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A credit score is often something you don’t think about until you have to. But even when you aren’t paying attention to it, your credit score is there and reflecting your financial life. So what is this important number and how do you make it the best it can be?
Credit Score Ranges: What is Your Credit Score?
A credit score is an estimate of a borrower’s creditworthiness represented as a numerical value. As your score improves, you will likely experience personal financial benefits, like lower interest rates and better chances at getting a loan approved. There are five factors that influence a credit score:
- Payment History
- Credit Utilization
- Length of Credit History
- New Credit
- Credit Mix
Read more: How to Build Credit in 6 Easy, Smart Steps
FICO vs VantageScore
In the US, there are two major players in the credit scoring industry: FICO and Vantage. You might be more familiar with FICO, as the VantageScore was created in 2006 by the three major credit bureaus (Equifax, Experian, and Transunion). Both provide a snapshot of your credit history, but they do measure scores slightly differently.
While your FICO score is based on a single credit bureau’s snapshot of your borrowing history, the VantageScore creates a single report using information from all three bureaus. You will also need a minimum of six months of credit history to get your FICO score, while you just need one open credit account to get a VantageScore.
It is also important to note which score you are using, as the score ranges are fairly different:
- Excellent: 800-850
- Very good: 740-799
- Good: 670-739
- Fair/average: 580-669
- Poor: N/A (FICO goes directly from ‘fair’ to ‘very poor’)
- Very poor/bad: 300-579
- Excellent: 750-850
- Very good: N/A (VantageScore goes directly from ‘excellent’ to ‘good,’ placing some qualifying scores in the upper category, with the rest falling into the lower)
- Good: 700-749
- Fair/average: 650-699
- Poor: 550-649
- Very poor/bad: 300-549
What Happens When You Improve Your Credit Score?
Raising your credit score comes with several benefits, some less obvious than others. It is important to keep in mind that there are natural fluctuations that occur when working on your credit score, but you shouldn’t be discouraged when you encounter small decreases.
You’re More Likely to Receive Approval for Loan Applications & Credit Cards
Like everything in life, having a couple of years of strong experience will only improve your chances of success. Having a better score doesn’t guarantee approval, but it is a factor in credit card and other creditor decisions.
Applicants with higher scores are seen as more likely to pay back their debts and are rewarded with more trust from lending companies. This is also a bit cyclical, as access to credit increases your ability to continue building credit and increasing your score.
You May Receive Lower Interest Rates
Not only are you more likely to be granted a line of credit or a loan, but a strong credit score could also impact the interest rate you are offered. The higher your credit score, the lower you can expect interest rates to be on things like loans, credit cards, and mortgages.
This ultimately gives you more money to spend on the principal of your loan or credit card bills, and less on interest payments. This is money you could also be putting towards other personal financial goals.
Raising Your Credit Score Increases Your Negotiating Power
If you have a strong credit score you are seen as a more desirable borrower for a lender, and they may be more willing to work with you. You can always try negotiating interest rates and credit limits with lenders, but a higher credit score will increase your chances of succeeding in those negotiations.
Those with a lower credit score might have a harder time convincing creditors to give them a better deal on loan terms, or they might have fewer options.
A Higher Credit Score = Higher Credit Limits
A higher credit score may increase your borrowing capacity and credit limit. This frees borrowers up to make large purchases that they are more likely to pay off. It also means you have a larger security blanket available in case of needed emergency funds.
Like all things credit, higher credit limits don’t mean that you have to spend more, and if you overspend you might negatively impact the score you have been working to build.