The Complete Guide to Credit Scores

The Complete Guide to Credit Scores

It is not that difficult to establish a good credit score, but it is essential for your overall financial picture and health. People with a good or excellent credit score have an easier time getting better rates on homeowners and car insurance or getting approved for renting an apartment, and it is cheaper to get a loan when you need it. A good credit score is especially beneficial when facing unexpected financial crises (e.g., getting laid off). By taking a look at your credit score, lenders determine whether you are a trustworthy borrower or not. If you are ever in a pinch, you are more likely to get favorable offers for zero percent financing with a good credit score.

Once you understand how credit score works, it is not difficult to establish a healthy score. Split has created a complete guide to credit scores that will walk you through the basics. Find out more about what makes a good and bad credit score, how it is calculated, how to establish a credit score (if you don’t have it or have a bad one), and how to maintain it in the long run.

Credit Score Ranges: From Very Poor to Excellent

Credit scores can range between 300 and 850. A 300 score is very poor, while 850 is excellent. However, credit score ranges may vary based on the credit scoring model used (VantageScore vs. FICO) and the credit bureau (TransUnion, Equifax, and Experian) that pulls the score. Let’s take a look at the credit ranges for the two most popular credit scoring models:

Vantage Score credit score ranges

  • Very poor: 300-499
  • Poor: 500-600
  • Fair: 601-660
  • Good: 661-780
  • Excellent: 781-850

FICO Score credit score ranges

  • Very poor: 300-579
  • Fair: 580-669
  • Good: 670-739
  • Excellent: 800-850

For example, if your lender is pulling your credit score from TransUnion, they’ll see your VantageScore. This means that you’d need to score between 661and 780 to have a good credit score. But if they are checking your FICO score with Experian, you would need to rate between 670 and 739. As an applicant, you won’t know which credit scoring model your lender will want to see. Lenders request credit information from one of the three credit bureaus and don’t always ask for the same one.

Disadvantages of Having a Poor Credit Score

In the case of a poor or fair credit score, the disadvantages are the following:

  • You will have limited credit card choices. The options you have will be secured credit cards, which can help you rebuild credit, but you are required to make a security deposit in order to get an equivalent line of credit. Still, there is not a guarantee that you will be approved for a credit card.
  • It is less likely you will be approved for loans or credit cards. A bad or fair credit score reduces your chances of getting approved for loans or credit cards, which makes it more difficult to accomplish further financial goals. For example, you need a balance transfer card to get out of that. To get approved for it, you’ll need good or excellent credit.
  • If you do get approved, you will probably get unfavorable loan terms. Even if you get approved for a loan or credit card, it is highly likely that you’ll receive less favorable terms, such as high annual fees and interest rates.

A poor credit score can have a significant impact on your financial life because it influences the type of loans you will be approved for.

The Factors that Determine Your Credit Score

The factors that affect your credit score vary among different credit bureaus. Since 90% of lenders use the FICO score to bring lending decisions, we will focus on the factors that affect your FICO credit score.

  1. Payment history

In calculating your credit score, your payment history is the most important factor because it shows your lenders whether you have been making consistent on-time payments on your credit cards and loans. If you did, that indicates that you are likely to pay back your debts in the future. Just a few late or missed payments can hurt your credit scores. Having several missed payments in your credit history can turn into a negative record or derogatory mark on your credit report, which includes liens, foreclosures, bankruptcies, and collections. That is why paying your bills on time is one of the best things for maintaining a good or excellent credit score.

  1. Credit card utilization ratio

Your credit utilization ratio measures the amount of your overall credit card limit you’re using. The lower your credit card utilization – the better, and a good rule of thumb is to keep it below 30%. Credit card utilization ratio (also known as a debt-to-limit ratio) is calculated by dividing total outstanding balances on all your credit cards by total credit limit. Having a high credit utilization ratio will lower your credit score and tell potential lenders that you may not be able to handle more debt (because you are overextended).

  1. Age of credit history

If you have old credit cards, keep them open (unless you’re racking too much debt or paying high fees) because they can help your score. Closing a credit card will shorten your credit history and, in turn, lower your credit score. That means that a long credit history improves a credit score as long as the customer has a history of consistent, timely payments on their open accounts. Factors that determine this credit score element include the age of your newest account, how long all of your accounts have been open, and how long it has been since you used each one of them.

  1. Credit mix

What also contributes to your credit score is the number and the mix of your credit accounts that you have in use – mortgages, student loans, auto loans, credit cards, and other lines of credit. Having multiple open credit accounts helps improve your score because it shows that you have been approved by several lenders. The two main categories of credit are installment loans and revolving credit, and having a diverse mix of credit can also improve your credit score.

  1. New credit and hard credit inquiries

An inquiry is documented on your credit report every time someone pulls it out (an insurer, landlord, or lender). Soft inquiries and hard inquiries are the two types of credit inquiries, but only hard inquiries affect your credit report. Hard inquiries happen when you apply for credit, or a bank, mortgage lender, credit company, or other financial institution accesses your credit report. These inquiries are only made with your permission and are reflected in your credit score.

One hard inquiry can affect your credit score by just a few points, so it won’t damage it much. However, they can stay on your credit report for 24 months, meaning that multiple hard inquiries in a short period can be detrimental to your credit score.

How is Your Credit Score Calculated?

Credit bureaus (TransUnion, Experian, and Equifax) are the institutions that calculate credit scores, and they use the information they have in their files to do that. Each one of them keeps credit files on U.S. consumers in which they include any financial information they have. For example, if a company reports that you paid all your bills on time or that you are late on a payment, that information will be included in your file

Using your financial information, credit bureaus apply a credit scoring system to calculate your credit score, and they don’t do it just once. They produce credit scores using a different scoring system, meaning that your credit score varies depending on the scoring model that was used. What may cause your credit score to vary between bureaus is them not getting the same information. One creditor or company could report your payments to Experian and TransUnion, but not Equifax, which will lead to different scores.

How to Improve Your Credit Score

To improve your credit scores, you first need to check them, and you can do it online. Aside from your scores, you’ll also get information about each specific factor that is affecting your credit scores the most. Knowing that will help you understand where to start. Certain factors are more important than others (e.g., your payment history and credit utilization ratio are the most important in all credit scoring models and can represent up to 70% of your credit score).

Improving credit score if you have no credit history

  1. Open a college student card

To start building your credit early while taking advantage of special financing offers and rewards, you should consider applying for a college student credit card. There are various college student cards you can choose from, and each one of them comes with its own set of benefits for different types of students – from international students to commuters and travelers. For some of them, you are not required to have a credit history – you just have to be 18 or older and have a steady source of income.

  1. Become an authorized user

Becoming an authorized user on someone else’s credit card is a good option to build credit. It allows you to boost or build your credit score and is a relatively low-risk option. When someone adds you as an authorized user to their credit account, you basically begin to piggyback off their credit. Be sure to become authorized on an account by someone with good credit. You will be able to make charges but cannot make payments.

  1. Get credit for paying monthly bills on time

Another way to start building credit is by making your cell phone and utility payments on time. That’s an easy and free way for you to improve your credit scores – about 2 out of 3 people see an instant increase to their credit score. As a result, many people become scoreable for the first time. To start building or boosting your credit this way, you will need to connect your bank accounts to Experian Boost so they can identify your cell phone and utility payment history. When you verify the information and confirm that you want it to be added to your Experian credit file, your FICO score will be updated and delivered in real-time.

Improving credit score if you have bad credit

  1. Apply for a card for consumers with average or poor credit

People who cannot or aren’t able to put down a deposit also have a few credit card options. Once you open a credit card, you should make sure to spend only within your means and pay your balance in full and on time. In some cases, paying bills on time for a few consecutive months will entitle you to a higher credit limit.

  1. Apply for a secured credit card

Secured cards can help borrowers improve their credit scores. A secured credit card needs to be backed up by a deposit that acts as collateral on your account. It provides the card issuers with security in case you cannot make payments. They are typically issued to those with limited credit histories (thin-file borrowers) or subprime borrowers.

Secured credit cards are almost identical to unsecured credit cards because you receive a credit limit, can earn rewards, and can incur interest charges. However, the difference is the deposit (which becomes your credit limit) you must make in order to receive it.

Deposits on secured credit cards can range from $200 to $2,500, so if you want a higher limit, you’ll have to deposit more cash. The deposit is refundable when you pay off your balance in full, close an account, or upgrade to an unsecured credit card. Use it responsibly, and the information will be sent to all three credit bureaus, raising your credit score and making you eligible to apply for an unsecured card.

Maintaining a good credit score

Once you manage to build a good credit score, you should look to maintain at all times. It all comes down to using your credit responsibly and wisely. Now that you know the credit score ranges, factors that determine it, how it is calculated, and how to build it, you know everything you need to either improve it or maintain your strong credit score.

  • Check your credit report regularly

Checking your credit report and score on a regular basis will help you know whether you are making progress or if there is something that’s pushing your credit score down. To keep track of your credit score, changes in your credit report, and the essential factors that affect it, you should use a credit monitoring tool. For example, Split Credit Monitoring is a valuable tool that can help you monitor your credit thanks to features such as monthly score tracker, monthly Vantage and Experian credit reports, monthly credit monitoring, and real-time alert notifications. For example, if any unauthorized charge occurs on your credit report (due to identity theft and financial fraud), you will be notified and can report it to the credit bureaus in a timely manner.

  • Change your credit mix

Credit scoring models consider your ability to manage different types of financing – from personal loans to mortgages to credit cards. That is why you should consider diversifying your credit mix. You should never take on financing that you cannot handle or don’t need because missing payments is more detrimental to your score than not having a diversified credit mix.

  • Make timely payments

Since your payment history accounts for a third of your credit score, it is obvious why not missing monthly payments should be your top priority. Enroll in automatic payments or set up a reminder to stay on top of your payments. This applies to all your bills, including cell phone service, rent, and utilities.

  • Lower your credit utilization ratio

Always aim to keep your credit utilization under 30%. If you have exceeded it, you can lower it by:

  • Leaving your cards open after paying them off. That will reduce the overall balance owed while maintaining the total limit. This will ultimately lower your credit utilization ratio.
  • Getting a low-rate personal loan to refinance your high-interest rate credit cards. You can lower the amount of interest you owe by consolidating multiple credit card balances into one lower-interest rate loan. That will allow you to pay off your debt quicker. Leave your credit cards open even after you transfer the balance to a personal loan to lower your credit utilization ratio.
  • Paying more than the monthly minimum.
  • Avoid closing accounts or taking on new debt.

If you want to apply for a new line of credit, you need to be thoughtful about it and do it under optimal circumstances. Do it only if you really need it, and when you know you’ll get the financing to pay installments on time. Otherwise, there might be too many hard inquiries on your credit report, which is a signal to creditors and lenders than you are taking on more debt than you can handle. Also, before you close an old account, think twice because keeping old accounts open can improve your credit history and keep credit utilization ratio low (which does good to your credit score).

Despite so many factors that affect your credit score, there are always ways to improve and maintain it. Creditors and lenders value consumers who are responsible and pay attention to their bills and late payments. Follow these tips to start improving your credit score today, and with Split Credit Monitoring, you will have an excellent tool that will help you remain in a good or excellent credit score range. Our tool is equipped with features like identity theft insurance, identity theft restoration services, 24x7x365 alert notifications, lost wallet restoration, and more. 

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