How to Understand Credit Scores

How to understand credit scores.

Credit scores.

Why does a three-digit number cause many people anxiety and stress? After all, it’s just a number. Right? Well, your credit score indicates how likely you’ll repay your debt.

Credit unions, banks, and lenders use scores to decide if they’ll approve you for loans or credit cards. The tricky part is that you may have more than one score. Yikes! Let’s dive further into credit scores so that you have a better understanding of them.

How are Credit Scores Determined?

Since your credit score is used to rate your credit history, the better you repay debt, the higher your credit score. Companies calculate credit scores, but they use the same criteria, such as:

  • Payment history—Are your bills paid on time?
  • Available credit—Have you maxed out your credit limits?
  • Credit history—Have you established credit, or you a new borrower?
  • New credit—Did you open new credit accounts in a short amount of time?
  • Credit type—What kind of debt do you have? Auto loans? Mortgages? Loans? Credit cards? Other?

What’s a Good Credit Score?

You may wonder what credit scores are bad and which ones are good. Even though there are several credit-scoring formulas, most lenders use the FICO® Score. Scores range from 300 to 850 and are categorized as poor, fair, and good. Numbers under 580 suggest very poor credit, while those above 670 indicate good borrowing habits. Keep in mind that scores vary by lender, but most are broken down as follows:

  • 800+ Exceptional
  • 740-799 Very good
  • 670-739 Good
  • 580-669 Fair
  • <580 Poor

How to Improve Your Credit

If you have changes to your credit history, it will affect your credit score. Improve a poor credit history with these tips:

  • Maintain a low balance because it’s good for your credit utilization ratio, which compares your balances to your limits (how much of your available credit you’ve used). It’s recommended to keep your utilization ratio below 30 percent.
  • Make a habit of paying your bills on time because timely payments can help improve your score over time. You could automate your bills with our Bill Pay so that you don’t miss a payment.
  • Review your credit reports from Equifax®, Experian®, and TransUnion® to ensure that the information is accurate. If you see mistakes, you can request corrections.
  • Resist the urge to open new accounts before major purchases such as a home, car, recreational vehicle, etc. because they can affect the average age of your credit score and history, and possibly disqualify you from getting better loans.

Have Your Checked Your Score Lately?

Don’t forget to review your credit score periodically. If you pay off debt, you’ll want to make sure that it’s reflected on your credit reports, which in turn would affect your credit score and potentially increase it. Keep in mind that it may take some time before your score changes.

Get an Account Review

If improving your credit score and finances have been on your mind, take advantage of our Dare2Compare account review. One of our friendly teammates will sit down with you and go over your finances and see what they can do to help. And keep in mind that even if you’ve experienced a divorce, job loss, or medical setback, you can improve your credit. However, it may take some time. Don’t become discouraged. Keep taking steps to get your credit back on track.

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