Working towards good credit can be daunting, but educating yourself is the first step in the right direction.
A good credit score is anywhere above about 670. Your credit score is used to determine your eligibility for cards or loans, so having a good score is vital to get you approved for everything you might need.
Unsure where to start with your credit? Start here! This article will tell you all about credit scores and what it takes to get a good one.
How does a credit score work?
Your credit score is a three-digit number calculated from the information provided in your credit report. Your credit score is used by creditors to determine your likelihood of repaying a loan.
A credit score influences how much you can borrow, how long you have to repay said borrowed amount, and how much it will cost in total after interest.
It’s a quick and simple way for banks or lenders to determine your eligibility for a loan so they don’t have to evaluate your credit report themselves.
What kind of scores are there?
There are two primary credit scoring systems: FICO and VantageScore. FICO was the first credit scoring system to go public in 1986. The FICO score was created by the Fair Isaac Corporation, which was previously called Fair, Isaac, and Company.
The VantageScore system emerged in 2006 when credit bureaus Equifax, TransUnion, and Experian banded together to create their own scoring system. Both scoring systems are widely used by credit issuers.
FICO also has different types of credit scores. FICO has auto, bankcard, and mortgage credit scores that vary from one another. These credit scores are typically used by their respective industries, and the credit issuer decides which score they use whether it’s industry-specific or not.
What is a good credit score?
No matter what the scoring system, the higher your score, the better. Currently, both credit scoring systems measure scores on a scale of 300-850.
FICO 8.0 scores are divided into five different sections: poor, fair, good, very good, and exceptional.
- A poor score is 580 or less.
- A fair score ranges from 580-669.
- A good score ranges from 670-739.
- A very good score ranges from 740-799.
- An exceptional score is 800+.
VantageScore sections into five similar sections. It recently adopted the same scoring range as FICO with its latest models VantageScore 3.0 and VantageScore 4.0.
- A very poor score is about 300-499.
- A poor score ranges from 500-600.
- A fair score ranges from 601-660.
- A good score ranges from 661-780.
- An excellent score is 781-850.
Also Read: What Credit Score Do You Start With?
How is a credit score calculated?
Your credit score is calculated using an algorithm that is undisclosed to the public. Essentially, the creation of your score is influenced by the following factors.
- Payment history: Your payment history is the most important factor influencing your credit score. Making your payments on time and having a long history of doing so will significantly boost your score. That being said, having past due payments or delinquent accounts will make your credit score drop.
- Amount owed: How much of your used available credit is another factor impacting your credit score. You want to utilize your credit, but it’s risky to max out all of your credit cards. Don’t pass 30% utilization overall, or your credit score will suffer.
- Credit history: The length of your credit history is taken into consideration too. A long period of time borrowing (and repaying) will boost your score. Although, if you open any new accounts, the average length of your history decreases. This also considers how long it’s been since you’ve used an open account.
- New credit: Opening or applying for new accounts affects your score. Too many hard inquiries or new accounts in a short time is seen as a credit risk. Hard inquires impact your score for about a year, but remain on your credit report for two.
- Credit mix: The types of accounts you have open are your credit mix. Your score takes into account any installment or revolving credit lines. An installment line would be a personal, car, or mortgage loan, and a revolving line would be a credit card. It’s not necessary to have one of each, but it can be something that boosts your score.
Both FICO and VantageScore take these factors into consideration, but their algorithm weighs them differently.
How do you check your credit score?
When you apply for a credit card, you should receive your credit score in the mail along with your welcome package or the reason you were denied. No matter what the outcome, companies are required by law to give you a copy of your report.
Most credit card issuers offer a perk that lets you access your credit score at anytime. They can either team with FICO or VantageScore to show you your score via their website or app.
You can also purchase your credit score directly from FICO or sign up with credit score services. Some services let you check your credit score for free, but others charge monthly subscription fees.
Furthermore, you can access your annual free credit report from all three credit bureaus on AnnualCreditReport.com. Your score is not listed on your credit report.
How do you improve your credit score?
Pay on time: Pay your bills every month. Late payments can negatively impact your credit score. A long history of paying your bills on time is key to having a good credit score.
Lower your credit usage: Lower your credit utilization and keep it under 30%. If you can, aim for 10% utilization. Using your credit lines just a little can go a long way.
Get pre-approved: Try to avoid hard inquiries and multiple card applications by getting preapprovals! Oftentimes, credit card companies reach out to you through the mail, or they have services online to check if you’re eligible to be pre-approved.
Check your report: Checking your credit report is just as important as knowing your credit score. Your report can explain why your credit is low and if any negative information is impacting it.
Repair your credit: If you see harmful marks on your report, a credit repair company can help you with credit restoration. Credit repair companies reach out to the credit bureaus and notify them of any incorrect information affecting your credit. This results in an investigation that will require credit bureaus to stop reporting the invalid information if they cannot verify it.
Without good credit, you can miss a lot of opportunities! Start your journey to good credit so you can enjoy all the perks of a good score.
Since your report and score go hand-in-hand, start by accessing your report first. Your report will give you a general idea of how your credit score is evaluated. Plus, you need to take initiative if you see something wrong. Contact Cool Credit to help.
Cool Credit is a credit restoration company invested in helping you reach the 700+ club. Cool Credit fights to correct mistakes, negative listings, or fraudulent activity harming your credit report and score.
Contact the Cool Credit team to learn more about repairing and improving your credit today.