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Most people probably couldn’t tell you what their credit scores are at any given time. It’s just not something that comes to mind very often. It only becomes an issue for most when they apply for loans or need to have their credit checked for other reasons.
Your credit score isn’t something you should take for granted. Credit scores are used for many different things – and not just for taking out loans. Just a few include:
- Employment screening
- Renting an apartment
- Utilities (electricity, water, cable, etc.)
- Cell phone service
- Car loans
- Home loans
- Personal loans
- Obtaining credit cards
- Insurance coverage
Since having a good credit score is so important, it’s a good idea to keep up with it. This allows you to maintain or improve it, and it also prevents any awkward surprises when your credit is checked and it’s lower than what you were expecting.
To keep up with your credit score, it’s first important to understand a few things about your score and how it is calculated so you’ll know how to avoid things that could hurt it.
What is considered a good credit score? Let’s take a look at how credit scores are calculated so you’ll know when you have a good one.
What Is a Credit Score?
Did you know that many aspects of your life have been reduced to a score that lenders use to determine whether they will loan you money or not? It’s also used by companies when making hiring decisions and by landlords to see if they want to rent to you.
It’s kind of Orwellian when you think about it. But it is a reality of the modern life we now live in where information is transferred in the blink of an eye.
Three different credit reporting agencies issue credit scores. They include TransUnion, Equifax, and Experian. When lenders report information on someone’s payment history (both good and bad), they report it to these three agencies. Different credit scoring models are used to determine your credit score, but the two most common are FICO and VantageScore.
There are several different components of a credit score. They include:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
Your payment history should be self-explanatory. It’s your history of making payments on time. At 35%, this represents the largest factor that determines your credit score.
The credit utilization ratio is another big factor, and it is responsible for 30% of your credit score. The credit utilization ratio is just a fancy way of referring to the amount of available credit that you have.
In technical terms, it refers to the amount of your credit cards’ remaining balances divided by the total credit limit. To maintain a good credit utilization ratio, you want to use 30% or less of your available credit at any given time.
Length of credit history represents how long you’ve had a credit account. The longer, the better. For example, if you’ve been with a credit card company for 15 years, that is much better than if you’ve only been with a company for six months.
The credit mix represents the different types of credit accounts that you have. For example, it could represent your credit cards, student loans, mortgage payments, and other loans.
New credit represents the number of new credit accounts you’ve established in the past year.
What Is a Good Credit Score Range?
Credit scores range from 300 to 850, and the higher the score, the better. A FICO score of 800 and above is considered excellent.
It’s important to keep in mind that several different credit score models are used in the United States. FICO and VantageScore are the two most common.
Lenders tend to categorize FICO credit scores in the following ranges:
800 – 850 (Excellent)
740 – 799 (Very Good)
670 – 739 (Good)
580 – 699 (Fair)
300 – 579 (Bad)
What Is a Bad Credit Score?
A bad FICO credit score is generally considered to be 579 or less. A variety of factors can contribute to dragging your score down. A few common things that negatively impact your credit score include:
1. Carrying High Credit Card Balances
Carrying a high balance on a credit card doesn’t just strain your finances, it can also harm your credit score. This is because it can negatively impact your credit utilization ratio.
2. Not Having a Mix of Credit Types
Although it may sound counterintuitive, having a mix of credit types on your credit report is a good thing. Having only one or two types listed may harm your credit score.
Someone with a couple of credit cards, for example, may have a lower score than someone who has credit cards, a car loan, a mortgage, and other types of credit. The credit mix represents 10% of your score.
3. Unpaid Parking Tickets
Unpaid parking tickets don’t just cause problems with local authorities, they may also harm your credit score. If tickets remain unpaid, some localities may turn them over to a collections agency and report it to the credit bureaus.
4. Late Payments
Late payments make up a large part of your credit score – 35%. And all it takes is one single late payment to negatively affect your score. Because of this, it’s vitally important that you always make all of your payments before their due dates.
5. Not Paying at All
Not paying your bills for a while can devastate your credit score. If you go long enough without making a payment or contacting your creditors to try to make payment arrangements, the account could be turned over to a collections agency.
6. Canceling Old Credit Cards
About 15% of your credit score is determined by the average age of your open accounts. Because of this, canceling an old credit card that you are no longer using may cause your score to go down.
7. Cosigning for Someone
Cosigning for someone who doesn’t have good credit may sound like a nice gesture, but it can harm your credit score if that person doesn’t make all of his or her payments on time. When you cosign for a loan, you are as responsible for that loan as the other signer. If payments aren’t made on time, it can harm your credit score.
8. Applying for Too Many Lines of Credit in a Short Period
Applying for multiple lines of credit in a short period may cause your credit score to go down. This is because a lender will most likely do a hard credit check on you for each account you apply for to see if you qualify. If multiple hard credit checks are done in a short period, it can negatively affect your credit score.
9. Having an Account Sent to Collections
If you are unable to make payments on an account, it may be sent to collections. Delinquent accounts are often reported to the credit bureaus. This can result in a decrease in your credit score.
10. Filing Bankruptcy
Most file for bankruptcy when their financial situations have reached rock bottom. They are unable to repay your debts. It’s an extreme measure that will cause your credit score to plummet.
11. A Home Foreclosure
Home foreclosures typically result when you get significantly behind on your mortgage payments. Not only will these late payments harm your credit score, but they can also make it difficult to obtain another mortgage in the future.
What Is the Average Credit Score in America?
The average credit score in America is 695, which isn’t bad at all. This is a score that is considered good but not excellent. Since the average credit score does fluctuate, this number may have changed since the publication of this article. The average credit score can also vary due to the differences between scoring models. The average tends to fall in the range of 660 to 720.
An important factor to consider is about 14% of the American population does not have a credit score. Several factors contribute to this, one being that many young adults simply haven’t done anything to establish a credit score yet. We all have to start somewhere.
How Often Is a Credit Score Updated?
Creditors report both the good and the bad to the three credit bureaus monthly. Sometimes they report the information to one or two bureaus, and sometimes they report to all three.
Because information is continually coming into the credit bureaus, credit scores are updated frequently. A new score is calculated, for instance, every time a lender performs a credit check.
It’s important to point out that your credit score may also vary depending on which of the three credit bureaus is checked. Your score may be slightly different depending on whether FICO, VantageScore, or another model was used to determine it and whether each bureau has the same information.
What Is the Average Credit Score by Age?
One thing that is not a factor in determining your credit score is your age. But it’s interesting to note that people’s credit scores, in general, do tend to increase as they get older. According to Money.com, the average credit score by age breaks down accordingly:
- 18-29: 652
- 30-39: 671
- 40-49: 685
- 50-59: 709
- 60+: 743
One reason why there is a direct correlation between age and average credit score has to do with the length of credit history. If you’ll recall, credit history makes up 15% of a person’s credit score. Many people sign up for credit cards when they are young and keep those cards for many years – sometimes decades.
How to Improve Your Credit Score
If your credit score is lower than you would prefer, there are some things you can do to improve it. Credit scores fluctuate constantly. The credit score you have now doesn’t necessarily have to be the one you’re stuck with forever.
It’s important to keep in mind as you review this list that it can take some time to see meaningful changes to your credit score. Also, negative information remains on your credit scores for seven years.
Nevertheless, if you are diligent with your efforts, it is definitely possible for your score to improve as time passes. Here are 10 things you can do to improve your credit score:
1. Obtain Your Credit Reports
Knowing your score is the first step to improving it. And the best way to keep up with your score is to obtain reports from each of the three credit reporting bureaus.
You can obtain one free credit report from each of the three agencies in a 12-month period. You can obtain all three at once if you’d like. But to help you track changes to your score, you might want to consider obtaining a credit report from one agency and then waiting a few months to obtain one from another agency, and so forth.
2. Review Your Credit Reports for Errors
Sometimes incorrect information ends up on credit reports. And when it does, you have a right to dispute that information. An error on your report can really drag your score down, and removing the incorrect information may help to improve your score. Information on disputes can be found on each of the three credit bureaus’ websites.
3. Make All of Your Payments on Time
This may seem like a no-brainer, but getting behind on your payments is one way to damage your credit score. Staying on top of your monthly payments will help to turn things around.
4. Watch Your Credit Utilization Ratio
Your credit utilization ratio makes up 30% of your credit score. Because it’s such a big factor in how your score is determined, you want to keep tabs on this metric at all times.
You can obtain a good credit utilization ratio by using no more than 30% of your available credit at any given time. If you are currently carrying a high credit card balance, for example, working on paying that balance down may improve your score.
5. Don’t Try to Remove Old Debts from Your Reports
If an old debt appears on your credit reports where you made all of the payments on time, don’t try to have that information removed. Those on-time payments can actually help your score. Also, old debts disappear on their own after seven years.
6. Only Apply for New Credit Accounts If Necessary
If you are trying to improve your credit score, it’s best to avoid applying for new credit cards or other types of loans. A new line of credit would decrease the average age of your accounts, which may cause your score to decline.
7. Leave Accounts Open
If you are behind on making payments on a credit card, you may be tempted to close the account. But doing so could hurt your credit score because it could trigger an adjustment to the average age of your accounts.
As long as you are making on-time monthly payments to the account, leaving it open could actually benefit your score. It’s important to focus on paying the amount you owe down and getting your credit utilization ratio under 30%.
8. Get Professional Help
Navigating the credit jungle can be confusing. One of the best things you can do to improve your score is to develop a plan of action, and seeking assistance from a professional is a great way to create a strategy that is custom-tailored to your specific situation.
The National Foundation for Credit Counseling is a nonprofit organization that can help you create a plan to get your financial life to pay down your debt and improve your credit score.
9. Don’t Forget About Your Cell Phone and Utility Payments
When most think about making payments on time to improve their credit scores, they tend to focus on their credit cards, mortgages, car payments, and other lines of credit. But it’s important to remember that your monthly mobile phone and utility payments also count. If you are working on rebuilding your credit score, you don’t want to make late payments on any accounts.
10. Be Persistent and Don’t Give Up
Rebuilding your credit score can take some time. Just as large ships at sea don’t turn on a dime, it may also take a while for you to see improvements to your score – even if you are doing everything right.
It’s important not to become discouraged if you don’t see rapid and dramatic improvements to your score. As long as you are making steady progress on turning your financial situation around, your score should improve over time.
Your Credit Score Matters
Obtaining a good credit score is something that nearly anyone can achieve as long as they are diligent in monitoring their credit information and proactive in doing the things that can improve their scores. If any issues do arise, it’s important to take care of them as soon as possible.
Having good credit is something that can benefit you in many ways, and in the age we live in, it’s vitally important to strive for as high a credit score as possible. Thankfully, achieving a good score is definitely possible.
Don’t let a bad credit score drag you down. A good score can open many doors in your life. By staying on top of things, you won’t have to cringe whenever a lender runs a credit check on you. You can relax and smile as the lender tells you that you have “excellent credit.”