A credit score is a three-digit number with a huge impact on your finances. The score determines the amount of money you can borrow and the rates financial institutions are prepared to offer you if, for example, you want to buy a home.
Considering the importance of your credit score, it’s important to know what constitutes a good one, and what to do to improve your score if it’s not as high as you need it to be.
Several companies provide consumer credit ratings. Some of these ratings, such as Experian’s PLUS score and the Equifax score, are only for education purposes, and lenders don’t use them to assess your credit risk.
The two major credit scores that financial institutions use to determine your eligibility for a loan are the FICO score and the VantageScore.
FICO, created by the Fair Isaac Corp., is the more widely used credit score. VantageScore is the product of major credit bureaus Experian, Equifax and TransUnion.
VantageScore and FICO credit scores range from 300 to 850. The higher the number, the better the credit rating.
A good FICO score is in excess of 670, but to get the best possible interest rates, you need a score of more than 800:
According to the most recent data, about 20 percent of U.S. consumers have exceptional FICO scores, while 60 percent have at least a good score.
A good VantageScore is anything in excess of 700. A rating in excess of 750 qualities you for the best rates:
Experian says 30 percent of consumers have excellent VantageScores, and 43 percent are in the good-to-excellent range.
Companies derive credit scores from your credit history. Each element of your credit history contributes a different amount to the total.
The way in which you use loans and pay debts has a significant impact on your credit score. You have plenty of opportunities to improve your score, but change doesn’t come instantly.
Make changes as soon as possible rather than waiting until you need a loan:
Your credit score determines your financial well-being, so it pays to keep it as high as possible. A high rating makes it easier to get a mortgage, a credit card and a loan, and it makes you eligible for more favorable rates.
It also may make it easier to get a job, as some employers check your credit.
A good credit rating is essential if you want to start your own business, as it makes it easier to borrow money. Additionally, some regulatory agencies refuse to license professionals with a poor credit score, and you may even find your rates for auto and property insurance go up, as research indicates individuals with a poor credit rating are more likely to file a claim against their insurance policies.
These penalties for poor credit scores have the potential to put you under greater financial strain, so take steps as soon as possible to improve your scores.