In America these days, credit score is king. It may be a tough truth to swallow for some, but having a great credit score makes life not only easier, but cheaper as well. A good credit score allows you to more easily secure loans, more easily get a credit card with a favorable annual percentage rate, it even will help you buy a house.
On the other side, a bad credit score can make it nearly impossible to feel financially free.
Before going over what you can do to maintain or improve your credit score, here is a quick rundown of how credit scores work.
The FICO Score ranges between 300 and 850 with 300 being the lowest possible score and 850 being the highest possible score. A score of 700 or above is considered to be strong. A score of 800 or above is considered to be excellent.
The higher the score, the better your score, and higher scored represent better credit decisions. That history of responsible credit decisions and borrowing can make creditors more confident that you will be able to pay your future debts as well.
Here is a basic breakdown:
- 300 – 579: Very poor credit score. Credit applicants may be required to pay a fee or deposit and applicants with this rating may not be approved. Approx. 17% of people have scores within this range.
- 580 – 669: Fair credit score. Credit applicants with scores in this range are considered subprime and will likely be able to take out loans but at increased rates. Approx. 20.2% of people have scores within this range.
- 670 – 739: Good credit score. Only 8 percent of applicants within this range are likely to become seriously delinquent in the future. Approx. 21.5% of people have scores within this range.
- 740 – 799: Very good credit score. Applicants with scores in this range are likely to receive better than average rates from lenders. Approx. 18.25% of people have scores within this range.
- 800 – 850: Exceptional credit score. Applicants with scores within the range are near the top of the list when it comes to receiving the best rates from lenders. Approx. 19.9% of people have scores within this range.
Factors That affect your credit score:
There is a list of factors that impact your credit score, and it is important to know that not all deciding factors are created equal.When it comes to your FICO Score, there is a list of most influential to least influential factors.
Most influential: Payment history on loans and credit cards.
Highly influential: Total debt and amounts owed
Moderately influential: Length of credit history
Less influential: New credit and credit mix
Next, it’s important to know some of the most common ways to improve and maintain good credit. While You now know the important factors when it comes to your credit score, having things spelled out as simply as possible is important.
Here are the most common ways to build and maintain good credit:
1. Pay your bills on time
This may seem simple, but you’d be surprised how many people fail to do just this. When lenders review you credit report and request a score for you, they will be very interested to see how reliably you are able to pay your bills. That’s because past payment performance is usually considered to be a great predictor of future performance.
If you want to positively influence your credit score by paying bills, make sure that you pay them all on time. This doesn’t just mean your credit card bills, or loans you may have like a student loan or auto loan, this means all bills. Electricity, water, gas, etc. If you can, just set up as many automatic payments as possible.
2. Pay off debt and keep balances low on your credit cards
This is another very important factor to keep in mind. Your credit utilization ratio basically means that you want to be using 20 percent of your available credit at most at any one time. For example, if you have $20,000 of available debt across your credit cards, you will typically want to have under $4,000 in your balance.
A low credit utilization rate tells lenders that you have not maxed out your credit cards and likely know how to manage credit fairly well. This alone will make you a far more attractive potential borrower because lenders will be able to feel confident in your ability to pay back a loan should you take one out.
3. Don’t close unused credit card accounts
Keeping unused credit cards open as long as they’re not costing you money in annual fees is a good strategy to building strong credit. That’s because closing an account may increase your credit utilization ratio. Owing the same amount in credit card debt but having fewer open accounts – and less available credit – may lower your credit score.
4. Dispute inaccuracies in your credit report
You should always check your credit report at all three credit reporting bureaus for any inaccuracies. Incorrect info on your credit report can drag your scores down in a big way. Verify that all the information on your report is correct and if you see errors make sure that you dispute the information and get it corrected as quickly as possible.
Here are the less common ways to improve your credit score
1. Take out a loan for a major purchase
If you have the money and are able to do so, taking out a long-term loan such as a car loan or mortgage can be a great thing when it comes to your credit score. Though there is the initial hard inquiry on your score that will knock a couple points off your score, the long-term benefits will dramatically outweigh short-term negatives- that is, if you can keep up with your payments.
The reason why this is a great way to improve your credit score is because your FICO score states that about 10% of your score is based on the mix of credit types you use.
The score will consider the mixture of credit cards, retail accounts, installment loans, and mortgage loans you have when determining your score. While it is certainly not necessary to have each of those types of credit to have a great credit score, having a nice mix is a good idea.
2. Open new credit card accounts
Obtaining additional credit cards increases your total available credit. As mentioned previously, your credit utilization, or the percentage of your available credit that you have spent, plays a large role in improving your credit.
Still though, you want to be sure that this method does not backfire on you.
For one, it is important not to open a lot of accounts at one time because the more new accounts you have, the shorter the average age of your accounts will be. A lower average age will typically lower your credit score.
Another issue that you may run into could ultimately lead to temptation for you to dip into your newfound available credit. That could lead to further credit card debt, which could in turn lead to a lower credit score.
3. Take out a small loan you don’t need
This is another option at your disposal and can be a great asset if your credit score is preventing you from getting the type of interest rate you want. Taking out a small loan can help improve your credit score if you repay it as promised.
The reason why this is a valuable strategy is because borrowing and paying it back in a timely manner can add some positive activity to your credit history.
There are a lot of options for small personal loans that you can take out. Options like peer-to-peer lenders, car title loans, and online personal loans are a great way to get a small amount of money in the form of a personal loan that you can comfortably pay off.
Still, when contemplating this strategy, it is crucial to know what the interest rate attached to your loan is going to be. Sure, it can be worth it if you are able to pay off your loan, but you don’t want to overpay.
Hopefully all this information has helped you get a better grasp on what your credit score means, how it can impact your life, and how you can maintain a strong score, or improve your score if you need to.