How To Build Your Credit Score Range In 5 Simple Steps
If you’re looking to take a loan, your credit score range is important. Some people don’t know this 3 digit number exists until they get their loan applications denied. Some people think that credit score is just one number, when it’s actually a range. And some don’t know how to improve it.
Why Is Your Credit Score Range So Important?
Put yourself in the lenders’ shoes. Would you be more likely to provide a loan to Bob who has been late paying his mortgage for the past 5 months? Or Jane who has always been paying on time? Of course, Jane is a better choice because she has a good history. Thus, she’s likely to pay you back on time.
Lenders use credit scores to gauge how likely you are to repay your loans on time. A good credit score could mean that you get favorable rates and terms for the mortgage for your new home or loan for your new car. And a bad score could mean you’re paying more to service the loan or your loan application may not be approved at all.
In this article, you’re going to learn how your credit score range is calculated, what is considered a good score, how to build a good score, and how to get your credit score and report.
How Your Credit Score Range Is Determined
One common misconception is you only have one credit score. You actually have a range of scores. There’s a couple of reasons for that.
How Credit Bureaus Get Your Information
The three main credit monitoring bureaus – TransUnion, Experian, and Equifax – are amongst the largest of many credit bureaus. Each credit bureau collects information about your credit usage in monthly reports from lenders. The timing of these reports varies from bureau to bureau and from lender to lender.
Moreover, these lenders are not required to report to all 3 bureaus. They can choose to report to only one bureau or even none of them. That’s why the 3 credit bureaus have different information to calculate your score.
Based on the information, they’re going to calculate using the FICO or VantageScore model. Due to the different timing and information, it’s not unusual to see 20 point gaps or higher in your credit score range.
The Different Scoring Models
Let’s take an example of basketball. You score 3 points when you shoot from outside the three-point line and 2 points when you shoot from inside the three-point line. However, the three-point lines are drawn differently. Now, the 3 points you used to score in one court only gets you 2 points in the other court.
It’s the same for FICO and VantageScore. Both take into account similar factors, but they’re weighted differently. Thus, based on the model used, the numbers are going to be different.
How Lenders Use Your Range
When considering your credit applications, lenders may request more than one credit score type. From the credit score range, they may choose to consider the lower score or the middle score.
What Is A Good Credit Score?
There is a range of possible score numbers. You can think of it like a thermometer where water freezes at 32 degrees and boils at 212 degrees. As for credit score, the lowest FICO and VantageScore is 300 and the highest is 850. Here’s how your scores are rated and how it affects you.
|FICO® Score||Rating||How It Affects You|
|800 – 850||Excellent||Congratulations! Lenders will give you the very best available interest rates.|
|740 – 799||Very Good||Lenders are likely to give better-than-average interest rates on your loans.|
|670 – 739||Good||Historically, only a small percentage of applicants in this range default on payments in the future. Lenders are likely to approve your loan.|
|580 – 669||Poor||Lenders consider applicants in this range as “subprime”. You are likely to get some of the highest interest rates.|
|300 – 579||Very Poor||Lenders may not approve your loan. If they do, they require you to pay a fee or deposit or have a co-signer for your loan.|
|VantageScore||Rating||How It Affects You|
|781 – 850||Excellent||Congratulations! Lenders will give you the very best available interest rate and most favorable terms.|
|661 – 780||Good||Lenders are likely to approve your credit at competitive rates.|
|601 - 660||Fair||Lenders may approve your credit but not at competitive interest rates.|
|500 - 600||Poor||Lenders may approve for some credit. Be prepared for unfavorable interest rates with additional conditions like larger down payment amounts.|
|300 – 499||Very Poor||Lenders will likely not approve your loan.|
As you can see, even though both VantageScore and FICO score levels go from 300 to 850, they have a different rating system. A good VantageScore range isn’t necessarily a good FICO score range. Let’s take 663 for example. Based on VantageScore ratings, you would be considered “Good”. However, the same 663 FICO score would be rated “Poor”.
When applying for a loan, lenders may not follow the same rating system. They have their own definition of “good” or “very good” to decide if they are going to approve and the interest rates you get.
What remains true is the higher your credit score, the more trustworthy you are as a borrower and the more likely you are to be approved for new lines of credit. This, in turn, could mean you will pay significantly less in interest over the term of a loan.
For example, on a $250,000 30-year, fixed-rate home mortgage:
|FICO® Score||Interest Rate||Monthly Payment||Interest Paid||Total Cost Of Mortgage|
|760 - 850||2.93%||$1,045||$126,054||$250,000 + $126,054 =|
|700 - 759||3.15%||$1,074||$136,763||$250,000 + $136,763 =|
|680 - 699||3.33%||$1,099||$145,648||$250,000 + $145,648 =|
|660 - 679||3.54%||$1,128||$156,152||$250,000 + $156,152 = |
|640 - 659||3.97%||$1,189||$178,119||$250,000 + $178,119 = |
|620 - 639||4.52%||$1,270||$207,087||$250,000 + $207,087 =|
As you can see in this example, if your FICO score is 760 or better you will pay $225 less per month for a $250,000 30-year, fixed-rate mortgage than if your FICO score is 620 – that’s a savings of $2,700 per year.
5 Steps To Build A Good Credit Score
Now that you know how a credit score affects your loans, it’s a good idea to start building it early.
If you’re not happy with your current credit score range, it’s not the end of the world. The good news is that credit scores are not forever. As you get new records over time, the older records are less of a factor.
Step 1: Understand how scores are calculated
In order to improve your credit score range, first you have to understand what factors are taken into consideration and how scores are calculated.
FICO score factors are broken down by percentages:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
On the other hand, VantageScore factors are not as specific:
- Most influential: Payment history
- Highly influential: Age and type of credit, percent of credit limit used
- Moderately influential: Total balances and debt
- Less influential: Recent credit behavior and inquiries, available credit
Both FICO and VantageScore have payment history as the most important factor. However, other factors are weighted differently. Ultimately, if you adopt good personal finance habits, your credit score range will improve.
If you notice, there are lots of things not factored into the FICO and VantageScore model. These include your race, religion, nationality, gender, marital status, age, income, savings, occupation, employer, employment history, child support payments, where you live, your total assets, etc.
Although credit scores don’t take these into account, your lenders may still take them into consideration. Most lenders obtain these information from consumer reporting companies.
Step 2: Keep Track of Your Credit Score
If you’re looking to improve your credit score, you need to have a way to keep track of it regularly. It allows you to see your progress and make sure the information is accurate.
According to the Consumer Financial Protection Bureau (CFPB), errors in credit reports are fairly common. If you see any errors, report them immediately.
The easiest way to get your credit report for free is to go to AnnualCreditReport.com. It’s a site sponsored by the 3 credit bureaus. Under U.S. law, you’re entitled to a free copy of your credit report once every 12 months. However, this credit report doesn’t include your credit score.
Moreover, 12 months is way too long. You wouldn’t check your savings or checking bank statements every 12 months, would you? It’s the same with your FICO score. Checking it once every 4 months would be sufficient. A site that gives you unlimited access to your credit score and credit report is Identity IQ Credit Score.
Some banks also offer their customers a free FICO score and tools to monitor it. Check with your bank if it’s available for you.
Note: Checking your own credit report or FICO Score has no impact on your credit score.
Checking your credit score regularly doesn’t have to be a hassle. Credit reporting apps like Credit Karma or Credit Sesame make it easy for you. You no longer have to check manually.
Whenever there’s an update to your credit score, the app sends you a notification. You’ll know exactly what changed and why it affected your score.
Although these apps don’t give you a score from all the 3 big credit bureaus, it still gives you a clear picture of your credit situation.
By monitoring regularly, this lets you know if you’re on the right track. If it improves, you can continue doing it, make it a habit and improve your credit score over time. Conversely, if it had a negative impact, you’ll know what to avoid.
We’ve covered many ways to track your credit score. Feel free to choose the one that fits your needs. What’s important is to use the same method every time you check.
Step 3: Boost Your Credit Score
There are several ways to improve your credit score. But first you need to find the source that’s lowering the score, so you know how to fix it.
If there are errors, you can dispute them. If it’s because of recent credit card applications, you may want to stop applying for new ones. If it’s because of non-payment, reduce the number of obligations you have.
Here are other ways to build your credit score:
- Ask a friend or relative for help. Co-sign a loan with them. Of course, they need to have a good credit score to have the loan approved. Then pay the loans on time.
- Self report rent payments. You can report your rent payments to the credit bureaus.
- Get a secured credit card. Manage the account well and be sure to pay on time.
- Engage a credit repair service. If you don’t want to DIY, these services are there for you. They work on your behalf to dispute any questionable items on your report with the credit bureaus.
Step 4: Develop Good Credit Building Habits
Now that you know how to repair your credit score, it’s time to create habits to continually build your credit score.
- Pay your bills on time or early. Keep building a history of on-time payments. This is the biggest factor, making up 35% of your FICO score.
- Limit your credit usage. This is 30% of your FICO score. Experts recommend using no more than 30% of your total credit card borrowing limit. Anything higher can drag your score down.
- Pay down debt as fast as possible.
- Don’t close credit cards, even if you don’t need them. Closing cards will shorten your credit history, which make up 15% of your FICO score.
- Don’t apply for new accounts too often. When you apply for a loan or credit card, lenders will request for your credit score. This is known as a hard inquiry. It lowers your credit score by a few points.
- Keep an eye on your credit report. Keep checking it regularly to catch any errors early. If you see a drop, quickly find out the source and remedy it.
Step 5: Be Patient
Building your credit score is like building trust with a friend. Small mistakes and misunderstandings can quickly ruin trust and friendship. And trust is built over time with constant communication.
Similarly, small errors like missing payments can quickly hurt your score. And building it back up again takes time. It can take months or even years to see major changes in your credit score range.
The most important thing is to be patient, keep monitoring your score and continue forming good habits. Eventually, you’ll see your score going up.
With the knowledge of credit score ranges in mind, you’re now ready to get the highest credit score possible. It may take a while so it’s important to plan ahead of time before applying for a loan.
Lenders have their own criteria for what’s a good FICO score level. And they may take other factors into consideration before approving your credit line.
However, having this knowledge means you’re no longer in the dark. You’ll know when you have the highest chance of approval and favorable interest rates.