From the moment you got your first job, paid your first bill, or applied for your first credit card, you probably became aware of how important a credit score was. According to the FICO model, a perfect score is 850, but most people only long for a number that high! If you have a score over 740, pat yourself on the back and know that you are in what is considered the best range for low-interest rates on home mortgages, credit cards, and vehicle loans. You can still get no credit credit cards and they can be used to build credit too, they just won’t be paired with the best interest rates.
Not All Scores Are Created Equal
When the credit score system was created back in 1989 by Fair, Isaac, and Company, the big credit companies like Experian, TransUnion, and Equifax quickly jumped on board, as did most of the major credit unions and banks. The group established a system that broke credit into specific ranges, and those ranges have become the standard today.
- Poor (580 and below)
- Fair (580-669)
- Good (670-739)
- Very good (740-799)
- Excellent (800+)
Most people in the United States have a FICO credit total in the ‘fair’ range with a score under 621. That means there is a great deal of room for improving their credit score, but for many individuals that can be a very confusing journey. Having a bad credit score isn’t the end of the world. It just means you need to manage your finances a little better, so with time, hopefully, you’ll notice a change in your credit score. With that being said, for some people, they have found looking to opt for a secured loan for example, could help with improving their bad credit score. Additionally, if you want a great deal in interest rates, you have to improve the credit score.
Excellent Credit Is a Modern Necessity
Don’t begin pulling your hair out and asking, “What is the highest credit score, and how am I ever going to get that high?” The fact is that if you improve your score and move it into the ‘excellent’ area, you can generally reap most of the benefits that those with a perfect score have. There is a conundrum though because if your score is within a certain range, any interest rate you are offered on a home mortgage, car purchase, or credit card sales will stay within that specific range and most lenders will not offer better until your score moves into the next higher range. The difference in a single interest point on a mortgage can cost you tens of thousands of dollars throughout a 30-year loan.
Advantages of Understanding the System
One problem most consumers have with the FICO scores is that each company has a separate rating scheme within the larger system. To make matters worse, the categories are not consistent with the FICO ranges because there is no ‘very good’ rating, and the top three companies have added a very poor category. To alleviate the confusion, here is a breakdown of the numbers for each group.
- Very poor (559 and below)
- Poor (560-659)
- Fair (660-724)
- Good (725-759)
- Excellent (760-850)
- Very poor (600 and below)
- Poor (601-657)
- Fair (658-719)
- Good (720-780)
- Excellent (781-850)
- Very poor (549 and below)
- Poor (550-649)
- Fair (650-699)
- Good (700-749)
- Excellent (750-850)
The main difference in scores has to do with the scoring algorithm each business uses.
Improving Your Credit Score Is Possible
Although getting credit has become increasingly difficult in the past few years, once you do have credit, there are several ways you can quickly improve your credit score – and the great thing is you can easily do all of them.
- Keep balances on your credit cards low.
- Pay your credit cards on time.
- Stay aware of your credit vs. debt ratio.
- Keep your oldest credit card accounts open.
- Watch your credit report and contest discrepancies.
Most consumers can move up one rating point in the system within less than a year by using the strategies on the list.
Keeping a Great Credit Score Takes Awareness
There are three simple steps to making sure you keep a great credit score. The first is that it may come as no surprise that the numbered list above is also the way to manage and maintain a high credit score. Using these strategies can contribute to the improvement of your overall credit, but they can also help you realize when something is off. Errors on credit reports are common, and if you find a problem, report it to the firm as soon as possible – it is your right to dispute any glitches you find. You may even choose to enlist the help of a lawyer to dispute credit report errors if you wish.
The second way to keep a great credit score is to resist the urge to apply for every new credit card that comes your way. Each time a new credit inquiry prompt hits the credit bureau, your score takes a major ding. Unless you need the credit card, and you are sure you are going to get approved, don’t apply for the card.
The third way is to remember that your credit to debt ratio is the foundation of your credit score, so keep your credit high and your debt low. If you use your credit card for your monthly necessities, find out when your credit company reports the debts each month and pay your bill in full if possible before that date.
You can stay on top of your credit scores, and with these tips, you can help your score move from good to excellent in no time.
This is a collaborative post. All opinions are my own. Image courtesy: Canva