Building a good credit score is essential if you ever want to purchase a new home or car, qualify for a better interest rate on your credit card, or even get a better job. But a bad credit score will prevent you from achieving any of those dreams.
A bad credit score will increase your interest rate, reduce the loan amounts you can qualify for, and make it difficult to qualify for a mortgage or auto loan in general.
For that reason, it’s important to know the difference between a bad credit score and a good one. It’s also smart to understand how to improve your credit score.
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What is a credit score?
Your credit score is a three-digit number that represents how responsibly you handle debt. Banks and credit card companies will look at your credit score when determining your eligibility in terms of loan sizes and interest rates for new lines of credit.
There are a few different credit score models in use today, but two of the most common are the FICO score and the VantageScore. While their weighting systems vary slightly, they use similar metrics to judge your creditworthiness.
When you take out a personal loan or make purchases on your credit card, lenders expect you to repay your debt. Making regular payments on time builds your credit score over time, but if you miss even one payment, you can tank your credit score overnight.
FICO score weight: 35%
VantageScore weight: Moderately influential
Credit utilization refers to the size of your debt compared to your available credit. For instance, if your credit card balance is $100 on a $1,000 limit, your credit utilization is equal to 10%. Making small purchases or paying off your credit in full every month will boost your score but lenders will still consider you a risk if you regularly max out your credit cards.
FICO score weight: 30%
VantageScore weight: Extremely influential
Length of credit history
If you have a longer credit history, especially if it’s a good one, creditors will consider you less of a risk as they’ll have more data regarding your creditworthiness. Simply leaving your accounts open – even if you rarely use them – will raise your score over time.
FICO score weight: 15%
VantageScore weight: Less influential
Properly managing multiple types of debt is one way to show lenders that you are a responsible borrower. If you have a mix of revolving credit like credit cards as well as non-revolving credit like a student, auto, and home loans, you’ll successfully increase your score as long as you continue to make your payments.
FICO score weight: 10%
VantageScore weight: Highly influential
Every time you apply for a loan, like a mortgage, an auto loan, or a credit card, the lender may perform a hard credit check in order to view your credit history. A sudden burst of activity will suggest that you’re seeking debt and you may be a risk to lenders.
Hard inquiries can lower your score. They will also typically stay on your report for about two years, so it’s important that you don’t apply for too many loans at once. If possible, try to only consider borrowing from lenders that perform soft credit checks.
FICO score weight: 10%
VantageScore weight: Less influential
Who determines my credit score?
Your credit score is based on items mentioned above, which collectively illustrate how responsibly you’ve used and continue to use your open lines of credit. This information is collected, stored, and used by credit reporting agencies that then create your very detailed credit reports.
The three largest agencies in the United States are Experian, TransUnion, and Equifax. Each bureau uses the items above to compile credit histories and issue credit scores. However, note that your score may vary among the three bureaus depending on how your lenders report your information.
What are the credit score ranges?
For a quick reference, a bad credit score typically falls below the 580 to 600 range, depending on which model you use. But that’s not the whole story.
You see, credit reporting agencies may also categorize your credit score differently. As such, if you want to know what a bad credit score looks like, you need to know which agency you’re referencing.
Experian and Equifax
Experian and Equifax use the same numerical breakdown to determine whether your credit is good or bad. This model is based on your FICO score, with numbers ranging from 300 or poor to 850 or excellent. Here are the rest of the scores:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800-850
Unlike the other agencies, TransUnion relies on the VantageScore model to rate your credit according to letter grades similar to grading systems in high school. Similar to the FICO score, your credit score will fall somewhere between 300 or F and 850 or A:
- F: 300-600
- D: 601-657
- C: 658-719
- B: 720-780
- A: 781-850
How to increase your credit score
If your credit score needs a boost, you can take a few steps to lift it out of the gutter. But keep in mind that this process isn’t instantaneous. In fact, it may take months or even years to raise your score.
Keep your utilization low
The lower your credit utilization, the better your credit score. Ideally, you should keep your total usage below 10% of your total credit limit.
If you rely on credit cards for all of your purchases, be sure to pay off your cards either in full or at least close to full every month. If you find yourself buying a lot of items that you don’t need and putting the purchases on your credit cards, consider cutting back for the sake of your financial health.
Make on-time payments
Your payment history comprises around 35% of your credit score. Even though making one on-time payment won’t skyrocket your score, missing a payment can drop your score by several points overnight. If you find that you’re struggling to pay your credit cards on time, consider setting up automatic bill pay.
Remove credit report errors
According to a Consumer Reports investigation, a whopping 34% of Americans found at least one error on their credit report in 2021. These mistakes can lower your score incorrectly and that can potentially cost you in the long run.
If you suspect that your credit report is lower than it should be, you can request a free copy from each bureau once per year from annualcreditreport.com. When you receive a copy of your credit reports, look for the following items:
- Incorrect names, addresses, or other identifying information
- Expired credit information
- An account that you closed voluntarily listed as closed by lender
- Late payments that you know were made on time
Under the Fair Credit Reporting Act, you have a right to report any errors to the relevant bureau for investigation. If your credit report does indeed contain an error, the bureau is required to remove it promptly.
Use a secured credit card
If you’re still struggling to fix your bad credit score, you may want to look into a secured credit card. Secured credit cards require an upfront deposit that will then act as your line of credit and remove risks for the lender.
Once your card is open, you use it just like a regular credit card and pay it off every month. Your lender will then report your payments to all three credit bureaus as a way of helping you build your score over time.
After you’ve proven that you can responsibly handle your secured line of credit, you might be able to transfer to an unsecured card with the same lender.
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