What is a Credit Score and How to Improve It

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There's a lot of confusion out there about what a credit score is and what it means for you. So, we'll provide a comprehensive understanding of a credit score, what it covers, and how you can improve it.

A credit score helps creditors determine whether you are a worthy candidate for a loan. Credit scores are vital in most people's lives because they are essential for your finances.

Whether you plan on purchasing a house, renting an apartment, buying a car, or taking out credit cards, credit scores will play a crucial role in getting financing. How favorable your credit score is will also determine the terms and conditions you receive from lending institutions.

Credit scores will impact lending rates whether you're getting a construction loan, land loan, or conventional home mortgage.

The better your credit score is, the happier you'll be with the terms offered on loans and credit lines.

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What Are Credit Scoring Ranges?Deposit Photos

What is a Credit Score, and What is it Used For?

A credit score is a number that lenders use to determine whether or not you're a reasonable risk for borrowing money. It reflects your credit history, which includes your credit score, credit utilization, and payment history.

Credit scores range from 300 to 850. The higher the score, the better. Credit scores will indicate the probability you will repay bills and borrowed money.

Three credit bureaus keep track of your credit accounts. They are Experian, Equifax, and Transunion. The data gathered by these credit bureaus will significantly influence your scores.

While 850 is the best credit score possible, there isn't a significant difference between perfect and excellent scores regarding the terms you'll receive from mortgage lenders and creditors.

So, getting a perfect credit score is not only highly challenging but not worth the effort.

What Are Credit Score Ranges?

Understanding the credit score ranges is vital because they will likely determine the financial products offered and the applicable financial terms you'll receive. Individual lenders could have their own ratings for what terms they will provide a borrower, but these ranges will give you an excellent idea of what to expect.

  • Credit scores above 720 are considered excellent.
  • A credit score in the range of 690-719 is considered good.
  • A credit score ranging between 630 and 689 is fair.
  • Credit scores lower than 629 are thought of as being poor.

Remember that other factors besides your credit scores will determine whether you'll be a good candidate for a loan. Lenders will also look at your debts and current income too.

What Are FICO and VantageScores?

If you plan on buying a home, a FICO score is the gold standard lenders use to determine your loan terms and conditions. FICO scores are used chiefly by mortgage lenders, but their competitor is the VantageScore.

Both VantageScore and FICO pull from generally the same data. However, interpreting the data can impact the scores as they are weighed slightly differently. It is unlikely you will see big swings in scoring from either model.

No matter the scoring model you are looking at the data can vary because of constant updating. You can check your credit score one week, which might be slightly different the next.

Also, your credit score can vary depending on which credit bureau supplied the data used to generate it. Not all creditors send account activity to all three bureaus, so your credit report from each one is different.

What is The Average Credit Score of All Consumers?

In the United States, the average credit score is slightly different between FICO and VantageScore. The average FICO score comes in at 716. The average VantageScore is 695.

What Factors Impact Credit Scores The Most?

Not surprisingly, paying bills promptly is the number one factor impacting your credit score. Late payments can have a devastating effect on your credit scores. If you are more than 30 days late, you will be punished with a lower credit score. It will also stay on your credit report for years.

The other factor you will hear credit professionals talk about improving all the time is credit utilization. Credit utilization is how much of your credit limits are being used. Your credit scores will be helped when you keep your utilization ratio below 30 percent. The lower it is, the better.

While these two factors will significantly influence your scores, a few others will have some impact. They are credit age, credit mix, and recency of credit applications.

If you have had credit for longer, it helps your scores. When you have applied for and paid back different types of credit, that is also helpful.

How Do You Improve Your Credit Score?

Know that you know how crucial your credit score is to get the best terms on mortgages and other loans; you're probably wondering how you can improve it quickly.

Let's go over how to increase your credit scores.

Use A Credit Decision Engine Such as Credit Karma or Credit Sesame

Did you know some companies will help you increase your credit standing for free? Well, there are! Credit Karma and Credit Sesame will provide you with the necessary information to raise your scores.

Have you ever wondered if you should pay down a specific credit card bill vs another? Maybe you have a student loan and want to know if paying that off faster will help your score. These are the kinds of decisions these companies can answer for you.

Pay All Your Bills Before They Come Due

Make sure you pay all of your debts on time before the due date. Doing so is one of the most essential things you can do to raise your credit scores.

Keep Credit Utilization Under 30 Percent

As we previously discussed, keeping your credit utilization as low as possible will help to increase your credit scores.

Don't Close Out Credit Card Accounts

Contrary to popular thinking, closing out credit cards does not help improve your credit scoring. It is essential to keep older credit cards open to keep up the average age of your accounts.

Constantly Monitor Your Credit Score

It is essential to stay on top of your credit reporting and scores. Remember that a mistake on your report can negatively impact your scores. Keep working to make improvements every week.

Final Thoughts

Investing the time and energy into improving your credit score will pay off in the long run. So much of your finances are tied to credit scoring. Nothing happens overnight. It is a constant process to make improvements. Do your best, and the results will come.

You should now better understand a credit score and how it works.

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Bill Gassett is an avid writer for numerous real estate topics including finance, mortgages, moving, home improvement, and general real estate. His work has been featured on numerous prestigious real estate publications.

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