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Credit Scores: What's Good, Average and Bad?

Jan 10, 2020, 09:45 AM
Credit Scores What's Good Average and Bad

When applying for a business or personal credit, the first thing that matters is your credit score. In the same way, a report card described what kind of student you were, your credit score tells banks or other lenders what type of borrower you are.  Your credit score tells a lender how well you’ve repaid loans in the past, and how likely you are to repay a loan in the future.  Not only can your credit score determine whether you get a loan, but it can also determine how much you pay in interest on the loan.  A better credit score can save you hundreds or even thousands of dollars in interest.

Is your credit score good, average or bad? Here's how to tell – and what you can do to increase your score.

Check Yourself

By law, everyone is entitled to one free copy of their credit report every year from each of the three main credit reporting agencies.  You can get yours at annualcreditreport.com.  While valuable, because your free credit report can help you ensure there are no errors affecting your score, your free credit report does not include your score.  Over 90% of lenders use FICO Scores, and most financial institutions will give you your score.  Most banks and credit unions update scores in their database quarterly, and many give you access through their online banking platform. FICO Credit Scores range from a low of 300 to a high of 850.  Most lenders give the best rates and terms for scores of at least 740 (45% of consumers).  The next tier, scores between 670 and 740 (20%), are considered good scores, and most of these borrowers can get credit but they may not always get the best rates.  The remaining third of consumers have scores below 670.  Scores above 580 are considered “fair” and scores below 580 are considered “poor”.  These consumers have trouble getting credit, and when they do they frequently have to pay very high-interest rates.

To Improve your Credit Score

There are a few simple rules you can follow that will improve your credit score.  It’s hard to make your score jump a lot overnight, but if you do these things, your credit score is certain to go up over time.

First, you have to make payments on time.

Nothing is more important to your score than demonstrating you’re able to make timely payments.  Even if you’ve missed some payments in the past, all is not lost.  Those late payments stay on your credit report for several years, but they hurt your score less as time goes by.

Second, pay down your debt.

While simply paying off debt will improve your score, there is a trick to improving your credit score more quickly.  The trick is, pay down your credit card debt first!  You get points in your score for having low (or no) balances on credit cards.  It’s called “capacity”, and you get a lot of points in your score for carrying very low balances on credit cards.

Third, do not close credit cards when you pay them off!

This requires discipline to not build the balance back up, but keeping these cards open with no balance increases your capacity and adds points to your credit score.

Fourth, avoid applying for a lot of new credit, and when you do, don’t apply for a lot of new loans all at once.

Sometimes people who don’t have a lot of credit try to improve their score by getting new loans and paying them off.  While you do need to show some experience repaying loans, getting (or applying for) too many loans in a short period of time hurts your credit score.

Lastly, dispute any mistakes or inaccuracies you find on your credit report.

Incorrect information, like a payment you were not late on or a loan balance that isn’t showing paid off after you’ve made the final payment, can really hurt your score.  You can dispute inaccuracies directly with the credit bureau or with the lender. Credit problems don’t have to last forever.  Anyone can improve their score by following these rules, and while your score won’t always go up right away, it will go up over time, and it’s worth it.  The higher your score, the easier it is to get the best rates from lenders.

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We look at more than your credit score! Smart move. Apply Now or contact us for any questions.

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