Are you applying for a mortgage, car loan, or credit card within the next few months? If so, it’s important to know your credit score range. The better the number, the better your chances of getting the loan and the lower your interest payments will be.
What Is a Credit Score?
A credit score is commonly used to determine whether a person is estimated to make on-time payments for future loans. Banks and finance companies want to lower their risk. They may deny a loan altogether to those that are high risk or charge an exceedingly high-interest rate to make sure they recoup their costs.
There are three reporting credit bureaus that a finance company or bank will use to pull a credit score: Experian, Equifax, and TransUnion. Typical credit scores range between 300 and 850.
Here’s how credit scores are broken down:
Poor Credit: 300-579
Fair Credit: 580-669
Good Credit: 670-739
Very Good Credit: 740-799
Excellent Credit: 800-850
People with credit scores in the poor range will usually be unable to secure a loan at all. Scores in the 580-669 range would be considered to be high-risk. Scores of 740 and above likely enjoy a lower interest rate than those at lower scores.
What Affects Your Credit Score Range?
There are specific items that affect your credit score. Each item carries a certain weight.
- 35% of score = On-time payments
- 30% of score = Available credit
- 15% of score = Length of credit history
- 10% of score = Recent credit applications
- 10% of score =Types of current credit
Let’s look at each of these in more detail…
Payments Made on Time
The single best thing you can do for your credit is to make every payment on time. If a payment is late it will show on your credit report, including how many days it was late. On-time payments are so important that your score can be lowered by up to 50% simply by missing a single mortgage payment. And damaging credit mistakes like that can stay on your report for up to seven years.
Amount of Credit Available
The second largest impact on your credit score range is how much credit you have available versus how much you owe. So, if you have a $10,000 credit card limit, having a $200 balance will earn a higher score than if you have an $8,000 balance. One way to raise your credit score would be to monitor your credit for high balances.
Length of Credit History
This is probably the hardest one to control. Again, the longer you can demonstrate on-time payments and be able to handle credit, the higher your score will be. Avoid closing old credit cards to keep the history for as long as possible.
Recent Credit Inquiries and Applications
If you’ve opened several new loans in the past year, or even just applied for the loans, it will lower your score. If you have added several new loans or sources of credit within the past 12 months, it will raise a flag that you need the extra cash flow. If possible, wait to apply for a credit card or store financing until after a major auto loan or mortgage is already in place or paid off.
Types of Current Credit
There are mortgages, student loans, car loans, credit cards, and many other types of credit. If the same person has five loans in different categories, it would be more acceptable than having five different credit cards. Mortgages carry large balances, but having one usually shows stability and maturity in the credit rating, as long as it is paid consistently.
Not All Credit Scores Are Equal
Many factors can influence a credit score. A bank or finance company may report to one credit bureau and not another, so your TransUnion score might be higher than your Experian score, for instance.
Monthly payments are constantly being added, so scores can fluctuate from month to month. It’s important to get your credit score before trying to apply for a loan. This can be done for free from several places, including on annualcreditreport.com, where you’ll be able to get a report from all three credit bureaus.
How to Improve Your Credit Score
If you’re denied a loan, the financial institution must provide a copy of your credit report to show why you did not receive the loan. By regularly monitoring your credit, you can see if there are any errors that can be removed. The credit bureau must remove any properly communicated errors within thirty days.
Credit scores have a big effect on the outcome of the loan process. Knowing your score before you apply will provide the information you need to take action and improve your score. If you want to take things one step further, you might want to consider signing up for automatic credit monitoring and identity protection services.
You can go directly to the source by choosing a service that’s run by credit industry experts like Experian IdentityWorks or myFICO Identity Protection to help you keep a closer eye on your credit rating and make sure there haven’t been any unauthorized transactions made using your name and Social Security number.