A good credit score can help you land your dream job, get a better credit card and even become a homeowner.
But what’s the story if you have bad credit? Unfortunately, you may have access to fewer opportunities. You might have trouble getting the loans you need to go back to school or start a business.
You may not be able to open a new credit card because you’ve missed payments in the past. You might even have to put your dreams on hold while you wait for your score to improve. But what is your credit score, anyway — and how can you tell if you have a bad score?
We’ll take a closer look and give you a few useful tips so you can get started on the path to healthier credit.
First, What Makes Up a Credit Score?
Your credit score is a three-digit number that represents how well you pay back
You’ll have a higher score if you always pay your bills on time and you only put a few dollars on your credit cards each month. But if you rely on credit cards for everyday expenses and you’re guilty of missing more than a few minimum payments, your score will be lower.
There are a few different credit score calculation methods, but lenders and banks most commonly look at your FICO score. There are five major factors that contribute to your FICO score.
When you take out a loan or you put money on a credit card, lenders expect you to pay them back in small, monthly installments. As you might expect, missing payments negatively impacts your score. Always make your minimum monthly payments on time to improve your credit score. Your payment history makes up about 35% of your FICO credit score.
Credit utilization refers to how much of your available credit you use every month. You have a low utilization rate if you only charge a few dollars during every cycle and you pay it off every month. You have a very high utilization rate if you regularly max out your credit cards. Banks and lenders consider you to be a risky borrower if you use a lot of credit. Your credit utilization rate makes up about 30% of your FICO credit score.
Length of Credit History
Credit lines and accounts that have been open for a long time are considered more stable than those that have just been opened. Simply leaving your accounts open for a few years will naturally raise your score. The age of your accounts contributes to about 15% of your FICO credit score.
Banks and credit card companies like to give out loans and credit to borrowers who have more experience managing different types of accounts. A mix of revolving credit (like home equity lines of credit and credit cards) and non-revolving credit (like student and personal loans) can boost your score. Your credit mix makes up about 10% of your FICO score.
A bank, lender or credit card company uses a hard inquiry to check your credit. Hard inquiries appear on your credit report and temporarily lower your score. This is to discourage you from applying for several loans at once.
Try not to apply for any other credit for at least a few months if you have an application for a big loan coming up (like a mortgage or a student loan). Your recent inquiries make up about 10% of your FICO score.
The other main type of credit score calculation is the VantageScore model. Fewer lenders and banks use VantageScore when they consider you for a loan or card, but it’s still good to know your score for both models. Most VantageScore categories are very similar to the ones that go into your FICO score. The following factors make up your VantageScore credit score:
- Payment history: 40%
- Age and type of credit: 21%
- Credit utilization: 20%
- Total balances on all your accounts: 11%
- Recent inquiries and behavior: 5%
- Available credit: 3%
Who Determines My Credit Score?
Your credit score comes from the items on each of your credit reports. Credit reports list how you’ve used credit in the past and how you’re using it now. A bank or lender looks at your credit report to see missed credit card payments, past foreclosures and the types of debt you have. The items on your credit report make up your credit score. Your score will be higher if you have a lot of positive items on your report. You’ll have a lower credit score if you have more negative incidents.
Credit reporting agencies create, store and issue your credit reports. The three largest agencies in the country are Experian, TransUnion and Equifax. Each bureau uses the items on your credit report to create a score for you. Your score might be a little bit different depending on which report you’re looking at because not every lender reports to all three bureaus.
You can get a free copy of each of your credit reports once every 12 months by visiting annualcreditreport.com.
What Are the Credit Score Ranges?
Let’s take a look at each of the credit reporting bureaus and how they categorize different credit scores.
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800-850
- Poor: Below 560
- Fair: 560-659
- Good: 660-724
- Very good: 725-759
- Excellent: 760-850
Unlike other agencies, TransUnion doesn’t give you an adjective rating to describe your score. Instead, it gives you a letter grade ranging from an F to an A. Just like when you were in school, an F is the lowest grade you can get and an A is the best. Here’s what “grade” you can expect for your score:
- F: 300-600
- D: 601-657
- C: 658-719
- B: 720-780
- A: 781-850
How to Increase Your Credit Score
Does your credit score need a boost? Use these tips to get started on the road to a better credit score.
Remove Credit Report Errors
About 20% of Americans have a mistake on their credit report, according to research from the Federal Trade Commission. If you have a mistake on your credit report, your score might be lower than it should be. Take a look at each one of your credit reports and hunt for errors. Some of the most common credit reporting errors include:
- Listing information for someone with a similar name to yours
- Not removing negative credit information after it expires
- Listing an account you closed voluntarily as “closed by lender”
- Listing payments you made on time as late
If you notice an error, report it to the bureau immediately. Under the Fair Credit Reporting Act, the bureau has to investigate your claim — and remove the item if it shouldn’t be there.
Always Make Your Payments On Time
Your payment history makes up 35% to 40% of your credit score. This means that one of the best ways to raise your score is by making all of your minimum payments on time every month. Mark your payment due dates in your phone’s calendar or on a desk calendar where you’ll see it every day. You might even want to consider signing up for automatic bill pay through your lender, which deducts your minimum payment on the day it’s due and helps you avoid accidental missed payments.
Keep Your Utilization Low
The lower you keep your debt utilization, the better off you’ll be. Sit down with your finances and see where you can afford to cut back if you rely on your credit cards for everyday spending.
Ideally, you should aim to use no more than 30% of your available credit every month. Cut your usage down to about 10% to see the biggest jump in your score. Making more of your purchases with a debit card or cash can help you manage your utilization.
Consider a Secured Credit Card
You might not be able to open a credit card if your credit score is really low. However, you may still be able to get a secured credit card. Secured credit cards require an upfront deposit that becomes your line of credit.
For example, if you put down $500, the credit card company will give you a $500 line of credit. If you stop paying your bills, the credit card company will simply keep your deposit. This removes the risk for the lender, which means that you don’t need a high credit score to get a secured card. The lender will keep your deposit if you decide that you want to close the card and haven’t paid back your line of credit.
Credit card companies report secured payments to credit reporting bureaus. This means that making your minimum payments on a secured card will raise your score over time. Some credit card companies even allow you to transition to an unsecured card after a certain amount of time after managing your secured line of credit.
Using Credit Monitoring with MoneyLion
You might see your score dip if a thief gains access to your credit information and abuses it. MoneyLion’s credit monitoring service will let you know when something new appears on your credit report, can help you identity theft and fraud early on and help you raise your score.
Open a Zero-Fee Checking account with MoneyLion and you’ll have access to 24/7 credit monitoring. You can check your credit score whenever you want and you can also see how you can raise your score with MoneyLion’s tips and 5.99% APR credit builder loans, part of the Credit Builder Plus membership. You’ll have access to all of these tools and more when you open an account with MoneyLion.
Working to Change Your Credit Range
Improving your credit score can be a long process — but it’s a journey that’s well worth the effort. Stick to your plan for a few months to see your credit score rise. Keep making your payments on time, watch your credit utilization and pay down debt.
Are you ready to make the next step toward a better score range? Get started with MoneyLion’s full suite of credit improvement tools today. Download the MoneyLion app from the Google Play or Apple App store today to open your Zero-Fee Checking account.