Guide to a Good Credit Score - Why You Need One
“In times past, your social security number was the most influential number known to man…
However, there is a three digit number that is giving the social security number a run for its money…”
– The Credit Repair Book
What is a credit score?
Your credit score is a three digit number from 300 to 850. The higher the score, the better credit you have.
Your credit score is a calculation the credit reporting agencies use, based on all the information in your credit report. Your credit report is a history of past and current credit accounts (credit card, mortgage, personal loans), approvals, denials, if your account is delinquent or paid to date, and your credit utilization.
Your credit score and underlying history are some of the most vital parts of your financial life!
Your credit score follows you forever and it will play a huge role in many major financial situations throughout your life. Many people think that a credit score only really matters when it comes to being approved for a loan or credit card, but it goes far beyond that.
Why is a good credit score important?
Having a good credit score shows your trustworthiness and dependability to lenders. A good credit score is a huge factor towards many financial situations and decisions in your life.
A good credit score will make the difference of whether or not you’re able to buy the home you fell in love with, or the car you’ve had your eye on. If your credit score is not high enough, chances are you won’t be able to find anyone to lend you the money you need.
Credit scores do not only determine whether or not you can get approved for a loan or credit card, but has a much bigger role than most people realize.
- Having a high credit score not only makes it easier to get loan approval, but also gets you the lowest interest rates, saving you money.
- A high credit score gives you more negotiation power when it comes to purchases.
- A good credit score saves you money by giving you discounts on insurance, such as a good credit discount on car insurance.
- Some insurance companies may also require a minimum credit score before granting you a policy.
- It helps with employment opportunities, as it shows your employer you are a responsible person.
- Some landlords may use your credit score to decide whether or not to rent to you.
It’s important to know your credit score, and continually monitor your credit score, given it’s the number one factor in your financial outlook and opportunities.
We’ve created this infographic to easily understand each part of a credit score, things that raise your score, and what can negatively affect your score.
What can I do if I have no credit or bad credit?
Your choices today will determine your future credit. Just because you have no credit or bad credit now, it doesn’t mean it has to stay that way.
If you’re just starting out, there are some things you can do to make sure you get approved for your first loan or credit card, and start establishing your credit history.
- Have proof of your employment, wages, income, cash on hand or assets. The financial lender needs to know how much money you make so they can determine what amount they can lend you without it being too much risk.
- Apply at a financial institution you have a relationship or prior history with. If you’ve had an account at a bank since childhood, and they know who you are, it’s much easier to get approved than it is if you’re a total stranger.
- Apply for a small loan. If you have no credit history, they’re not going to want to give you a high balance loan. Start small, like $500. Pay it off, then ask for a little larger one like $1,000. Once you show them you pay your bills on time, they’ll be more open to loaning a larger amount to you in the future.
- Co-sign with a trusted friend or family member. This is cautious advice, as co-signing puts both your credit and the other party’s credit on the line. However, if you have a family member, like a parent, with established credit, the bank or credit union is likely to approve a loan for them that they won’t for you. By also having your name on the loan, it will build your credit up.
- Report Your Rental History. A lot of people without a credit history do have a history of paying rent on time. All 3 major credit bureaus accept rent payments as part of their reports if they receive it, and only about 1% of renters take advantage of this. Although you can’t report rent payments yourself, you can have a service verify your on-time payment history for up to 2 years, and it can boost your credit an average of 40 points! Click the banner below to get started!
If you have bad credit, you can apply some of the same principles as those with no credit. There’s a few other things you can do to get your credit back into good shape.
- Check your credit report for any errors. Your low credit score may not be a result through any fault of your own. Sometimes things get reported to credit agencies that were not even yours. Sometimes payments you made aren’t credited and end up showing on your account. If you’ve been a victim of identity theft, there’s likely things on your credit report that are inaccurate.
- Get current on your payments. Being more than 30 days behind on a payment will flag your account as delinquent. It will continue to hurt your credit score until the account status has been updated to current. Bring your account payments to the current month and you’ll soon see your credit score start to raise.
- Call your creditors to negotiate. We all have unexpected expenses and things happen when can make it difficult to pay our bills by the due date. A simple call to your creditor can have them change the due date or waive a late fee. If you’re already behind on payments, ask for an alternative payment plan. They would much rather have you paying towards your debt than have to resort to using a collection agency.
- Keep your accounts open, even if they’re paid off. The average age of your accounts plays a factor in determining your credit. If you close an account you’ve had for 10 years, then that will be gone from your credit report. Decreasing the age of your accounts can negatively affect your credit score.
What else can affect my credit score?
As seen above, there are five man categories towards what affects and determines your credit score.
- Payment History: The number one factor in your credit score is your payment history. Your credit score is all about determining your trust and reliability towards paying your debt. Always make your credit payments on time.
- Outstanding debt: This is known as your credit utilization rate. If you have a total limit of $25,000 across all accounts, and your outstanding balance is $2,500 then you have a 10% credit utilization rate. The higher your utilization rate, the higher risk you are to lenders. Keeping your utilization rate below 30% will positively affect your credit score. If you can keep it below 10%, then it’s even better.
- Credit history length: The longer credit history you have, the more trustworthy you are. To use an extreme example, which do you trust more, a surgeon with 20 years of successful practice, or a surgeon that just graduated medical school and your operation will be their first? The longer you have active credit, the more dependable you appear, increasing your credit score.
- Types of credit: There are two main types of credit: revolving and installment. Revolving accounts would be credit cards. Installment accounts would be fixed accounts like a mortgage. Showing that you can responsibly manage all types of credit accounts will increase your score. It’s best to have a mix of both revolving and installment accounts.
- New credit: Every time you apply for a credit card or loan, a credit check needs to be made to determine your approval or denial. This is known as a hard inquiry, and shows up on your credit report. Repeated hard inquiries in a short amount of time will negatively affect your credit score, so only apply for new accounts when you absolutely need to.
Along with these five categories, there are additional factors when it comes to your credit score that you may not know about.
- Other delinquent bills or outstanding debt: Your credit score is not just determined by your credit accounts. Any bill that is not paid to date can be reported to a collection agency, thus showing up on your credit report and damaging your credit in a big way. Rent, medical bills, utility bills, child support, parking tickets, subscription or membership services can all be sent to a third party for collections, and can ruin your credit.
- Requesting a credit limit increase: When you ask for your credit limit to be raised, the credit company will do a credit score check, which is a hard inquiry and can temporarily lower your score. However, if your limit increase is granted then you’ll have less credit utilization, so it may also offset or increase your score.
- Paying off a loan: At first glance this sounds counter-intuitive, but if you only have one loan account and pay it completely off, then you’re not using any credit. Having zero credit utilization is similar to having no credit at all, as you won’t be adding to your credit history.
- Changing cell phone plans: Cell phone providers will often do a credit check when you sign up for a plan with them, which is a hard inquiry on your credit report.
- Overdraft fees: While these are not normally reported, if your checking or savings account is also tied to a backup line of credit, it can show up on your credit report, especially if you don’t pay or resolve the overdraft fees.
- Identity theft: There’s a victim of identity theft every 2 seconds. It’s a staggering statistic, and it can happen to anyone. When your personal information is stolen, all your accounts can be compromised, drained, passwords changed, and you may even be locked out of your own accounts. This can have devastating effects on your credit and take years to resolve. It’s happened to me before. I wish I had the peace of mind and expert help from Identity IQ when my identity was stolen.
Protect your identity, and continually monitor your credit, and you’ll see the results on your credit score.