It doesn’t matter if you’re a teenager getting your first credit card or an adult looking to buy your first house: most people could probably use some education on credit scores. You’ve probably heard how important it is to build and maintain good credit throughout your life. A strong credit score can allow you to get a mortgage and take out a car loan.
With that said, Homeowner Funding has prepared this beginner’s guide to credit scores to assist anyone looking to boost their credit standing and get ahead in life. We’ll cover what determines a credit score, provide a credit score breakdown, and describe the effects of a good and bad credit score. We will also list some ways you can improve your existing score.
Healthy credit is the key to many good things, from securing low interest rates to qualifying for vinyl siding funding. Let’s dive into the facts.
What Determines Your Credit Score?
Credit bureaus use various models to calculate a person’s credit score. Those bureaus typically do not share which model they use, although the most common ones are the FICO score or VantageScore.
The exact nuances of each are probably of little interest to the average consumer. However, to give you an idea of what goes into your credit score, here is an overview of the elements that factor into an individual’s FICO score:
- Credit card repayment history
- Credit utilization rate, or your current debts compared to your credit limit
- How long you have held your current credit
- Frequency of new credit applications, as in, how often you open new credit cards
- The diversity of your existing debts, such as a balance between a mortgage, car loan, and monthly credit allowances
You can learn a lot even from this bird’s-eye view of the matter. Credit scores really come down to this: the less financial risk you seem to pose to your lenders, the more options will be open to you when you need a loan.
Credit Score Breakdown
FICO scores and VantageScores are calculated slightly differently. To make it easy, however, the three-digit numbers are broken down into categories indicating the strength of that credit score range.
The credit score breakdown for FICO read like this:
- 300-579: Very poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
Meanwhile, the VantageScore credit ranges run this way:
- 300-499: Very Poor
- 500-600: Poor
- 601-660: Fair
- 661-780: Good
- 781-850: Excellent
How Your Credit Score Affects Your Life
You can see from the breakdowns above that the higher your credit score, the better off you will be when applying for credit and other financing. Conversely, a low score will make that aspect of life more difficult for you. Let’s see how it works.
Benefits of a High Credit Score
A high credit score–say, one between 740 and 850 in the FICO range–will allow you to get approved for virtually any kind of credit you want. You should have no trouble getting credit cards, a car loan, or a mortgage, and at the lower end of interest rates, too!
In some cases, like getting a mortgage for a house purchase, your credit could be the deciding factor in whether you can proceed. Pose too much of a risk to a potential lender, and you’ll get passed up. That could seriously foil your life plan of buying a house and settling down.
So, always work on keeping your credit score high and healthy.
Disadvantages of a Low Credit Score
On the other hand, if your FICO score is anywhere from 300 to 669, you may struggle to get approved for credit cards or major loans. That means you could be rejected for car loans and mortgages, two of the largest types of loans a person will generally take out in life.
You can see how having bad credit can frustrate your efforts to get ahead. If your current car is on its last legs, and you badly need a replacement, you would have to come up with cash to pay for it. Mortgage lenders will also probably avoid giving you a loan, meaning you might be unable to buy a house with anything other than cash (an unrealistic expectation for most people).
The other major disadvantage to keep in mind here is that, if a lender does approve you for a loan, the terms will not be favorable to you. That means your interest rates would be higher than for someone with good credit. You may also have to pay annual fees for the life of the loan, whereas someone with a high credit score might not have to pay any fee at all.
Improving Your Credit Score
It is never too late to start improving your credit score. Doing so can open all kinds of doors to the future you want to make for yourself and your family. We have written about the ways to boost your credit score fast.
Here are a few methods:
- Start paying your bills on time – pay off your credit card bills in full every month. This shows you are responsible with your credit.
- Lower your credit utilization rate – one way to pay off those bills on time is simply to spend less if you can help it. Eliminate unnecessary purchases so you can ultimately use less of your available credit each month. Reducing that percentage over time will help raise your score.
- Correct credit report errors – your credit reports, which explain your credit history in greater detail than a score does, may contain errors that artificially lower your score. Check over your reports and ensure the credit bureau that produced it fixes any mistakes.
- Get a credit card now if you have no credit history – having no credit history can hurt you, too. The longer you hold credit, the higher your score will tend to be. Make small, responsible purchases with your new card every month, and you can start building credit.
Credit Scores Matter in Many Ways
As you can tell, good credit scores are necessary to get a lot done in life. They are also a large part of how Homeowner Funding does business.
In explaining to our customers how home improvement loans work, we remind people that good credit is often necessary to qualify for such a loan, or at least for a favorable one. Low credit scores could wind you up with a low loan amount, high interest rates, or no loan at all. This all comes back to the point we made above: bad credit can stop your life in its tracks. Good credit is the key to opportunity.
We hope you have learned from this beginner’s guide to credit scores. Building good credit isn’t rocket science, but it also doesn’t take much to ruin a good score with bad spending habits. Stay conservative with your credit, and all kinds of exciting options will become available, from financing your home improvement projects to buying that first house.
