What Your Credit Score Really Says About You—And How to Improve It
On the surface, your credit score looks like another number that’s used to determine if you can get approved to purchase a home or vehicle. However, your credit score actually plays a much larger role in your financial future. Whether you’re applying for a credit card or you need to finance a new appliance, your credit score comes into play.
At its core, your credit score summarizes your financial story. In the same way that you get grades on assignments that you submit in school, your credit score grades your financial past and present.
Unfortunately, credit score ranges and how they’re determined, along with other aspects of this important piece of data, continue to be misunderstood by millions of people. Understanding credit reports is important, no matter what stage you’re at in life. Learn more about credit score ranges, improving your credit score, and more today.
Poor Credit (Below 580): There’s Trouble Ahead
Let’s start with what most financial experts consider to be the worst-case scenario. A credit score below 580 is considered poor credit, and at those levels, it’s virtually impossible to get approved for anything. In fact, you may even run into problems finding rental properties with such a low score.
Generally, people who have credit scores this low face one of two problems. Either they’ve established a history of failing to pay back debt, or they have an incredibly thin credit profile. For people who fall in the first group, the only way to truly improve their score is to spend some time carefully repaying every debt on or before its due date each month. If you’re dealing with a low credit score because of a thin credit history, it can be a little easier to build your score. While you may struggle to get approved for major loans, you can usually get approved for store-specific credit cards or other forms of credit, even if you don’t have much credit history.
Having a poor credit score does not mean that you’re doomed to a life of financial struggle. Instead, it means that you have a lot of work to do. It’s important to remember that your credit score is not permanent, so making strides in the right direction can get you out of this range.
Fair Credit (580-669): There’s Some Work to Do
When you start getting into the “fair credit” range, you may find that you get some different answers from different lenders. Some mortgage lenders generally don’t consider anything below 590 fair, while others are willing to adjust their standards slightly. Still, if your score falls between 580 and 669, it’s a good idea to take some steps to improve your credit score.
Generally, if you get approved for a loan with a credit score that falls within this range, you should expect some unfavorable terms. For instance, many lenders will charge higher interest rates when lending money to applicants with fair credit. This allows them to recoup more of their initial loan up front. Others may choose to require a larger down payment if they’re issuing a mortgage or a vehicle loan to mitigate some of the risk that they’re taking by lending money to someone with a credit score in this range.
When evaluating different credit score ranges, the fair credit scores are generally considered transitional. Many people with minimal credit history have scores that fall within this range. Others who have faced a relatively brief financial setback often find themselves falling into this range. The good news is that you can usually climb out of the fair credit range pretty easily. By making your payments on time, you can move closer to a score of 680 or better with relative ease.
Good Credit (670-739): You’re In a Strong Position
When you start getting into the upper 600s on your credit report, you have things trending in the right direction. Most lenders agree that credit scores between 670 and 739 mean that the applicant is on solid ground financially. People who have scores in this range may have dealt with some financial issues in the past, but they’ve managed to overcome those issues and have put together a recent history of on-time payments.
People with good credit may not receive the absolute best terms from a lender, but it’s safe for them to assume that they won’t be looking at exorbitant interest rates and hefty down payments. Lenders are generally willing to take a chance on someone with a good credit score, especially if they’re not trying to borrow huge sums of money.
While this bracket is certainly a good place to be on your financial journey, there is still some room for improvement. If you fall into this range because of past issues that you’ve overcome, keep making your payments on time like you’ve been doing. This range also puts you in a position to keep your credit utilization low, so you have more available credit. This can lead to an increase of several points that can take you from good to very good.
Very Good Credit (740-799): Enjoy Perks and Lower Interest Rates
When you start getting into the mid-700s, you’ll start receiving some better options from lenders, credit card companies, and other financing institutions. At this level, virtually every lender considers you low-risk for default, which means that they’re more willing to offer you credit with interest rates that are significantly lower than they were when your score was 739 or lower. It’s amazing how much of a difference a couple of points can make on your score, but when you move from good to very good, you’ll quickly notice the benefits.
You won’t get to this range by accident, though. Instead, people who have credit scores that fall in this range have spent years practicing good financial habits and have proven that they can be trusted to repay their debts on time. Additionally, most people who fall within this range have a lengthy credit history and a healthy mix of different types of credit accounts. For instance, they may have credit cards, student loan payments, and a mortgage, all of which they pay on time each month.
It's easy to reach this level and assume that you can go into cruise control when it comes to your finances, but there’s a lot to be said for those who keep pushing for improvement, even when they get this close to the top. By improving your credit score, even when it’s already considered very good, you can set yourself up for the type of long-term financial success that you’ve been dreaming of.
When you get to this level, it’s important to remain vigilant. You got to this level by making payments on time and not taking on lots of unnecessary debt. When you reach this level, you’ll find yourself getting a lot of credit card offers, and it’s easy to assume that you can take on some more credit. Instead, focus your efforts on getting to the next level of the credit score ladder.
Excellent Credit (800 or Higher): Top-Tier Credit Status
Achieving a credit score of 800 or higher puts you in rarefied air. Only 22% of Americans have credit scores that fall within this range. To get a score of 800-plus, you have to have years of credit history that show how committed you are to making all of your payments on time. People who fall into this range also have a wide array of credit on their reports, typically including a mortgage, car payment, credit card debt, and more.
While you can get to a score of 800 or higher with a lot of different types of debt on your report, you’ll need to have a low credit utilization rate. This figure represents how much available credit you’re using compared to what’s available to you. For instance, if you have $350,000 of available credit across loans, credit cards, and more, the less of that credit that you’re using, the higher your credit score will be. While you need to have some sort of debt to show that you’re paying things off on time, having more credit available raises your score.
When you reach this level on the credit score ladder, you need to go into maintenance mode. The highest possible credit score is 850, and ultimately, there’s not much difference in the rates you receive when your score falls between 820 and 850. However, you need to work to make sure that your score doesn’t dip. While there’s nothing wrong with using your high credit score to finance your home, you don’t want to fall too far from the top of the credit mountain.
When you climb to the highest point of credit scores, it’s a great accomplishment. With that comes the need to protect your work. A high credit score isn’t a license to get reckless and run up a lot of debt. Instead, it’s an opportunity to set yourself up for long-term success. For instance, if you own your home outright and have a credit score higher than 800, you could consider purchasing a second home that could be used as a rental.
How to Go About Improving Your Credit Score
If you find yourself well below the goal of a credit score of 800 or higher, you don’t have to lose hope. While a low credit score can make things difficult in the present, it doesn’t have to define your future. Perhaps the best thing about credit scores is that they’re never set in stone. If you’ve spent years making financial mistakes, you can start climbing out of the credit score cellar today.
The best way to start making positive strides is to start making payments on time. Ultimately, nothing can negatively impact your credit score faster than late payments. While that’s startling, the good news is that making your payments on time can turn things around in a hurry.
Outside of that, it’s a good idea to bring down your credit utilization rate. The more available credit you have, the higher your score can go.
Spending Today With an Eye to the Future
Whether you’re struggling with a low credit score or you’ve already achieved a score of 800-plus, today is the first day of the rest of your financial life. Whether you need to boost your score or you want to utilize the results of your hard work, being wise with your spending habits is where it all starts.