Think of your credit score like your financial resume. If you want to qualify for the terms of your dreams, you’ll need to have the right credentials.
That’s why building good credit is so important. However, it can be challenging to know where to start.
We turned to Lovett Weems, Vice President of Lending Strategy at a national financial services company, for some advice.
How do you define a good credit score?
“Typically, most people would say FICO scores of 680 and above,” says Weems. Experian.com, one of the major credit reporting agencies, notes that scores of 670-739 are considered “good.” FICO scores range from 300-850, and fall into the following categories:
800-850 – Exceptional
740-799 – Very Good
670-739 – Good
580-669 – Fair
300-579 – Very Poor
When it comes to understanding your credit, you’ll most often hear references to your FICO score. So, what is a FICO score, and are there other types of scores?
FICO (Fair Isaac Corporation) scores are numerical representations that give potential lenders a quick, at-a-glance idea of items on your credit report. Your credit report is like a report card or statement of all your credit history. This report includes details like your personal information, the number of credit accounts you have open, your available credit, and your credit inquiries. It can even change month to month or day to day as new data is collected on your credit report.
This information is valuable to potential lenders, but your FICO score is a much faster way to get a general sense of your credit usage. It’s sort of like watching the whole game versus watching the highlights.
There are many different types of credit scores. FICO is the credit score system most often used by banks, but it’s not the only one available. Some lenders may use nontraditional credit scores or VantageScore reporting to determine your credit eligibility.
The VantageScore was developed by the 3 major credit bureaus including Experian, Equifax, and TransUnion. The latest VantageScore model uses a range between 300 and 850, where anything about 700 is generally considered to be “good.”
What are some factors that impact your score?
“One of the most important things to keep in mind is, do you pay all your bills, and do you pay your bills on time?” says Weems. Your payment history says a lot to lenders about how well you manage your money.
“The second would be open credit lines and what they call credit utilization. If you have credit cards open and say your number of credit limits are $15,000 across all your cards, and you have $2,000 in balances on that $15,000, that’s not going to hurt you much. If you have $14,500 on $15,000, it could affect your credit score.”
Your payment history and credit utilization rate (your total amount of credit divided by the total amount of revolving credit you have available) impacts your score. There are other factors potential lenders may consider as well, including:
- The type and age of your credit accounts
- Public records, such as bankruptcy
- Newly opened credit accounts
- Number of inquiries on your account
How to establish credit when you have no credit history?
Weems weighs in saying: “One of the easiest ways to start building credit is to get a low-balance credit card and pay it off at the end of every single month. You’re building credit by showing that you have a line of credit, and you’re showing your ability to repay it every time.”
If you’re just starting your credit journey, here are a few more ways to get started, according to Experian:
- Open a secured credit card
- Use no more than 30% of your credit limit on any card (best scores go to people using 10% or less of their credit limit)
- Become an authorized user on another person’s credit card (for instance a parent or spouse with a good credit history)
- Pay student loans on time
- Open an auto loan with affordable monthly payments
How can someone with bad credit take steps to improve their score?
“The first thing would be just to ensure that you’re paying all of your bills, on time and completely,” says Weems.
“If you do have credit cards, make sure that you’re at least paying the minimum balance by the due date, every time. That way, you’re not late. You may still have a balance, but you’re not being counted as late on your credit card.”
To further help improve your credit score, be sure to monitor your scores, pay bills on time (including utility and phone bills), keep balances low, and dispute inaccuracies on your report. If you can, it’s best to avoid opening too many new accounts at once.
New accounts lower your average account age, and each application affects your overall score. We recommend spacing credit applications about 6 months apart while you’re in the building stage. Credit inquiries show up on your report, and if you’re denied, that can impact your score as well.
What’s the most critical key to a better credit score?
There isn’t one specific key to point to for a better credit score. Keep in mind that your score is a big-picture reflection of a variety of types of activity on your credit report. You can start seeing improvement by focusing on 3 credit priorities:
- Payment history – pay bills on time, every time
- Credit card utilization – the amount of money you have available vs. the amount you owe
- Type of credit – the types of credit you have and how many, such as credit cards, mortgage, auto loans or a mixture
What are some credit-use tips you can offer?
Weems encourages you to focus on managing the credit you already have, and be mindful about the future loans you take on.
“Definitely managing your credit cards, meaning that you charge for things you know you can pay back at the end of every single month. The goal is to build up your credit, not build up your debt,” says Weems.
Keep these tips in mind as you put together a plan of action for credit use:
- Charge for what you can afford to pay back the same month
- When buying a car, choose a vehicle you can afford to pay on each month
- Pay student loans on time
How long should you expect to wait before seeing a change in your score?
When lenders are considering your eligibility for a loan of some type, they use your credit score to help quickly assess how trustworthy you may be with repaying borrowed money. Lenders want to have an idea that you’ll be able to pay them back when you say you will.
That said, building credit takes time. You shouldn’t expect to see your credit score leap overnight when you start to build good credit. It can be difficult to pinpoint an exact timeline on when you could see results. Instead, it’s best to focus on developing good credit habits, and your score will improve as a result.
From Weems: “Fixing errors on your credit report, keeping your credit card utilization low, and paying all your bills on time will move your score the quickest.”