Your credit score is a number that represents your entire financial history.
It is used by lenders, creditors, landlords, and employers to “assess the risk” you present to them. A long, positive history lets them know that you have been financially responsible throughout your life. A “good score” shows that you pay your debts and are experienced at handling your money…
Most people do not understand which numbers are considered excellent, average, or poor.
Here is a breakdown of what a “credit score number” would mean to a lender:
720 – 850 – this range is considered excellent. It shows lenders that you have almost always paid your bills on time, you never or very rarely carry a credit card balance, and that you have little to no outstanding debts.
- Benefits: The pluses of having a score in this range are that you can more easily qualify for a loan or mortgage. You also will be able to qualify for the lowest interest rates, your auto insurance will cost less, and obtaining new credit will be easier.
680 – 720 – This score range is considered good by most lenders. It shows them you have a history of paying your debts, but may have had a couple problems. You may carry a balance from time to time, but almost always will pay it off completely.
- Benefits: With this type of credit score, creditors will see you as a financially responsible person. You will probably be able to qualify for a loan with a good interest rate, but you will have to have a good employment history to back it up. Lenders will want to look at other documents that prove your credit worthiness.
620 – 680 – This range would be considered average to below average. It means that you may have been late on some payments or are carrying some debt. You may be recovering from a default or bankruptcy.
- Benefits: It may be difficult to qualify for loans or new credit cards. Your interest rates and auto insurance rates will be higher than average. If lender do decide to work with you, you will have to present extra evidence that you will be able to pay back the loan. They will most likely want to see a list of references, employment history, and even a bank statement. Creditors might work with you, but you are going to pay for it with higher rates.
below 620 – This is considered very bad credit. You will most likely not be able to qualify for a loan or credit card. You may have a history of not paying bill, or have a recent bankruptcy or default.
- Benefits: The only type credit card you will be able to qualify for is a very high interest card or a secured card. A secured credit card is your best bet as it is available to almost anyone that has an active checking account and can be used to build a better credit history. It also is good for people that have difficulty dealing with credit. Secured cards work off a cash balance, so there is no balance that you would have to pay off at the end of the month.
So, How Can You Improve a Poor Score?
If you have a bad credit score, don’t worry! Your credit score is not set in stone… It is a number that will change as you change your spending habits.
A score can improve greatly even if you have a bankruptcy or default on your record. Some people have been able to increase their score up into the 700′s, just a few years after filing bankruptcy. (Here are a few tips from the FTC on how to repair your own credit)
Here Are Some Tips On How To Improve A Bad Credit Score:
Get Your Credit Information from AnnualCreditScore.com - This website was setup by the 3 major bureaus as a response to the Fair Credit Reporting Act (or FCRA). This act guarantees every U.S. citizen the right to access their credit information once each year. This site is very simple to use and does not require payment of any kind.
Look for Errors in Your Credit History – Over 30% of credit reports contain errors that are serious enough to cause them to be denied loans, new credit cards, etc. If you find an error, you can send the bureau with the bad information a dispute letter. Once the letter is received, the bureau legally must check into the complaint. This will usually be done in around 30 days.
Pay Down Credit Card Debts – Carrying a high balance on a credit card can seriously affect your score. Your history of payments (late or on time) makes up 35% of your total score. If you have unpaid debts or outstanding collections, paying them off will reduce your “credit to debt ratio”. This ratio makes up another large portion of your credit history.
Don’t Apply For New Credit – too many applications for credit cards or loans in a short period of time may be a signal to creditors that you are financially desperate. If you need a credit card to make payments online or just for the convenience, try a secured credit card.
Use A Secured Credit Card to Build Your History – if you are having difficulty obtaining a credit card or feel that you tend to use them irresponsibly, try a secured credit card. Secured cards work just like regular cards except payments are withdrawn directly from an account. Some secured cards report all transactions to the 3 bureaus. Over time this will help you build a “positive credit history”.
Communicate with Your Creditors – If you have good communication with people you owe money, they are alot less likely to send your account to collection and may work out a deal with you. Some of them might even be willing to remove the late payment history from your credit and only take partial debt payment for a lump sum.
Work With A Credit Counselor - There are many non-profit credit counselors that will help you set up a plan to repay your debts. They can provide free financial information about your situation and advise you on the best plan to get out of debt, improve your credit score, and get back on track financially.