What is a good credit score?
Fair Isaac Corp. produces the most commonly used credit scoring algorithm in the United States. Most FICO scores range from 300 to 850, and the higher the score, the better. (Some versions of the FICO score, such as those for the auto and credit card industries, are on a 250 to 900 scale and a new version, NG, has a 150 to 950 scale.)
Each lender sets its own standards for what constitutes a “good” FICO score. But, in general, FICO scores fall along the following lines:
- 300-629: Bad credit
- 630-689: Fair credit
- 690-719: Good credit
- 720 and up: Excellent credit
The average FICO score was 695, according to the latest data as of April 2015.
But there are several commonly used credit scores, not just FICO. The increasingly popular VantageScore also employs a 300-850 scoring range, as do most other credit scores. “Good” or “excellent” scores depend on what an individual lender decides, but in general 720 and up is considered excellent.
Even if your score is in the low 500s, you may still be able to get credit, but it will come with very high interest rates or with specific conditions, such as depositing money to get a secured credit card. You may have to pay more for car insurance or put down deposits on utilities.
At the other end of the scale, borrowers with scores above 750 or so have many options, including the ability to qualify for 0% financing on cars or a 0% credit card.
That’s why you want good credit. Here’s how to get there:
7 steps toward a better credit score
- Pick a score (FICO, VantageScore or another) and monitor it — we suggest monthly.
- Check your free annual credit reports and dispute any errors.
- Pay your bills on time.
- Use less than 30% of your total credit limit.
- Apply for credit only when you need it.
- Keep old credit accounts open.
- Watch your mix of credit types.
Find the starting point
The first thing to do is to see where you stand. Some credit cards offer free scores, and you may also be able to get a free score online. The important thing is to use the same score every time, as each weighs your credit history a little differently. (Doing otherwise is like trying to monitor your weight on different scales.)
So, pick a score and stick with it to monitor your progress. Advancements you make measured by one score will be reflected in the others.
Check your credit reports for errors
Next, check your credit reports — the information used to calculate your scores. You are entitled to one every 12 months for free from each of the three major credit reporting agencies, Equifax, Experian and TransUnion. You can access your reports at AnnualCreditReport.com.
Check them for errors, making sure your name, address and Social Security number are correct and that you recognize the accounts listed. (Here’s a guide on how to read credit reports.) If you believe there is an error, dispute it.
Because credit scores are derived from information in your credit reports, an error could potentially lower your score — and correcting one might improve it. Checking scores regularly can also alert you to potential identity theft, and the sooner you can address that, the better.)
Pay every bill on time
Your payment history accounts for about a third of your credit score.
A late payment can stay on your credit report for seven years. The more recent the late payment is, the more it hurts. The later the payment, the worse the damage. Sixty days late is worse than 30.
If you are a few days late, your creditor is unlikely to report the account in arrears. If it’s more than 30 days, though, expect a ding. A single, recent late payment can deal a heavy blow to a good credit score, as much as 100 points if your credit had been considered excellent until then.
On the other hand, if you begin now to establish a history of on-time payments, your older late payments won’t matter as much. Nothing will improve your credit score faster than paying your debts.
Use credit sparingly
Your credit utilization also accounts for about a third of your score.
The more of your available credit that you use, the less likely you are to be able to repay your debts. In general, you need to use 30% or less to get the best credit scores.
Credit algorithms look at your credit utilization on both your individual cards and as a total against all your cards. That is, if you have two cards, one that is charged up to its limit and the other with zero balance, you would be penalized even if your total credit use is below 30%.
Keep credit utilization in mind when you decide which balance to attack first.
Another way to reduce credit utilization is to get a higher credit limit. If your financial situation or credit has changed for the better since you applied for the card, it might be worth calling your issuer to ask for a higher limit.
Apply for new credit only when you need it
New credit accounts for about 10% of your credit scores; applying for a lot of credit in a short time could hurt your score, as it represents increased risk that lenders won’t get repaid.
Inquiries fall in this category.
A “hard” credit inquiry involves an actual application for credit and can cause a small, temporary drop in your score. You are not penalized for shopping around for a mortgage or a car loan over the course of a few days or weeks; those inquiries are typically grouped together as a single hard credit pull.
A single credit card application may ding your scores, but this is often offset by having a higher credit limit that improves your credit utilization ratio.
A “soft” credit check, on the other hand, isn’t an application for credit and doesn’t affect credit scores. A soft pull is either informational, as when you check your own credit, or promotional, as when a credit card company makes you a preapproved offer or a personal loan provider quotes you a rate.
The length of your credit history matters
The age of your credit accounts for about 15% of your score. If you’re new to credit, the length of your credit history could hurt your score.
You might be able to counter it by becoming an authorized user on an older credit card, assuming the primary user pays on time and keeps balances low. Not all issuers report authorized users, so make sure the issuer does.
If you have established credit and have been tempted to cancel an older card, you may want to reconsider, unless there is a compelling reason — like a fee — to ditch it. (Even then, the issuer may be able to switch you to a different card and keep the account age.)
Have the right kinds of credit
There are several types of credit accounts, and consumers with high credit scores tend to have more than one. Your credit mix accounts for about 10% of your scores. Each account on your report will be noted as Revolving, Installment or Open.
Revolving accounts such as credit cards set a limit on how much you can spend, and you can repay either the minimum, the whole balance or anything in between. You can carry a balance until the day you die.
An installment loan applies fixed monthly payments against a specified payoff date. Paying off an installment loan demonstrates responsibility over time; that’s why a current mortgage is typically part of an excellent credit score.
An open account involves accounts where the entire amount is due at the end of the billing period. Typically these involve services such as cell phones and utilities, but also can include some gas station cards and credit cards.
The designation of each credit type can affect your score. For example, revolving credit card debt of more than 30% of your available limit can hurt your score. A debt consolidation loan could move that credit card debt over to the installment column, improving the credit utilization ratio on your revolving accounts.
Making it count
It’s smart to focus your efforts where they have the most impact. Keep in mind that credit applications, the kind of credit you have, and how long you have had credit — combined — make up only about a third of your score.
Although every little bit helps, it’s all but impossible to improve your score if you don’t pay on time.
Image via iStock.