Credit scores have a significant impact on how secure our finances are. Lenders, credit card companies, and landlords use credit scores to decide on loan approvals, interest rates, credit limits, and rental applications. It is important to understand credit score ranges and what they represent for your financial situation.
What is a credit score range, and what makes a good credit score range? What factors affect credit scores, and what steps may you take to raise your score? We will answer these questions right below!
What is a Credit Score?
A credit score range is a number from 300 to 850, which rates a consumer’s creditworthiness. It is a numerical summary of your credit report, which details your financial transactions, payment patterns, credit accounts, and credit history.
Lenders use credit scores to determine the likelihood that a borrower would make timely loan repayments. The higher your credit score is, the better you will seem to potential lenders.
Credit agencies like Equifax, Experian, and TransUnion use sophisticated algorithms to calculate credit scores by weighing several aspects of your credit report.
What is a Good Credit Score?
Although a good credit score varies depending on the scoring model used. Generally, a good credit score falls between the numbers 300 and 850.
A good credit score shows you are a trustworthy borrower who will likely repay your debts on time. In contrast, a low credit score says that you may have a history of making late or missed payments, having a heavy debt load, or having other financial issues.
Factors that Affect Credit Score
Many factors represent your financial and credit history that affect your credit scores. By being aware of these issues, you can keep a decent credit score and prevent activities from damaging your credit profile. The following are some of the factors that impact your credit score:
#1. Payment History
Your payment history is one of the key factors that will determine your credit score. It indicates how you’ve handled your account credit so far, detailing how many credit account payments were made on time, late, or skipped.
This proof of repayment is why your payment history accounts for 35% of your score and plays a significant role in its computation.
#2. Credit Utilization Rate
Credit utilization rate, or ratio, can impact up to 30% of your credit score, depending on the scoring model used, making the credit utilization ratio another key factor in determining your credit score.
A low credit utilization rate indicates that you are using less of your available credit, which is typically a sign of good credit management. A high credit utilization ratio lowers your credit score because it shows that you’re overspending,
#3. Length of Credit History
The length of your credit history refers to how long the accounts on your credit reports have been open. Longer credit histories are viewed as less risky because more information is available to assess the payment history.
Although it may not be as major as other factors like payment history or credit utilization, the length of your credit history still accounts for 15% of your credit score.
#4. Types of Credit
There are three types of credit; revolving credit, installment credit, and open credit, and having a mix of these tells the lenders that you are less of a credit risk as you can manage different types of credit and their payment systems.
Having a mix of different types of credit accounts is good for your credit, but it’s not the most important factor in determining your scores; it accounts for 10% of your score.
#5. New Credit
New credit refers to any new credit accounts that you have recently opened. This can include credit cards, car loans, or personal loans. When you apply for new credit, the lender will typically perform a hard inquiry on your credit report, which can temporarily lower your credit score.
However, managing your new credit responsibly and making timely payments can improve your credit score. Apply for credit only when necessary to avoid opening multiple accounts simultaneously, which can negatively impact your credit score. Overall, the total amount of new credit accounts for 10% of your credit score
What are the 5 Ranges of a Credit Score?
A credit score range can change depending on the credit bureau and the scoring model used.
However, the FICO score is the most widely utilized credit scoring system. Lenders, credit card companies, and other financial organizations frequently utilize the FICO score to assess credit risk and set interest rates, loan conditions, and credit limitations
The five groups with varying levels of credit risk make up the FICO score range:
#1. Poor – 300 to 579
Those who fall into this category must raise their credit scores before obtaining new credit, as they frequently encounter difficulties getting new credit approved.
#2. Fair – 580 to 669
People in this group are seen as fair borrowers. They might have a few negatives on their credit report, but nothing major. Despite being a higher risk and maybe having problems getting new credit, lenders are nevertheless likely to grant them credit, though not at excellent rates.
#3. Good – 670 to 739
Lenders typically regard those with credit scores of 670 or higher as acceptable or lower-risk borrowers. They might still receive competitive interest rates, but they won’t likely get the best deals compared to people in the two higher ranges, and they will likely find it more difficult to get some type of credit.
#4. Very Good – 740 to 799
People in this range have shown a history of positive credit behaviour. Most of their payments, including loans, credit cards, utilities, and rent, are made on time; therefore, getting approval for more credit and better rates will be easier.
#5. Excellent – 800 to 850
Lenders consider those in this range to be low-risk borrowers. They have a lengthy history of on-time payments and minimal credit card balances, so they get cheaper interest rates on loans, credit cards, and mortgages. Also, they are more likely to get approved for a loan than borrowers with lower ratings.
Tips for Improving your Credit Score
Why is it important to have a higher credit score? A borrower with higher credit scores generally obtains more favorable credit terms, which results in lower payments and less interest paid overall
When information on a borrower’s credit report is updated, their credit score changes and can rise or fall based on the new information. Here are some ways that a consumer can improve their credit score:
#1. Review your Credit Report
Check your credit score with a scoring model, and when you receive your score, it will come with a credit report that tells you what is affecting your score, both positively and negatively.
Review the report and know what you need to improve on and what should be maintained. That is the first thing you should do.
#2. Make your Payments on Time
Your payment history has the biggest impact on your credit score, accounting for 35%. Therefore, ensure you pay on time to avoid creditors reporting you and listing a late payment on your credit history.
To keep track of all your bills and avoid late payments, you can create filing systems or set a due date alert to remind you when a bill is due.
#3. Keep your credit Utilization Ratio Low
Credit utilization is the second most important factor in your credit score after payment history. Your credit utilization rate should be 30% or less to improve your credit score.
Two ways you can reduce your credit utilization ratio is to pay your card balances in full each month and ask for an increase in your credit limit.
#4. Build your credit history
You may need to build your credit history to improve your credit score. It accounts for 15%, and a negative or minimal credit history may affect your score.
One way to build your credit history is by taking out a credit-builder loan, which is a personal loan designed to help you add positive payment history to your credit report. Also, you can apply for secured credit cards. Credit cards demand a deposit upfront, but using them reasonably can help you build your credit.
#5. Have a Credit Mix
The more varied your credit mix is, the higher your score will likely be. Having a range of credit in your name gives you good diversity and shows lenders that you can manage multiple loan types and their systems.
This will boost your credit score. While it might not give your score the biggest boost, it gives your score a 10% boost.
#6. Keep your old credit account, and don’t request new credit
A longer credit history shows that you are a less risky borrower and have strong credit habits. The older your average credit age, the more favorably you appear to lenders, so keep your previous credit accounts open even if you no longer use them.
Also, avoid applying for new credit frequently since that can lower your credit score. In general, more new accounts indicate to lenders that you are a risk to them and will shorten the average history of your credit accounts.
What is a Good Score for Credit?
Although ranges differ based on the credit scoring model, credit scores between 580 and 669 are typically regarded as fair, 670 to 739 as good, 740 to 799 as very good, and 800 and higher as exceptional.
Higher credit scores indicate that you have used credit responsibly, which could give potential creditors and lenders more assurance when reviewing your credit request.
What is the Average Credit Score in America?
The average credit score in the U.S. remained at 714 in 2022, following four consecutive years of increases. A credit score of 714 is generally considered good by lenders.
How Many People Have a Credit Score Over 800?
According to the FICO Score model, an exceptional credit score lands between 800 and 850. Only about 21% of the population has an exceptional FICO score.
How to Get Your Credit Score to 800?
The best way to determine how to improve your credit score is to check your score. Along with your score, you’ll receive a report that will indicate why your score isn’t higher. Then you can determine what steps to take to improve your score. Three steps you can take to get your score to 800;
- Pay your bills on time every month, as prompt payment accounts for 35% of your credit score.
- Take a debt consolidation loan from the bank and pay them off. This will improve your utilization ratio if you’re given a lower interest rate.
- Inquire about a credit increase if you have credit card accounts. You should be given a higher credit limit if your account is in good standing. That’s if you have a credit card account. This will lower your utilization ratio.
Why is it so Hard to Get an 800 Credit Score?
A credit score of 800 is considered excellent and has many benefits. Still, it is difficult to obtain because it requires responsible credit behaviour and takes a long time to build a payment history.
Other reasons why an individual might find it difficult to achieve an 800 credit score include; missed payments, a high credit utilization ratio, too many credit inquiries within a short period, and a lack of consistency.
Can You Have a 900 Credit Score?
Credit scores typically range from 300 to 850, but having a credit score of 900 is possible. However, it depends on the type of scoring model you use.
The scoring models that range from 250 to 900 are the FICO Auto Score and FICO Bankcard Score models.
Who has a 900 Credit Score?
Those who may have a credit score of 900 include individuals with a long credit history, a high credit limit, low credit utilization, and a mix of credit accounts, such as credit cards, mortgages, and car loans, that have been managed responsibly over time.
People with perfect credit scores may also have no negative items on their credit reports, such as late payments, collections, or bankruptcies.
Maintaining a sound financial situation requires knowing your credit score and its range. Your ability to secure loans and credit cards, rent an apartment, or even land a job depends on your credit score. To ensure that you are in the best possible position to reach your financial goals, it is therefore important to periodically monitor your credit score and take action to raise it as needed.
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