A good credit score can make it a lot easier to borrow money to purchase a home or car, get a credit card, take out a personal or business loan, secure a student loan, and more. There isn’t necessarily a single credit score that’s considered “good,” however. Instead, what constitutes a good credit score depends on the credit scoring model that’s used. We will analyze some of these and discuss how to improve your credit score no matter the model.
Types of Credit Score Models
A few different scoring models are used to calculate your credit score, with the Fair Isaac Corporation (FICO) score being a popular standard. Understanding the differences and factors used to calculate your score can help you improve your credit score over time.
FICO Credit Score
The FICO score is considered the most reliable credit scoring model because of its long-standing reputation. The model has been around since 1989 and has undergone numerous revisions during that time. Currently, FICO credit scores range from 300 to 850. A good credit score is typically between 670 to 739((Experian:
What Is a Good Credit Score?)), according to FICO; however, the required credit score to get approved on a loan or line of credit depends on the lender. One lender might offer its lowest interest rate to borrowers with a score above 730, while another lender might require a score of 760 to get approved.
VantageScore
The VantageScore was created in 2006 and is another widely used scoring model, after FICO. VantageScore is used on credit reports across all three credit bureaus. This algorithm uses traditional data, like number of on-time payments, credit card balances, assets, and other factors to calculate your credit score. The VantageScore 4.0 scale is between 300 to 850, with 700 considered to indicate good credit. This scoring model includes many of the same factors as the FICO score, like past payments and credit utilization, but it weighs each category differently. It also leaves out paid collections and reduces the weight of medical collections, so your score isn’t as dramatically harmed by these marks.
Other Credit Scoring Models
Depending on the purpose of your credit inquiry, other credit scoring models might be used to determine your creditworthiness. For example,
insurance companies use their own credit score to assess your plan premiums. Insurance credit scores range from 0-999, using similar scoring factors that are used for FICO, like your outstanding debt, age of credit, types of credit you have, and payment inquiries. These factors may be weighted differently, however, and the scoring model includes other factors that aren’t included in your FICO score, like homeownership.
How to Get a Good FICO Credit Score
There isn't a magic solution to raising your credit score to “good” standing. Even maintaining it at that level or
improving your credit to “very good” or “exceptional” takes work. Instead, there are a number of financially responsible steps you can take to ensure your credit score is strong enough to get you the credit that you need. Using the familiar FICO score((myFICO:
What's in my FICO Scores?)) to determine what a good credit score is, here are a few tips to improve your credit score.
1. Always Pay Your Loans on Time
Your payment history accounts for 35% of your FICO credit score. Showing that you pay your bills on time instills confidence in lenders that you’re a good credit risk.
Set up automatic payments or schedule reminders to ensure you do not miss any of your bill payments.
2. Avoid Getting Too Close to Your Credit Card Limits
“Amounts owed” is one of the five categories FICO looks at when it determines your credit score. This factor accounts for 30% of your credit score. Try to keep your credit card balances low compared to your total credit limit. In fact, it’s best to not carry a credit card balance at all by paying off your credit card statements in full every month. If you must keep a balance on your card, it’s advised to keep your utilization rate (your total credit card balance divided by your total credit limit) below 30%.
3. Establish a Long Credit History
Having a long credit history is a positive mark for your credit score — as long as it’s a good, long history. Credit scores are partially based on your experience with credit cards and other loans — “length of history” makes up 15% of your FICO credit score. One way you might inadvertently harm your length of credit is by
closing out a credit card that you’re not using anymore. Remember, the age of your accounts is a big part of your overall credit score. Fight the urge to close your active accounts, if they’re in good standing.
4. Only Apply for Credit When It's Necessary
Yes, having an established credit history is beneficial, but you can negate that goodwill with too much credit access to your name — especially if you’ve opened multiple accounts in a short time. Having a lot of new credit in a short amount of time might suggest that you’re in a bad spot financially, and a high default risk. Plus, every time you apply for a loan or credit card, an inquiry will show up on your credit report, whether you’re approved or not. The inquiry can drop your credit score five points, although this decrease is temporary. Try to keep your credit applications to a minimum and look for prequalification tools that perform a soft credit inquiry so your credit score isn’t adversely impacted.
5. Diversify Your Credit Accounts
Your “credit mix” comprises 10% of your FICO credit score. The more varied your credit mix — such as credit cards, a mortgage, and a car loan — the better your credit score will be, assuming, of course, that you are making all of your loan payments on time. Student loans are another financial obligation that might be included in your credit mix. Even if your credit isn’t at the “good” level yet, you can still apply. For example, federal student loans do not require a credit check. If you’ve maxed out your federal student loans, scholarship and grant options, private student loans can help make up the difference. Bad credit can make it harder to secure a loan, but getting a student loan with bad credit isn’t impossible((Credit Knocks:
How To Get Student Loans with Bad Credit)).
6. Review Your Credit Report
Your credit report might have items on it that are pulling your score down.
Credit score mistakes can happen because of an error on your credit report. It’s smart to regularly check your credit report for any errors, like a misspelled name, incorrect or old addresses, accounts that don’t belong to you, or adverse events that should have been removed. If you spot anything wrong or suspicious, contact the credit bureaus to dispute the errors. You’re allowed to request a free credit report from each of the three credit reporting agencies (Equifax, Experian and TransUnion) once every 12 months through AnnualCreditReport.com. You can request all three reports at once or spread them out throughout the year.
The Bottom Line
Having a “good” (or better) credit score can open a lot of financial doors for you when you need to borrow money. Not only will your chances of approval increase with a stronger score, but you’ll have access to more competitive interest rates. If you continue to make timely payments, keep the amount of money you owe low, and minimize your loan and credit card applications, your credit score will have nowhere to go but up.
More Tips on Getting a Good Credit Score
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