Credit Scores: Where Do You Stand and How Much Does It Matter?
Your credit score probably isn’t something that comes up over polite dinner conversation on a regular basis. In fact, it probably isn’t something that you talk about very much at all. So how are you supposed to know where you stand with your score? Who will give you advice if you want to push it higher? Don’t worry. We’re here to help.
What Exactly Is My Credit Score, Anyway?
Your credit score—also known as your FICO score—is one of the things that lenders consider when deciding whether to give you a loan and at what rate. Scores range from 300 to 850, with any score above 740 considered excellent and good enough to get the best rate from most lenders. Anything above 680 is good credit, while a score between 620 and 680 falls into the acceptable credit range. Your score is determined by a range of factors, from your bill-paying history to how long you’ve had your accounts open.
The good news about your credit score is that it is something you can control. With a little dedication, you can use it to achieve major financial and life milestones.
How To Raise Your Credit Score
If your credit score isn’t quite where you want it to be, there could be several reasons. The easiest to address are any errors that may have made their way onto your credit report—as surprising as it may be, mistakes are not uncommon. Request an up-to-date copy of your credit report and thoroughly examine it for errors. Look out for anything that doesn’t fit into your personal history, from addresses at which you never lived to the names of employers you never worked for to records of late payments that are older than seven years.
You may also just not have enough of a credit history built yet. To have a FICO score at all you must have at least one account open six months or longer. So how do you get credit without a credit history? The easiest way is to open a secured credit card, which is backed by an upfront cash deposit. You can also get a co-signer on a card or become an authorized user on someone else’s credit card. When you do get a card, make sure to use it and then pay your bills in full and on time every month.
If you have a credit history built but you’d like to improve it, start by paying down debts—a major part of your score is determined by how much of your available debt you’re actually using. If you have debts that went to collection, you can offer to pay off the remaining balance and ask the creditor to erase the debt. Set up recurring, monthly, in-your-face reminders to pay your debts on-time. Whether you use digital calendar reminders, or Post-its stuck to your front door, this is critical. Late payments (even by just a few days) can have a major impact on your score. You can even start paying off bills twice a month: once to ensure that you’re never using up too much of your credit and once at the actual due date to avoid any late payments.
As time passes and you build a history or pay down your debts, it’s important to keep some credit cards or installment loans active. There’s a common misconception that it’s best to completely shut down your accounts and shun the use of credit, but this can actually hurt your credit scores. By contrast, demonstrating responsible and consistent use of credit over time can improve your scores. We recommend evolving to the point where you have a small amount of active debt that you pay on time every month.
On the flip side, don’t open new accounts just to increase the amount of credit you have available. Opening new accounts probably won’t improve your credit score. Applications for new credit show up as inquiries on your credit report, indicating to lenders that you might be looking to take on new debt.
As you make progress, you’ll become more and more appealing to lenders (and your credit history will become less and less relevant). Inquiries into new credit stay on your report for two years. Bills that were paid late remain on your report for seven years but start to decrease in importance as you build a record of paying on time. The length of time it takes to improve your score is dependent on your specific circumstances, but your new financially-savvy behavior is sure to start to shine in the eyes of lenders.
Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. Please consult your tax advisor. All calculations and information shown here are for illustrative purposes only. All third parties listed above are for demonstration purposes only and are not affiliated with LendingHome. All views and opinions expressed in this post belong to the individuals referenced. NMLS ID: 1125207 Terms, Privacy & Disclosures. Copyright LendingHome Corporation 2019.