Credit scores are a hot topic these days, and the more information that comes out about them, the more you might start to start to wonder where your credit score stands among the rest. Credit scores are essentially designed to tell lenders how likely you are to pay your bills, but what exactly is a good credit score or a bad credit score? Who even decides these things, anyway?
Read on to find out.
What Is a Good Credit Score? A Few Things You Need to Know
1. Everyone Has More Than One Credit Score
One of the first things everyone should know about credit scores is the fact that no one has just one. And having multiple credit scores doesn’t just mean you could have two or three scores — people with credit scores can have upwards of 30 or more.
The reason there are so many credit scores (which are not the same as credit reports) is that there is more than one credit scoring company, and there are many versions of each score. The two main credit scoring companies are Fair Isaac Corporation, which produces FICO® scores, and VantageScore Solutions, which produces the VantageScore®.
FICO® has produced a number of different scores over the years, including different algorithms to be used specifically for different types of lenders. That’s one reason one person can have many FICO® scores. What’s more, lenders don’t always stay up to date on the latest FICO® models, leaving old ones in the rotation and giving consumers that many more credit scores to their name.
Here’s a breakdown of the different FICO® scores currently being used, and by whom:
|Most Commonly Used||Auto||Credit Cards||Mortgages||Newly Released|
|FICO® Score 8||FICO® Auto Score Score 4||FICO® Bankcard Score 4||FICO® Score 4||FICO® Score 9|
|FICO® Auto Score Score 5||FICO® Bankcard Score 5||FICO® Score 5||FICO® Auto Score Score 9|
|FICO® Auto Score Score 8||FICO® Bankcard Score 8||FICO® Bankcard Score 9|
VantageScore® is newer than FICO®, but it’s growing in popularity. According to VantageScore Solutions, more than “8.5 billion VantageScore credit scores were used between June 2016 and July 2017,” with 75 percent being “used by lenders of all sizes.” In other words, this score – which was developed by the credit reporting agencies Equifax, Experian, and TransUnion – is on the rise.
Since VantageScore® is newer, however, there are fewer scores in rotation. Two models, VantageScore® 3.0 and VantageScore® 4.0, appear to be the main scores currently in use (VantageScore® 1.0 and VantageScore® 2.0 were earlier variants and may still be in use by some).
More Credit Scores Is Good News
If you feel frustrated by the sheer number of credit scores you might have, consider this. The different credit scoring models are updated because the score developers want to create more accurate prediction models for lenders. As the models change, the potential for consumers to be scored more fairly grows.
Knowing that there is more than one score can also help if you find yourself striving for the “perfect” credit score. No matter what credit score you’re seeing, there are more out there, and they won’t be exactly that same number. Therefore, striving for a perfect score is nearly impossible, and it’s not that helpful, either.
Instead, it’s better to focus on the general range your credit scores fall into. This is a healthier way to look at your scores — and it will tell you what you need to know about how lenders might see you as a prospective borrower.
2. Credit Scores Are Categorized Into Ranges
It’s easy to get fixated on that little three-digit number that represents our credit score, but given the fact that this number will vary per score, the fixation isn’t very useful. Finding out which range your scores fall into, on the other hand, can give you an idea of where you stand.
FICO® and VantageScore® both define credit score ranges. From “poor” or “deficient” all the way to “exceptional” or “excellent,” these ranges are simple to see and understand. What’s more, even though your credit scores will differ from each other, there’s a good chance they’ll fall into the same range, or at least close to it. Anyone who wants to have an idea of what lenders might think of them as borrowers would do well to find out what range at least one of their credit scores falls into.
So, what are the ranges? Here’s a breakdown from myFICO:
|FICO® Score||FICO® Score Range|
And here’s a breakdown from VantageScore®:
|VantageScore® 3.0 and VantageScore® 4.0||VantageScore® Credit Tier|
Recent data on the distribution of its latest model, VantageScore® 4.0, shows approximations of where various consumers stand as of August 2018:
|VantageScore® 4.0||Percentage of Population|
All in all, the concept is simple. The higher your credit score, the better the range it will fall into. From there, the interest rates can potentially get lower the higher your range is, thus making new credit easier to get and cheaper to use.
If your score falls into the bottom two ranges, all hope is not lost. There are things you can start doing right away to improve your scores and get into a better credit score range.
How You Can End Up With a “Good” Credit Score
From the days of our schooling all the way to our annual reviews at work, the concept of being scored can strike fear into the hearts of some of us, and create a sense of competitiveness in others. For most, it’s not exactly inspiring to know that grades are being generated on us while we go about living our daily lives.
Here’s the good news. Although you can’t use credit and avoid being scored on it, you can improve your scores if they’re not where you want them to be. And the things you’d have to do in order to improve your scores will have the bonus of being good for your finances as a whole. Here’s how you can work towards getting good credit scores:
Make Payments on Time
If you want to improve your credit scores, one of the most important things you can do is pay your bills on time. Not just your credit bills, either. Any company you pay money to for services can report your payments behavior, from your credit card issuer to your utilities provider and more.
What’s more, any company you owe payments to can sell defaulted accounts to collections, which will majorly drag down your credit scores. Even that library fine you forgot about years ago could end up in collections and cause damage to your credit scores.
It’s okay if your past includes late and defaulted payments – they will eventually fall off your credit report and your credit scores will rebound. Just do what you can to make payments on time from this point forward, and your score will see an improvement for it.
Handle Any Accounts in Collections Immediately
Speaking of accounts in collections, if you have any floating around right now, then your credit scores are suffering because of them. The sooner you pay off collections accounts, the sooner you can start to move forward with a positive credit history and improve your scores.
Figure out what you can feasibly do about accounts in collections, such as saving up money to settle the debt or calculating how much you might be able to pay on a monthly payment plan, and then go ahead and take that next call from the debt collector. You can also call them on your own if you’re ready to negotiate.
Once you’ve got the debt collector on the line, calmly explain to them what you can do to resolve the account. It’s in their best interest to work with you, so ask for a supervisor if they refuse to negotiate on the terms you can afford. Once you have an agreement in place, ask for a copy of it in writing so you have proof.
Before you do this, however, brush up on these rules about what debt collectors can’t do so you can protect your rights.
All that said, there is something called the statute of limitations on debt, which means your creditors can’t successfully sue you for repayment after a certain amount of time has passed. Once a debt is old enough based on your state’s statute of limitations on that type of debt, it becomes “time-barred.” Keep in mind that if you’ve recently made a payment on an old debt, it might no longer be considered time-barred and a debt collector can possibly sue you for repayment. Whether or not this is true will depend on the state in which you took out the debt.
If you wish to not pay on a time-barred debt, you can choose to do so, but keep in mind that accounts can remain on your credit report for seven to 10 years, with the exact amount of time dependent on the type of debt it is.
Reduce Your Debt
Debt will affect your credit scores, but the tip to reduce your debt doesn’t mean you have to worry about how you’ll pay your mortgage off sooner. Long-term installation loans such as mortgages and student loans affect your credit, but companies know that these aren’t meant to be paid off in a short period of time.
Revolving debt such as credit cards, however, are a different story. Besides the fact that their high interest rates cost you money the longer you carry a balance, having too many high balances on them can make it look as though you’re financially overextended.
The best thing you can do is keep your credit card balances as close to zero as possible. That doesn’t mean you can’t use your credit cards, but that the best way to use them from a credit building (and money saving) perspective is to refrain from using too much of your available credit and to pay the balances in full each month.
This runs counter to some bad advice you might see out there, which is to carry a balance on your credit card to build credit. That is a credit score myth and a dangerous one at that. You only need to use credit to build credit, you do not need to carry a balance from month to month — doing so won’t help your credit and it will cost you money in interest.
As for what to do if you’re carrying high credit card balances now, it might seem impossible to pay them off. Focus on how you can strategically pay down the debt, whether it be earning extra money or cutting costs to put more towards your payments or even consolidating to a lower interest rate so you can pay them off faster. This will help you free yourself from expensive debt and improve your credit scores at the same time.
Apply for New Credit Strategically
When you’re in the market for new credit, especially a loan, it’s important to shop around for the best interest rate you can get. But if you’re applying for a new loan or credit card every month, your credit scores could take a hit.
Lenders understand that you need to rate shop, but constantly applying for new credit could again lead to the assumption that you’re financially strapped and desperate for new credit to stay afloat. That’s why it’s important to apply for new credit strategically.
If you’re looking for a new car loan, for example, keep the loan application period to a two-week window if you can. This time frame is a sort of grace period during which your credit score won’t be majorly affected by the multiple credit applications. You should also apply for the same type of loan and for the same amount to make it clear that you’re not trying to get all the loans, but looking for the best one you can get.
When you need a new credit card or loan, you don’t have to worry too much about this factor. Just keep it reasonable by selecting a top few, doing research on multiple before you apply, and then not applying for more credit on a regular basis once you’ve gotten what you need.
Keep Accounts Open
Here’s a really easy way to improve your credit scores. Keep old accounts open. You might feel the urge to purge your accounts to “clean up” your scores, but that will actually hurt your score.
The longer the history you have with financial accounts, the more trustworthy you might seem to lenders. Therefore, keep those accounts open and let their age help your credit scores. As long as you’re building a positive history through on-time payments, this is an easy win towards building better credit.
What’s more, closing a credit card account specifically will increase your credit utilization ratio (that is, the amount of credit you’re using in comparison to the amount of credit available to you). This will impact the debt amount factor of your score, of which credit utilization plays a large part. This is even more reason to keep old accounts open.
Fix Mistakes on Your Credit Reports
It’s not uncommon to find mistakes on a credit reports, which can unnecessarily drag your score down. It’s important, therefore, to review your credit reports regularly and ensure that all the information there is correct.
You can do this easily by downloading your credit reports for free once per year at AnnualCreditReport.com. There will be three, one from each credit reporting bureau (Equifax, Experian, TransUnion), and you should review all three. If you find an error on any of them, dispute the error with the credit reporting bureau whose report has the mistake.
Know What’s in Your Scores
Curious about how these tips can help your credit, or what the details are on what lenders care about when reviewing your history? It’s easy to find out by looking at what’s in your credit scores.
Here’s what myFICO lists as the factors that play into your credit scores:
And here’s what VantageScore® says you can do to improve your credit score:
The factors that calculate your score are those that can show lenders that you’re a trustworthy borrower — one that won’t take out more credit than they can reasonably repay and that will pay on time. In the end, it really is that simple, so the more you do to show that you’re that type of borrower, the better your credit scores will be.
When you think about your credit scores, avoid the overwhelm of information by remembering this: The things you can do to improve credit line up with the things you can do to build a stronger financial footing. Stay with the basics of paying bills on time and keeping debt as low as possible, and you’ll be in good shape.