Credit Scores: The Good, the Bad, and How to Improve
Your credit score can determine everything from your ability to buy a home to your chances of landing your dream job. But what separates a good credit score from a bad one? And how can you bump your credit score up from good to great?
Use this credit score guide to see where you fall on the scale and what you can do to boost your score, whether you’re struggling to rebuild a less-than-stellar credit score or simply trying to gain a few points here and there.
Keep in mind that there’s some variation on credit scores, and ratings differ a bit depending on the scoring model used. But this guide should give you a general idea of where you stand – and where you could stand to improve.
300 to 649: Not Good
If your credit score falls below 650, you’ll have trouble getting approved for loans and credit cards. You might have a hard time renting an apartment (many landlords run credit checks on potential tenants) or finding a job (some employers also run credit checks).
The good news is that if your credit score falls in this range, there’s nowhere to go but up. It’ll be a long haul, and it’ll take some hard work – but it is possible to rebuild your credit score and bump it up above 650. Here are a few things you can do:
- If you have no real credit history, consider a secured card. Secured cards work exactly like regular credit cards, with one exception: When you apply for a secured credit card, you’ll need to put down a cash deposit (the amount varies, but it’ll likely be a few hundred dollars). You can use your secured card to demonstrate responsible use by keeping your use low (you don’t want to max it out) and by paying your balance in full every month. Some lenders will even allow you to switch over to a regular, unsecured card after you’ve established a history of responsible use.
- If you’re struggling with debt, work with a credit counselor. If your credit score is in this range, chances are good that you’re struggling with debt. Credit counselors can be a big help. They can negotiate with your credit card lender to get lower payments or a better interest rate, and they can also set up a debt management plan.
While folks in this range aren’t at rock-bottom, credit-wise, there’s still a lot of room for improvement. Because your credit score isn’t great, you’ll be viewed as a high credit risk by most lenders. This means you’ll be less likely to be approved for credit cards or loans, and you’ll pay higher interest than consumers with good or excellent credit.
If your credit score falls in the “Fair” range, it’s important that you continue to take steps to improve and avoid any common pitfalls that can send you back into bad credit territory:
- Pay your bills on time. One missed or late credit payment can knock your score down a peg.
- Reduce your credit utilization. Your credit score is determined by several factors, including your ratio of available credit to credit used. Ideally, you want to have a zero percent usage ratio, which you can achieve by paying your credit cards off in full. If you’re not at zero yet, try to keep it under 30% usage (to put that in perspective, a 30% usage rate on a credit card with a $5,000 limit is $1,500).
- Don’t close any cards. Closing a credit card reduces your pool of available credit, which can negatively affect your usage ratio. If you don’t trust yourself to avoid using your card, cut it up or lock it away – but keep the account open.
- Don’t apply for any new cards. Credit score-wise, you’re not in the clear quite yet. Now is not the time to open new accounts. Focus on paying off your current cards and demonstrating responsible use.
You’ve made it: You’re officially in good standing! Sure, you might not always get best interest rates available, but you’re unlikely to be turned down if you want to buy a car or a home based on your credit rating. And your credit score won’t be a concern for potential employers or landlords.
At this point, you should stay the course. Keep doing what you’re doing, and see if you can find a few ways to bump your score up to the next level:
- If you have any trailing debt that you need to pay off, consider utilizing a balance transfer. Your credit score means that you’ll likely qualify for one, and you can use the low introductory interest rate to shave a few hundred dollars of interest off your payoff over time.
- Consider requesting a higher credit limit. A larger pool of available credit can improve your utilization ratio, which can translate to a higher credit score. But, as always, you should proceed with caution: Don’t ask for a higher limit unless you’re sure that you won’t be tempted to use it. And don’t do this with more than one account. Your lender will likely pull a credit inquiry, and too many inquiries can ding your credit.
- Check your credit. Everyone is entitled to one free credit report per year from all three of the major reporting agencies. If it’s been a while since you’ve looked at yours, now’s the time. This can alert you to any potential problems – such as errors or suspicious activity – that can drag your score down.
Congratulations! You’re at the top of the credit heap. Your stellar credit score means that you’ll get the best interest rates available when it comes to things like applying for a mortgage or obtaining a loan. At this point, our only advice is to keep doing what you’re doing. Consider turning your attention to other worthy financial goals like building up your emergency fund or planning for retirement.
And remember, the team at American Credit Foundation is always available to answer your questions about debt, credit, and budgeting.