A good credit score can make a real difference in your life, whether it’s getting a loan, buying a car, or renting an apartment. And according to Forbes, a good credit score saves you about $35,000 per $100,000 you borrow for a mortgage.
If you are trying to improve your credit score, it’s essential to know what a good credit score is and the steps to getting one. This post will cover what affects your credit score, how to improve it, as well as the best way to check your score.
The Role Of Credit Scores In Life
Before answering the question “what is a good credit score,” it’s beneficial first to understand how it affects your life.
Credit scores help lenders determine, at a fundamental level, whether or not to give a loan to an individual. According to Credit.com, credit scores “help lenders decide whether [a person] is a good risk.” For example, a person’s credit score can determine the interest rate they receive on debt, the terms of a loan, and whether they can get a loan in the first place. But did you know that it could also mean a more expensive home or car insurance policy; or paying more for the same amount of credit card debt?
Many people and institutions use credit to evaluate an individual’s overall financial trustworthiness. Hence, a credit score can affect:
- Whether or not an individual can purchase a home.
- How expensive it is to buy a car.
- How willing banks are to let you open up a checking or saving account.
What is a Good Credit Score
With something as important as credit, you’ll want to know what precisely good means. Thankfully, the answer to “what is a good credit score” is made transparent by FICO. Your credit score is a number in the range from 300 to 850, and Americans with a credit score above 670 have a “good” credit score.
However, as you optimize your finances and grow your net worth, it’s helpful to shoot for a credit score as close to 850 as possible. It won’t just mean more approvals but will free up more money in your budget to save for your kid’s college or to save and invest for retirement.
What Affects Your Credit Score
Despite their importance, only 21% of Americans have a good credit score. So if you find yourself missing payments or in credit card debt due to keeping up with jones, it’s time to evaluate your spending. Understanding what goes into your credit score and its influences may help improve it. Here are all the pieces of the recipe.
The 5 Components That Make Up Your Score
Five main components make up your credit score. Each of them plays a role in determining what credit score you receive and how low your loan interest rate could be.
- Payment history (35%): how often you miss or make your credit obligations
- The total amount owed (30%): how much of your entire credit you’ve used
- Length of credit history (15%): how long you’ve used credit
- Types of credit (10%): how diversified your credit mix is
- New credit (10%): how many new credit accounts you’ve opened recently
What Information Credit Scores Do Not Consider
Some things can severely impact your credit score (e.g., missing a payment), and others don’t impact your credit score at all. Here’s some information that credit agencies don’t take into account when determining your credit score:
- Paying with a gift card or debit card
- A change in salary
- Your marital status
- Having a prior credit application denied
- Having accounts with high-interest rates
- Paying a traffic ticket
- Moving money around in your accounts
- Stocks, bonds, mutual funds, or cryptocurrency investments
How To Improve Your Score
Understanding “what is a good credit score” is the first step towards improving it. Here are three tangible steps to help you improve your score.
1. Get a Handle on Your Bill Payments
Organizing your bill payments so that you make every payment on time is one of the best ways to increase your score, as payment history makes up the most significant percentage of your credit score. Some ways to get a handle on your bill payments are to:
- Create a budget: List your expenses and income on a sheet of paper or your computer. Then determine whether or not you can make each of your obligations. If not, immediately cut non-essentials out, like your cable TV package or satellite radio in your car.
- Set due-date alerts: Many people miss bill payments because they forget a bill. An easy way to avoid this is by setting due-date alerts on your calendar or phone to remind you to pay your bills on time.
- Automate your bill payments: If you have recurring bill payments you need to make (car payment, utilities, etc.), consider setting up automated payments. The bank will take money out of your accounts and pay your bills without you needing to worry about it.
2. Don’t Use Up All Your Credit
According to Value Penguin, “One of the factors lenders consider when modeling an individual’s credit risk is their credit utilization — the percentage of total available credit a consumer is using month to month.”
Your credit utilization ratio refers to the portion of your credit limit that you’re using at any given point in time. One way to keep your credit utilization in check is to pay your credit card balance in full at the end of every month. However, if this is not achievable, it’s wise to keep your total outstanding balance at 30% or less of your credit limit.
One final strategy is to request financial institutions to raise your credit limit. The worst they can say is no. A higher credit limit lowers the percentage that your current outstanding debt will take, helping your overall ratio.
3. Consider Debt Consolidation
If you have various debt sources that need repaying, consider consolidating them all into one payment with a debt consolidation loan.
The benefits of a debt consolidation loan are that you no longer need to worry about making multiple payments and instead focus on one monthly deadline. Plus, if you can get your debt consolidation loan for a lower interest rate than your other significant loans, you will be saving money and putting yourself one step closer to freedom from debt.
Just be wary of debt consolidation fees as they can sometimes be upwards of 3% of the total loan amount.
The Best Way to Check Your Score
Knowing “what is a good credit score” is essential, but it’s no use unless you know what your current score is.
To start, you can go to one of three major credit bureaus to check your credit report for free. Your credit report provides a history of your financial activity. A history of your financial activity includes any accounts you have, any bankruptcy reports, how often you pay bills on time, and any inquiries you’ve made. The three credit bureaus you can use to check your credit report are:
However, it’s important to note that your credit report is different from your credit score. To check your credit score with these three bureaus, you’ll need to pay a fee. Alternatively, you can visit a free credit scoring website to check your score (usually for free with a sign-up). Finally, you can also see your credit card provider for your credit score. Some credit card providers and banks offer the service of checking your credit score at no cost to you.
Why Your Credit Score Changed
If you’ve been consistently tracking your credit score over time, you may notice it fluctuate occasionally. Slight changes in your credit score are regular and can happen for several reasons. Some of them are:
- Differences amongst the three major credit bureaus
- The passage of time (the removal and addition of new credit transactions)
- Your debt to credit ratio/credit utilization ratio
- Different scoring systems for various industries
- Changing information and updated information
Fluctuations in your credit are bound to happen, and as long as you keep making payments on time, your score should recover. However, if you notice a significant unexpected drop in your score, it might be prudent to reach out to one of the credit bureaus to ensure that there isn’t any false information on your report.
Recap: What is a Good Credit Score and How to Get One
Your credit affects all areas of your life, from house purchases to banking and even buying a car. So it’s essential to understand what a good credit score is to set yourself up for financial success. Getting your credit score up is the first step to qualifying for more loans, building your financial reputation, and improving your financial health. So what are you waiting for?
This post originally appeared on Savoteur.
Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.