When it comes to personal finance, it is more important than ever to understand your credit score and how it can affect your financial life. Here’s a look at what you should know when it comes to a good credit score.
What is a Good Credit Score?
One way of determining the ability of a borrower to repay a loan is to look at their credit score.
The scores can be high, middle, or low. If you have a high credit score, then it is assumed that you would be able to obtain valuable credit and can easily pay back the funds loaned to you.
Conversely, if you have a low credit score, it is assumed that you’re unlikely to repay your loans. With a low score, lenders will be cautious, and it won’t be easy for you to get loans.
Your credit score can range anywhere from 300 to 850, and it is made up of various pertinent factors, including:
- Your payment history
- The amount you owe
- Your spending information
- The kinds of credit you use
Experian, Transunion, and Equifax are the three leading credit reporting agencies. You are entitled to one free annual credit report from each of the agencies. Entities extending credit will carefully look at numbers on your credit score. Most lenders feel that a score of at least 700 is a good credit score.
It’s important to maintain a high score as it comes with numerous benefits. For example, you’ll normally enjoy low-interest rates and fast credit approval processes from lenders.
What is a FICO Score?
A major aspect considered by financial institutions before granting a loan is your FICO score. It is one of the most popular types of credit score in the United States.
It is, therefore, important to understand what a FICO score is, how it’s determined, and the factors that affect it. Learning what affects a FICO score can help you improve your chances of getting affordable loans.
FICO score was invented by a man named Fair Isaac as a means of computing scores to assess an individual’s financial lifestyle and activities.
The term FICO is an abbreviation of the Fair Isaac Corporation. Your FICO score is used to determine your ability to pay the loan as well as the probability of payment or non-payment of the credit loan.
The score is prepared by credit reporting agencies, which compile information derived from previous and current transactions as well as loans from creditors. They also compute your risk or likelihood of defaulting on credits extended to you.
The score can be as low as 300 or as high as 850.
The higher the score, the greater the ability and chance at being in control of your finances and upholding a healthier financial lifestyle. With a healthy financial lifestyle, you have a higher chance of being granted credit loans by banks and creditors.
A low FICO score, usually below 600, denotes a greater probability that you won’t be able to maintain the necessary finances to be able to service the loan.
Hence, the banks and creditors may reject your loan application or approve it for a lower amount or at significantly higher interest rates.
It is worth noting that having a low FICO score doesn’t mean that you’ll never get decent interest rates. You can always improve your credit by working on various factors affecting it, such as reducing the number of debts that you owe. We’ll look at several ways to improve your credit score in the last section of this article.
What is a Vantage Score?
A Vantage Score is a credit score jointly developed by Equifax, TransUnion, and Experian to determine your probability of repaying borrowed money. Financial institutions, lenders, and landlords normally use it to evaluate creditworthiness.
The three credit reporting agencies developed the algorithm to produce Vantage Score in 2006. This credit score is rapidly gaining popularity among lenders, and it is usually offered to customers for free.
Statistics by research firm Oliver Wyman shows that lenders used about 6 billion Vantage Scores in 2017, of which at least 16% went directly to consumers.
Unlike the FICO score, the Vantage Score normally doesn’t use percentages to show how much weight it gives various credit factors. It describes the factors in terms of influence, as outlined below:
- Payment history – Extremely influential
- Age, type, and percentage of credit used – Highly influential
- Total debt and balances – Moderately influential
- Recent debt and credit behavior – Less influential
Vantage Scores range from 300 to 850. Much like FICO, a higher score means better credit.
What Makes up My Score?
The data from your credit report is divided into five main categories. The scoring model gives some factors more weight than others and we don’t actually know the exact weighting because FICO keeps that private.
That said, here’s what most experts agree makes your credit score:
- Payment History (35%) – This encompasses your account payment information, including any misconducts and public records
- Amounts Owed (30%) – This includes the amount of money you owe on your credit accounts
- Length of Credit History (15%) – When you opened your accounts and period since account activity
- Types of Credit Used (10%) – The various accounts that you have. May include revolving account and installment accounts
- New Credit (10%) – Any credit lines that you are currently pursuing. May include credit inquiries and various recently opened accounts
It would help if you realized that personal or demographic details such as age, income, employment, marital status, race, and address won’t affect your credit score.
How Can I Improve My Credit Score?
There are several things you can do to improve your credit score. However, keep in mind that this doesn’t work overnight. It takes time.
Here’s a list of five valuable tips that will help you improve your credit score over time:
Reduce the amount of debt you owe
This may sound like a difficult endeavor, but it is one of the best ways to improve your credit score. It’s also very satisfying to reduce the amount that you owe. To begin with, you should stop using any credit cards you have.
Get your credit report and make a list of all your accounts. Then check your recent statements to find out how much you owe on every account. Note down the interest rates they’re charging you as well.
With this information, create a payment plan where most of your available budget goes towards clearing the debts of the highest interest cards first while upholding minimum payments on the rest of the accounts.
Pay your bills on time
Nothing can ruin your credit score faster than late or defaulted repayments. Every time you miss a payment, such as a telephone bill or credit card repayment, your credit score drops. Fortunately, this is easy to fix.
Simply pay your bills on time, always. This will go a long way to improving your credit score. You should realize that an overdue payment will show on your credit report for five years.
Hence, if you are having a hard time staying up-to-date on all your bills, you should consider setting calendar reminders of when your bills are due. Another great idea is to set up direct debits so that your bills can auto-pay from your bank.
Talk to your creditors
If you are having financial issues that are making it difficult to meet your obligations, consider reaching out to your creditors. You can devise a plan on how to make your payments with minimal strain. This will not repair your credit score immediately.
Nonetheless, if you can start managing your credit and paying on time, you should expect your score to improve over time. You can also seek assistance from a credit counselor. It won’t affect your score.
Avoid applying for a new credit card
As long as you are trying to improve your credit score, you should stop making any new credit card applications.
Credit inquiries can negatively affect your credit score. Moreover, opening a new credit account reduces your average credit age. That’s another move that can hurt your score.
Check your credit report regularly
Take into consideration that some factors that could ruin your credit score are beyond your control. One example of this is identity theft. Fortunately, you can avoid being a victim of such factors.
One effective way to avoid situations is to review your credit regularly and report any anomalies to the relevant authorities before it’s too late. You can also freeze your credit to avoid credit inquiries that may lower your score.
The three major credit report agencies offer consumers a free credit report every year. This means every four months you can pull a report from one agency.
If the process of improving your credit seems overwhelming, there are several reputable credit repair companies. Three of the top credit repair services are:
- Lexington Law – The most well known credit repair service, Lexington Law is a top option for helping with credit repair.
- Pyramid Credit – Known for their personalize sergice, Pyramid Credit can help you get your score cleaned up.
- Credit People – The only service that has a 7-day trial, The Credit People has the most flexible pricing structure.
Final Thoughts on What is a Credit Score
Your credit is an important aspect of your financial profile. It can be used to determine some of the most important financial factors in your life, such as whether you qualify for a loan, a mortgage, or even a job.
When it comes to a 30-year mortgage, a difference in a few interest points can be quite expensive in the long run.