lenders that you pose a low risk to defaulting and therefore you can borrow money without getting penalized with higher interest rates. Scores between 650 and 750 are considered middle of the road and consumers will notice the terms reflect that. Borrowers with scores below 650 will find it’s more expensive to borrow money and the terms might not be as favorable.
Whatever your situation, the first step in improving your score is learning what needs to be addressed and taking steps to address the issues.
The most important step you can take is to order your report at least once a year, preferably more often than that. Get your credit report for free, online, from each of the three major credit bureaus — Experian, Equifax and TransUnion.
Review the document thoroughly and dispute any errors you discover in your credit report. Yes, credit bureaus and creditors make mistakes and the onus is on you, the consumer, to catch them.
Checking your credit report with each credit-reporting bureau at least annually is key to making sure that everything is above board. Mistakes can lower your credit score, so don’t leave anything to chase.
It may seem obvious, but on-time payments do influence a person's credit score. Likewise, late payments can dramatically lower it. The bottom line: Your credit score reflects how well you make your payments on your mortgage, credit cards, student loans and other financial obligations. Your payment history is responsible for a third or more of your overall score. Consistent, on-time payments help on this way.
Experts recommend only using a small percentage of the credit that's available to you. Maxed out credit cards or balances all approaching a credit limit will lower your credit score. Have you heard the term credit utilization? That's the percentage of your available credit that you actually use. Lenders and credit-scoring systems reward those with low credit utilization rates.
Generally, a good credit utilization rate is less than 30 percent. Simply put, that means you're using less than 30 percent of the total credit that is available to you. On a credit card with a $10,000 limit, that means keeping your balance below $3,000, with the goal of not carrying a balance at all.
Improving your credit score requires longer-term thinking. It takes time, strategy, consistency, and commitment to raising your score. If yours is in the good-to-excellent range, you likely are financially savvy and don’t need to change your habits. However, if you’re stuck in the 600s or below, here are some ways to get in the healthy range:
It might seem counterproductive to take out a credit card when you can make purchases with the debit card from your bank, but there’s a reason only one of them is called a “credit” card. Because the money used for debit-card transactions comes straight from your bank account, you’re not borrowing money for purchases—you’re electronically transferring funds.
Most consumers qualify for some type of credit card despite a lack of credit history— although you may end up with a lower spending limit and higher interest rates or fees. But if you’re not a good candidate for one, consider a secured credit card. It works like a normal card except that you must put down a security deposit.
If you don’t make purchases on the card, you can’t demonstrate that you’ll pay back the money. A good way to start is with regular monthly bills. Many utilities allow you to autopay their bills with your credit card—and you’ll get a discount for doing so. A good rule of thumb is to limit your monthly usage to less than half your credit limit. Going any higher might adversely affect the credit history and set you back.
Ideally, you’d pay off your bill every month. But even carrying a balance won’t hurt your credit if you pay the minimum amount required. You must not pay late or otherwise fall behind.
Consumers with favorable credit scores can more easily navigate the marketplace and get better treatment by institutions. Here are just a few ways:
As you may or may not know, insurance carriers can use your credit reports to help decide whether to approve your application and how much to charge you. And once you’re a customer, they may check your credit to determine whether to raise your premiums or even withdrawal coverage.
Good credit may be helpful when it comes to determining your annual percentage rate, since credit card companies typically offer their best rates to customers with robust scores. This is also a factor if and when you’re looking to upgrade or apply for a new credit card. Similarly, a good credit score might help your cause in that lenders might be willing to lend you more money.
Landlords may check your credit history when you apply to rent an apartment. This can mean the difference between getting the keys to a new place or getting denied. Score requirements can vary among apartments, and it's sometimes possible to rent with no credit history at all. Plus, good credit may also help you get a mortgage for a house and a lower interest rate.
The good and bad news is that your credit score is fluid. If you want to qualify for a mortgage and your credit score isn’t up to par, you have the power to change it for the better. It’s in your favor to read up on the true cost of home ownership so you can plan for your future. Take the time to evaluate your financial picture, including credit score, available cash on hand and desired timeframe.
Once you’ve done your due diligence, contact a loan officer in your area to talk through next steps. Even if your lender determines you’re not ready to purchase a home immediately, they’re happy to craft a realistic plan to make homeownership a reality in the future.