Make Your Credit Score the Best It Can Be
November 14, 2017
President and CEO
Q: In the past, we have spoken many times regarding credit scores—what they mean and how to keep them from declining. What if someone has an “ok” credit score? Should they make an effort to make it better than “ok”?
A: Yes. Boosting your credit score from merely good to great will give you access to the best offers and best rates on loans, credit cards, insurance rates, apartment rentals and even employment, to name just a few areas.
- For example, Applicants with higher FICO® Scores will generally receive more favorable rates that can translate into thousands of dollars in savings over the life of the loan.
* Average national APR for 30-year fixed mortgage by FICO® Score band sourced from Informal Research Services, Inc.,
** Over the life of 30-year loan
- Under this projection, with just a 21 point difference in FICO® Score, Susan would qualify for the lower APR, resulting in a slightly lower monthly payment and saving in interest of $18,287 over the life of the loan.
- Similar dynamics can be found with auto financing, as those interest rates also vary by FICO Scores.
Q: Before discussing “good” versus “great”, can we back up and define what a credit score is?
A: Of course! At its most basic, your credit score is a number that indicates how likely you are to repay your debts.
- Creditors use this number to decide on whether or not to extend credit to you, and under what terms.
- Your creditors report information about your payments and current financial obligations to the credit bureaus.
- Credit scorers then use this information along with other data about you to calculate a credit score.
- The credit score serves as a way of “grading” your financial responsibility.
- This grade is then used by creditors to determine how likely it is you’ll pay up in the future.
- The higher your grade, the more likely it is you’ll be approved for loans, credit cards, and get the best rates.
Q: What is a “great” credit score?
A: Trying to pin down a specific number that means your credit score is “great” can be tricky. There are different credit scores that lenders use (although FICO and VantageScore are the top scores used) and one lender’s “great” scored may fall into another lender’s “good” credit category. But, here are some broad rules of thumb:
- Most credit scores operate within the range of 300 to 850.
- Within that range are different categories that generally look like this:
a. Excellent (Great): 750+
b. Good: 700 – 749
c. Fair: 650 – 699
d. Poor: 600 – 649
e. Bad: below 6002. But these are not set in stone and may vary based upon the type of loan. For instance, in general:
a. You need a credit score of at least 620 to rent an apartment.
b. You need a credit score of at least 680 or above for the best rates on auto loans.
c. You need a credit score of at least 720 or higher to qualify for the best rates on home mortgages.3. Again, these guidelines are not set in stone.
Q: Where do most Americans fall on the credit score scale?
A: Recent research by FICO found that the average FICO® Score 8 in America reached 700 this past spring.
- This continues a trend that FICO research has observed in which the average FICO® Score has continued to increase since the severe economic recession in the mid to late 2000’s.
- The 700 mark represents a 10 point increase in the national average FICO Score of 690 observed in the fall of 2006.
- As a matter of fact, WalletHub also did a study, based upon Trans Union, October 2016 data, comparing 2534 cities on 10 key metrics
a. The city of Evansville had a median credit score of 669 so there is definitely room in the Tri-State to improve our credit scores from Good to Great.
Q: How can someone find out their credit score?
A: You can purchase your FICO credit score at FICO’s website, MyFICO.com. There is a one-time purchase option or you can subscribe to ongoing information.
Q: What would be the first step in setting out on the road to improving your credit score?
A: Order all three of your credit reports (if you haven’t lately) for Equifax, TransUnion and Experian.
- The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.
- You can order one free copy per year from each credit bureau through AnnualCreditReport.com.
- Ordinarily you would want to spread them out and order one per year. But to clear up all errors, you want to look at all three.
- Look for errors such as:
- accounts that don’t belong to you
- paid balances that are showing as unpaid
- credit limits that are reported incorrectly
- You can file a dispute online through each of the credit bureaus’ websites.
- Look for credit lines that could have been included in your report but aren’t such as:
- Wireless provider
- Cable and internet provider
- Utility company
Q: After cleaning up your credit score, what are some other ways to boost your score from Good to Great?
A: There are essentially five categories that most credit score models are based on:
- Payment history (35% of score)
- Credit Utilization (30% of score)
- Length of Credit History (15% of score)
- Mix of Accounts (10% of score)
- New Credit Inquiries (10% of score)
Q: Can you give examples for each category of what to do to maximize the score in that category?
- Payment history
- Pay your bills on time.
- Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO Scores.
- If you have missed payments, get current and stay current.
- The longer you pay your bills on time after being late, the more your FICO Scores should increase.
- Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
- Credit Utilization
- Keep balances low on credit cards and other “revolving credit”.
- High outstanding debt can affect a credit score.
- Pay off debt rather than moving it around.
- The most effective way to improve your credit scores in this area is by paying down your revolving (credit cards) debt.
- Don’t close unused credit cards as a short-term strategy to raise your scores.
- Don’t open a number of new credit cards that you don’t need, just to increase your available credit.
- Length of Credit History
- If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly.
- New accounts will lower your average account age, which will have a larger effect on your scores if you don’t have a lot of other credit information.
- Also, rapid account buildup can look risky if you are a new credit user.
- Mix of Accounts
- Apply for and open new credit accounts only as needed.
- Don’t open accounts just to have a better credit mix – it probably won’t raise your credit score.
- Have credit cards – but manage them responsibly.
- In general, having credit cards and installment loans (and paying timely payments) will build your credit scores. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
- Note that closing an account doesn’t make it go away.
- New Credit Inquiries
- Do your rate shopping for a given loan within a focused period of time.
- FICO Scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
- Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.
- Note that it’s OK to request and check your own credit report.
- This won’t affect a score, as long as you order your credit report through AnnualCreditReport.com .
Q: What else would you recommend in getting from Good to Great?
A: Be patient and persistent.
- Improving a credit score from Good to Great will not happen overnight.
- Once your credit score is in the prime range, do everything you can to protect it.
- When you have a near-perfect credit score, even one late payment or over utilization of credit cards will cause a big drop. Make sure you pay your bills on time and don’t max out your credit cards.
- Continue to research ways to improve your score as opportunities change and new ones appear over time.
- Take advantage of experts such as HFCU’s certified financial counselors. Just call 812-253-6928 to schedule a meeting to review your credit report and find ways to improve your score.