Key takeaways
- A good credit score grants you access to better financial products, lower interest rates, and favorable loan terms.
- Maintaining and monitoring your credit score involves paying bills on time, keeping credit utilization low, and checking your credit reports for errors
- Understanding and improving your credit habits can lead to significant financial benefits and long-term success.
Everyone knows that your credit score determines the credit cards you’re eligible for, the loans you can get, and the interest rates you pay. But did you know that insurers also use your credit score to set premiums for auto and homeowners insurance? Landlords often have credit requirements for renters. Phone companies will use your credit score to decide who gets the best phone plans. And if you have a low credit score you may have to pay a larger deposit to access basic utilities. Credit scores are a financial tool that affects many areas of our lives, like it or not.
A good credit score can help you save thousands. You are more likely to get lower interest rates on a mortgage, be approved for a credit card with a low APR and rewards, and get the best auto insurance deals. Bad credit, on the other hand, signals that you are a risky borrower, making it tough to get a credit card and more expensive to borrow money for any purpose.
But what is a good credit score? And how do you get one? Let’s take a closer look at what you need to do to get your score in the good credit range and have it stay there.
What is a good credit score?
A good credit score depends on the scoring model used. The two main scoring models are FICO and VantageScore. Both calculate credit scores on a scale from 300 to 850, with higher scores being better.
On the FICO scoring model, a good score is anything above 670. On VantageScore it is one that falls above 661.
FICO score ranges
- 800-850: Exceptional
- 740-799: Very Good
- 670-739: Good
- 580-669: Fair
- 300-579: Poor
VantageScore Ranges
- 781-850: Superprime
- 661-780: Prime
- 601-660: Near prime
- 300-600: Subprime
Once your score is over 670 (or 661), it’s considered “good,” and you will be eligible for lower interest rates on your loans, credit cards, and mortgages.
A good score can result in significant savings over time, as lower interest rates mean lower monthly payments and less paid in interest overall.
What is the difference between FICO and VantageScore?
FICO and VantageScore are two major credit scoring models used by lenders to assess a borrower’s creditworthiness. The FICO score was first introduced in 1989 by the Fair Isaac and Company. This model is used by the vast majority of lenders.
VantageScore is much newer. It was founded by the three major credit bureaus – Equifax, Experian, and TransUnion as an alternative to the FICO score.
The primary difference between the two scoring models lies in their scoring ranges and calculation methods.
FICO heavily emphasizes payment history and amounts owed, while VantageScore places more weight on recent credit behavior and trends. Another key difference is the time frame for credit history; FICO requires at least six months of credit history, whereas VantageScore can generate a score in as little as one month.
Additionally, VantageScore is known for using data from all three major credit bureaus (Equifax, Experian, and TransUnion) more uniformly, while FICO scores may vary slightly between bureaus due to differences in data reporting.
Understanding these differences can help consumers manage their credit more effectively and choose the best strategies to improve their scores.
Why your credit score matters
Your credit score isn’t just a random number; it’s a reflection of your financial behavior and trustworthiness. It tells lenders, insurance providers, landlords, and even potential employers how reliable you are.
A higher score indicates that you are trustworthy and will repay what you borrow as agreed. A lower score tells lenders to be more careful with you and that you are a risky borrower.
Easier credit approval: Lenders want assurance that you’ll repay your debts. A good credit score signifies you’re a responsible borrower, leading to quicker and easier approvals for loans and credit cards.
Lower interest rates: People with good credit are often offered lower interest rates on loans and credit cards. This can save you thousands over the life of a loan, especially with significant borrowings like mortgages.
Better loan terms: If you have good credit, you’re more likely to be offered favorable terms, such as a larger loan amount, longer repayment period, or flexible conditions.
Access to perks: Many companies offer perks and rewards to individuals with high credit scores. For instance, a higher credit limit or cash back on credit cards, a low fixed-rate mortgage, or no deposits on utilities.
Best rates on insurance: Many insurance companies use credit-based insurance scoring to determine premiums for auto and homeowner’s insurance. A higher credit score can lead to lower premiums, saving you money in the long run.
Easier time renting: Landlords often require a credit score of 700 or above to qualify for an apartment. A good credit score will make the application process easier and mean you’re less likely to need a co-signer or have to pay a large security deposit.
Overall, your credit score can significantly impact your financial opportunities and quality of life. Maintaining a good credit score can open doors to better financial products, savings on major expenses, and ease in obtaining essential services. Regularly monitoring and improving your credit score is a crucial step toward financial stability and success.
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What affects your credit score?
Several factors affect your credit score, each contributing differently to the overall calculation. Understanding these factors can help you manage and improve your credit score effectively.
FICO scores are calculated by weighing:
- Payment history
- Credit utilization
- Length of credit history
- Credit mix
- New inquiries
VantageScores weigh the following factors:
- Payment history
- Depth of credit
- Credit utilization
- Recent credit
- Balances
- Available credit
The good news is that improving one score will improve both. As FICO is used by 90% of lenders, we’ll discuss the factors that influence it in more depth.
Payment history: This is the most significant factor, making up about 35% of your FICO score. It reflects whether you pay your bills on time. Late payments, defaults, and bankruptcies negatively impact your score.
Credit utilization: This accounts for 30% of your FICO score. It measures the amount of credit you’re using compared to your total available credit. Keeping your credit utilization ratio below 30% is advisable to maintain a healthy score.
Length of credit history: Making up 15% of your score, this factor considers the age of your oldest account, the age of your newest account, and the average age of all your accounts. A longer credit history typically leads to a higher score.
Credit mix: This represents 10% of your score and looks at the variety of credit accounts you have, such as credit cards, mortgages, and auto loans. A diverse credit mix can positively impact your score.
New credit inquiries: The final 10% of your score is influenced by new credit inquiries. Hard inquiries, which occur when you apply for new credit, can slightly lower your score temporarily. However, soft inquiries, like checking your own credit, do not affect your score.
By understanding these components, you can take targeted actions to improve and maintain your credit score, such as paying bills on time, reducing debt, and managing credit inquiries carefully.
Grow credit with good habits
Boosting your credit score doesn’t happen overnight. However, adopting the following habits can set you on the right path to a healthier credit profile.
Pay bills on time: Nothing counts more than a positive payment history. Set up reminders or automate payments to avoid missing due dates. Consistent, on-time payments show lenders that you are reliable and can manage credit responsibly.
Light regular use of your credit accounts: It’s important to use your credit but not excessively. Aim to use less than 30% of your credit limit to maintain a low credit utilization ratio. This demonstrates that you can use credit without relying heavily on it.
Don’t open unnecessary credit accounts: Every new account results in a hard inquiry on your report, which can lower your score temporarily. Only open new credit accounts when necessary and after considering how they fit into your overall credit strategy.
Maintain older accounts: The age of your credit accounts is crucial. Older accounts contribute positively to your credit history. Keep these accounts open and active, as closing them can shorten your credit history and negatively impact your score.
Pay balances in full: There’s no need to carry a balance to build your score. Paying your balances in full each month avoids interest charges and shows that you can manage credit effectively. If you do carry a balance, aim to pay it down as quickly as possible to reduce debt and improve your credit utilization ratio.
By incorporating these good habits into your financial routine, you can steadily improve your credit score, making it easier to access better credit terms, lower interest rates, and more favorable financial opportunities.
Maintain and defend your score
Regularly check your credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion). Monitoring your reports allows you to spot any discrepancies or unauthorized activities promptly. If you see any errors, dispute them immediately with the credit bureaus to ensure your score reflects accurate information.
Keeping your credit score high is often easier than rebuilding it. It involves ongoing diligence to maintain good habits and monitor your credit health. By staying proactive, you can quickly address potential issues, preventing them from negatively affecting your score. Remember, a high credit score opens doors to better financial opportunities, including lower interest rates and favorable loan terms. Regular monitoring and disciplined financial behavior are key to sustaining a strong credit profile.
Credit building tools and tricks
Building credit takes time but there are tools that can help you in the process.
- Get a secured credit card
- Take out a credit builder loan
- Become an authorized user on a friend or family member’s card
- Report ALL your monthly payments
These tips can help give your score a boost! You still have to make payments on time; that’s the only way your score will grow.
Bottom line
Your credit score may only be a three-digit number, but it profoundly impacts numerous aspects of your financial life. It determines not only how much you’ll pay for your mortgage but also whether you can get the best insurance premiums or even rent an apartment. A good credit score grants access to high-reward credit cards, lower interest rates on loans, and better insurance premiums, potentially saving you thousands of dollars over time.
Understanding how your credit habits influence your score is crucial. Positive behaviors like timely bill payments, maintaining low credit utilization, and keeping older accounts open can help boost and maintain a high score. Conversely, missed payments, high debt levels, and frequent credit inquiries can hurt your score, limiting your financial opportunities.
Once you grasp the importance of your credit score, you can take actionable steps to improve it. Regularly monitoring your credit report, disputing errors, and practicing sound financial habits are all part of a proactive approach to credit management. By focusing on these areas, you set yourself up for financial success, ensuring that your credit score becomes a powerful tool in achieving your long-term financial goals.
