You just reached middle age and you’re looking to move away. You speak with your significant other and you both agree to take a loan to buy a new house.
However, you need a good credit score to boost your chances of getting your loan request approved. So now you’re wondering “What is a good credit score” and how can I get a good credit score or improve my credit score. To answer those questions is our aim here today. We’ll be looking at;
1) What is a good credit score?
2) How is a good credit score calculated?
3) Benefits of having a good credit score.
4) How can you get a good credit score?
5) How long will it take you to build a good credit score?
6) How long does negative information affect my credit score?
Disclaimer: In the name of full transparency, please be aware that this blog post contains affiliate links and any purchases made through such links will result in a small commission for me (at no extra cost for you).
What is a Good Credit score?
A credit score is a number used to assess how well a person qualifies for credit and loans I.e. how well a person is likely to pay back a loan. Credit scores vary depending on the rating system employed by the different organizations when they are considering your credit application.
Credit scores are used by banks, credit card companies, car dealerships, etc. There are evaluated by different factors; your payment history, credit mix, new credit, etc. Having a good credit score helps you get better loan and rental opportunities, better insurance premiums, and sometimes, better job opportunities.
Lenders prefer individuals with a good credit score, as this shows lesser risk and higher chances of paying back loans. Some employers also look for employees with a good credit score.
Types of Credit Score
For credit scores, many organizations, such as banks, auto dealerships, and credit card companies, have their specific rating system. However, they are two major credit score rating systems that are widely used among banks and other financial institutions. These include;
- FICO Scores: This type of credit score is produced by the Fair Isaac Corporation (FICO). This type of credit score is widely used by up to 90% of creditors in the US. Some people argue that it’s more important to focus on building a good credit FICO score above other rating systems when trying to build your credit score. FICO credit scores fall under two major categories;
- Base FICO scores (350–850); This range is the basic scoring range for creditworthiness and it is based on the FICO 8 scoring model. A good credit score in the base FICO range is between 670–739.
- Industry-specific FICO scores (250–900); This scoring system is used for specific industries and products like auto loans, mortgages, and credit cards. It is also based on the FICO 8 industry scoring model. A good credit score in the industry-specific scoring model is between 670–739. Industry-specific scoring models are very similar to the base scoring models, so having a good FICO Score 8 may translate into a good FICO Bankcard Score 8.
There are many versions of the FICO credit rating system. All of which aim to show how a person handles their debt. The most popular version of the FICO score being used presently is FICO Score 8. However, the company has released both FICO Score 9 and FICO Score 10.
- VantageScore; This credit scoring model was created by a joint venture of three major credit bureaus i.e. Equifax, Experian, and TransUnion. It is managed by VantageScore Solutions, LLC, an independent company owned by the three major credit bureaus. VantageScore models are very similar to FICO Score models in the data used to calculate the credit scores. The major difference between them is that VantageScore reports have little difference in the way they are presented on the major credit bureaus. Like FICO, VantageScore also has different versions of the credit score rating system and the latest versions are VantageScore 3.0 and 4.0. Which have a range of 300–850. A good credit score in the VantageScore rating system is between 661 to 780.
How is a Good Credit Score Calculated?
For calculating your credit scores, they’re different factors that lenders used to assess your accounts. Some of those factors include;
- Your payment history (35%); This is the most important factor that determines your credit score rating. Your credit score is directly affected by how early you make credit payments. Making payments early and on time will help you get and maintain a good credit score.
- Credit history (15%); The average age of your credit accounts, the age of both your earliest and latest accounts, are also taken into consideration when calculating your credit scores. Most times, the longer a person has had credit, the higher their score. However, if you have a short credit history but other categories are strong, then you might still get a good credit score.
- Credit Mix (10%); The accounts you’re managing also affect your credit scores. Managing installment accounts (e.g car loan, mortgage, etc.) and revolving accounts (e.g credit cards, etc.) Properly boost your credit scores.
- Total debt owed (30%); This talks about how much of your available credit you are currently using. This is done by comparing the amount of money owed to the amount of credit available to you. Lenders use this to judge how dependent on credit you are. Using less than 30% of your available credit will increase your chances of getting and maintaining a good credit score.
- Recent credit use (10%); New credit also affects your score. The number of recently opened credit accounts and the number of hard inquiries you have directly affect your credit score. This also tells the lender how dependent on credit you are. If you have opened several new credit accounts in a short time, it lowers your score and shows a risk to the lender.
Benefits of Having a Good Credit Score used for?
So now you know what a good credit score is, you are probably wondering “what having a good credit score will help you achieve in the first place and why should you take the time to maintain a good credit score?” Here are a few good reasons to maintain a good credit score;
- Better loans; Having a good credit score puts you in a position to qualify for better loans. Many lenders like to know that you can pay back their money in time and your credit score is a good way of determining that.
- Lower interest rates; Most times, having a good credit score leads to reduced interest rates on the loans you apply for as your credit score signals to lenders that you represent less risk. Plus, the extra money you save on interest rates could be channeled into something else, like your savings account or your child’s college fees.
- Helps you get better insurance premiums; Insurance companies turn to your credit scores to help them choose insurance premiums on home, life and auto insurance. And having a good credit score can be the difference in getting a good deal at your local insurance company.
- Can help you qualify for emergency loans; Having a good credit score (I.e. FICO 670 – 739) can help you qualify for loans in times of emergency, increasing your number of options.
- Some landlords screen tenants based on their credit scores
What Is A Good Credit Score? How To Get There.
- Pay bills on time; This is very important if you are serious about maintaining a good credit score. Allowing your debts to pass their due date will reduce your credit score. However, if you feel you will make a late payment, then call the creditor and talk about other options with them to protect your credit score.
- Maintaining Your oldest account; Keep your oldest account open and in good shape I.e. no outstanding debt as this directly affects your credit score and reduces your chances of having a good credit score.
- Clear all overdue payments; Another way of boosting your credit score is to clear all outstanding payments, as having multiple outstanding payments on your account reduces your credit score significantly.
- Avoid applying for a lot of credit in a short term; This will directly keep the number of hard inquiries low. A hard inquiry is a request for your credit reports made by a lender. Hard inquiries stay in your credit reports for 2 years and that significantly affects your credit score. Make sure that you do not have too many inquiries in a short period, otherwise you risk jeopardizing your good credit score.
- Check your credit reports regularly; and dispute any inaccurate information you find. Sometimes, they are errors in your credit reports. Errors made either by the credit bureau, yourself, consumer reporting agencies, past lenders, etc. And it is important to clear all errors so they don’t reduce your chances of getting a good credit score.
- Use credit monitoring services; These kinds of service help you monitor your credit accounts and give you up-to-date information on the latest happenings in your credit file, which helps you to maintain a good credit score. They can also help you spot problems like theft and identity theft.
- Consolidate your debts; Consider taking out a single loan that will pay off other outstanding debts. Debt consolidation offers the advantage of a single monthly payment and reduced interest rates.
- Setting up regular payment reminders; will help you make bill payments on time. Paying your bills on time consistently will boost your credit score significantly after a few months.
- Pay twice per billing cycle; Making your bill payments every two weeks instead of monthly will significantly reduce your credit utilization rate, which increases your chances of getting a good credit score.
- Manage your debts properly; Be careful when making debt payments so as not to make payments on “charged off” debts, otherwise, you risk reactivating the debt and reducing your credit score.
- Prioritize “Maxed out” cards; Pay credit cards that are close to the limit to bring down your credit utilization rate before paying other credit cards. Remember that having a low credit utilization rate is key to having a good credit score.
- Manage diverse accounts; Adding another account to your credit mix will surely boost your credit score so long you make all bill payments on time.
- Pay to Delete; This option is available to accounts already in “collections”. In this option, you negotiate a settlement to remove negative information from your credit reports with the company holding your delinquent debts. Sign the agreement in writing before transferring the money. Removing as much negative information as possible is key to maintaining a good credit score.
How Long Will It You Take To Build A Good Credit Score?
For building a good credit score, there is no magic formula that will rapidly boost your credit score in a brief period. What you need is months of good credit behavior before you can start seeing significant boosts in your credit score.
With less negative information on your credit report, i.e. missed/late payments, hard inquiries, bankruptcy, etc. It becomes easier to rebuild your credit score. Also, fixing a bad credit score is harder and takes longer than building a good credit score.
How Long Does Negative Information Affects My Credit Score?
So now you know the importance of having a good credit score and how to go about getting a good credit score. However, negative information on your credit reports significantly reduces your chances of having a good credit score. It is much harder to clear some of the negative information on your credit reports and some of them can have long-term consequences on your credit score depending on how serious the negative information is.
To avoid the damage of negative information on your credit score, it is important to know the negative information and how long it’ll stay on your credit report. Here are some common examples;
- Car repossession remains on your credit report for 7 years
- A typical Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 bankruptcy remains on your report for 7 years.
- Property liens remain on your credit report for 7 years.
- A loan that has entered delinquency remains on your credit report for 7 years.
- A typical hard enquiry remains on your credit report for 2 years.
Please note that damages to your credit score caused by negative information will reduce.
Now we’ve gotten to the end of this post. We started with a simple question; “What is a good credit score” and we’ve explored all there is to know about getting, boosting, and maintaining a good credit score. So use this guide whenever you are having any confusion with your credit score report, or when you want to apply for a loan.
Are you looking to improve your credit on your own? Would you like a step-by-step guide that shows you how to dispute errors on your credit report?
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