It’s a common story, and it might already have happened to you.
Maybe you’re in a department store or a bank, waiting on word from the representative about whether you’re going to get that new washing machine or get the funds to start an entrepreneurial venture.
Then come the words and a blank expression: You’ve been declined; your credit score is too low.
It happened to me in the middle of Sears almost a decade ago, and it didn’t make sense! I only had one credit account, with a low limit that was never maxed out.
Little did I know that what I thought was a responsible use of credit was actually harming my credit score.
Thankfully, this doesn’t have to be you. It all starts with one thing: awareness. Knowing your credit score is the first step to improving your credit, which can give you the buying power you need for home and automobile ownership, as well as starting a new business.
What Is a Credit Score and How Is It Used?
Your credit score is a three-digit number ranging from 300 to 850 that represents how responsible you are with debt. (It’s possible you don’t have a credit score if you’re “credit invisible”.)
When you look to take on a new loan, the lender will ask the credit bureaus for your score as a quick and easy way of determining the risk involved.
Similarly, if you apply for a new apartment, your landlord can run a credit check or request your credit report to figure out if you’ll pay rent on time.
Here’s a breakdown of the ranges of FICO scores and what each range means about your credit.
300-579: “Very Poor” Credit
If you’re in this score range, you may have declared bankruptcy in the past seven to 10 years. Lenders may not approve you for credit, and if they do, they might require you to pay a deposit upfront for what’s known as a secured credit card (more on that later).
It’s a difficult hole to get out of, but given enough time and dedication to paying your bills on time every month, you should be able to move out of this range.
580-669: “Fair” Credit
If you’re in this range, you might have difficulty getting loans for store credit products, but you’ll likely be able to apply for credit with banks, though at a higher interest rate. In this score range, you’ve probably had too many late payments in the recent past.
Keep in mind that you might also be in this range because you’re a new credit customer and have a limited credit history.
670-739: “Good” Credit
This is where most people are. If you’re here, you’ve only very rarely paid your bills late and have demonstrated you can handle the responsibility of a higher amount of debt, meaning you’ll be a good candidate for more credit in the future.
740-799: “Very Good” Credit
If you’re in this range, you probably haven’t paid a bill late in several years. You might have many types of different credit already, including a car loan, personal loan, student loan or home loan, giving you a diverse credit mix.
800-850: “Exceptional” Credit
This is considered an “A+” credit score. Only around 15% of people have a score this high. If you’re in this range, you have over $10,000 of unused credit and a spotless payment history.
The average score among Americans is around 695.
What Determines a Good Credit Score?
There are two main scoring models: the FICO score and the VantageScore 3.0. Both models have the same credit score range, but are calculated in slightly different ways.
That said, both the FICO and VantageScore take into consideration your loan payment history, your different types of credit, how much of your credit you’ve used, how high your loan balances are, if you’ve recently applied for more credit, and how much available credit you have still unused.
FICO is often the model that will be reported to lenders and landlords, while VantageScore is the model developed by the credit bureaus. While it can be handy to know both, in most circumstances it’s not necessary.
Who Are the Credit Bureaus?
There are three major credit bureaus in the United States: Experian, TransUnion and Equifax. Lenders are responsible for reporting your financial data to those bureaus, and in return the bureaus are responsible for keeping that data private and reporting your score to others.
It’s important to note that because of small differences in the way these bureaus work, your score could vary slightly depending on which bureau is queried.
That variation should never be major, so if you know your credit score as reported by one bureau, you should have a pretty good estimate for all three.
Why Does a Good Credit Score Matter?
The benefits of a higher score don’t start and end with being approved for a loan. In fact, a “very good” or “exceptional” score can save you money.
When the borrower has a lower score, lenders typically charge higher interest rates to dissuade them from taking out too much credit and potentially defaulting on the loan. Those with credit scores over 740 are likely to be offered lower rates.
At the same time, those with credit scores over 670 are more likely to be offered expanded credit, giving them access to more borrowing power. When it comes to a major credit purchase — like an auto loan or a mortgage — this can make a major difference because of the long-term nature of the loans.
Depending on the state you live in, a high credit score can even offer lower car insurance rates and better likelihood of cell phone plan approvals.
How Can You Improve Your Credit Score?
As someone who once had poor credit, this is the big question. The best thing you can do to improve your credit score is to commit to paying your bills on time every month over a long period of time. That said, a few tips and tricks can help bump up your score.
1. Start Secured
If your credit is low enough that you’re having trouble getting a credit card, it’s worth looking into a secured credit card. This requires you to pay a deposit as “collateral” for the loan, which may be a hassle, but it can show your lender how committed you are to improving your credit.
2. Avoid Your Limits
You may see your credit limit as a “ceiling” for how much money you can spend, but that’s not a great way of looking at it. Since credit utilization is such an important aspect of your credit score, you should stick to a personal limit of 30% of your credit limit.
3. Don’t Close Your Accounts
If you have a revolving line of credit or a credit card that you’ve paid off entirely, you may be tempted to close it. Unless there are substantial fees involved in keeping them open, though, you should use them as a safety net.
This will also add to your unused credit amount, which can improve your score.
4. Know Your Score
If you keep on top of your credit score — and get your free credit report — you’ll know what you need to change about your credit usage in order to improve your standing. That leads me to my next point…
Where to Get Your Credit Score Online
Banks and credit card companies are increasingly sharing credit scores as a service to their clients. Alternatively, you can find out your credit score for free at Credit Sesame.
Finding out exactly what’s affecting your credit score requires reviewing your credit report, which is different from your credit score. You can receive a free copy from each of the credit reporting companies once a year at AnnualCreditReport.com.
At first, it may seem daunting to keep on top of your credit, but if you get into the habit of knowing how you fare each month, you’ll never be surprised by a denial of credit.
By that same token, if you’re aware of any flags on your credit, you’ll be able to proactively make whatever financial adjustments you need to fix them, setting yourself up for success in the future.
Curtis Westman is a writer who, wondering once how he was going to wash the clothes he was wearing, nearly broke down in the middle of Sears. Now he has excellent credit. And Sears? We don’t talk about Sears.