If you’re applying for a loan or credit card, your credit score is typically the most important factor that lenders review. Lending money requires a gamble on the borrower, and lenders need to find a way to predict how likely they are to repay the loan.
Credit scoring is used to judge how likely a person is to honor a debt based on their history of taking on and repaying other debts. Credit scores are a major element of deciding whether to grant a loan or line of credit—and, if so, what interest rate to charge the individual borrower.
What Is a Credit Score?
There are multiple models of credit scoring; the most popular is FICO, which ranges from 300 to 850. Each lender sets their own requirements and limits, typically similar to this breakdown:1,2
● Exceptional credit: 800 – 850
● Very good credit: 740 – 799
● Good credit: 680 – 739
● Fair credit: 620 – 679
● Poor credit: 550 – 619
● Bad credit: 300 – 549
How Is Your Credit Score Calculated?
Your credit history is where banks, credit unions, lenders, and collection agencies report on your borrowing and repayment activities. The major credit agencies calculate a score that incorporates:3
● Length of credit history
● Payment history
● Current amounts of debt and available credit
● Mix of different types of loans and credit
● Duration of each debt/credit (and whether any are new)
● Defaults, collections, foreclosures, and bankruptcies (and when each occurred)
The Importance of Credit History
A good credit score isn’t based just on the absence of late payments, collections, and bankruptcies, but on proof that a consumer uses credit responsibly.
Let’s say Bob was raised off-grid in a cash-and-barter community. He’s spent his young adulthood living below his means, saving up for anything he needs instead of buying on credit. Now, however, he’s ready to take on a mortgage for his first family home.
A lender won’t review his application and see someone who’s a rock-solid bet for a loan (even though he might be). Instead, they see a finance beginner who has no credit history and no way to prove to them that he is capable of repaying a mortgage.
Build a Strong Credit History
A high credit score comes from having and using credit responsibly over time. This can be done when you:
● Use multiple credit types – Utilize a mix of credit types, such as revolving credit through credit cards and lines of credit lines vs. installment loans, and unsecured vs. secured credit.
● Maintain available credit – Keep a balance of available credit, at least 30%, rather than maxing out credit cards or lines and maintaining high balances month to month.4
● Pay on time – Avoid late payment reports (and penalties) by setting up autopay arrangements or otherwise ensuring you pay on time every time.
● Monitor your history – Review your credit reports on a regular basis to avoid credit score hits through errors or identity theft. You can obtain a free report annually from each of the three credit reporting agencies.
Improve a Low Credit Score
If your score is dropping, there are plenty of ways to improve it. Start with these actions:
● Review your credit histories from the three agencies: Equifax, Experian, and TransUnion
● Figure out your credit utilization ratio and set a reduction goal (0 – 10% ideal; 30% max)
● Consider working with an accredited credit counselor; discuss debt consolidation
Next, you can improve your credit score quickly with these steps:
● Don’t open any new accounts
● Dispute any errors on your reports
● Request removal of collections accounts older than seven years from your history
● Ask creditors to stop reporting missed prior payments on paid-up accounts
● Get caught up on late payments
● Make multiple small credit card payments instead of one big payment each month
● Pay down high balances
● Negotiate settlements with collection agencies (including a halt to reporting the claims)
● Use a reporting service to get credit for paying rent and monthly bills
Over the long term, cover these bases:
● Make all repayments on time
● Pay credit card balances in full each month
● Maintain a healthy credit mix and credit utilization ratio
● Address any issues before loans become delinquent, in default, or in foreclosure
Boost Your Credit Score with NJFCU
Used responsibly, the best credit union credit cards can help create and maintain a healthy credit score. The North Jersey Federal Credit Union (NJFCU) provides tools and solutions to help members meet their financial goals, including low-interest credit cards and a Credit Score Calculator that helps you keep tabs on your credit score and key credit report information.
Join the best credit union in NJ today!
Sources:
Forbes Advisor. What Credit Score Is Needed To Refinance My Mortgage? https://www.forbes.com/advisor/mortgages/refinance/credit-score-to-refinance-mortgage/
Credit.org. What’s a Good Credit Score? Credit Score Ranges Explained. https://credit.org/blog/what-is-a-good-credit-score-infographic/
Consumer Financial Protection Bureau (CFPB). What is a credit score? https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-score-en-315/
Consumer Financial Protection Bureau (CFPB). How do I get and keep a good credit score? https://www.consumerfinance.gov/ask-cfpb/how-do-i-get-and-keep-a-good-credit-score-en-318/
