What Should You Know About Credit Scores?
Your credit score is only three numbers, but those three numbers can have a big impact in your life. Because of this, it is extremely helpful to understand what a credit score is and why it matters so much.
- Everyone with a credit history has a credit score. Credit scores are generated for almost every adult citizen in America by credit rating agencies such as Equifax. You can find estimates of your credit score by looking at sites such as Credit Karma, although these estimates may not be completely accurate. Many banks offer this service to their customers as well. For example, CapitalOne app users see their creditwise score estimate when they log in.
- A credit score is the system used by banks to determine how likely you are to pay off a loan on time. It takes into account your past and present loans and debt in order to make this prediction, as well as how long you have had credit accounts and the types of credit you have. Inquiries into your score, which can be a sign that you are taking on more debt, are also considered.
- Credit scores range from 300 to 850. A score from 300-579 is considered poor credit, 580 -669 is fair credit, 630-739 is good credit, 740-799 is great credit, and 800-850 is exceptional credit. The national average credit score for the US is 700. In Minnesota, the average is 709, the highest state average in the nation.
- The lower your credit score is, the more a lending institution views you as a risk. The lower your credit score, the higher the interest rates you qualify for will be – a bigger payoff for the bank. If you’re buying a house, this makes your monthly payment more expensive. A low score can also limit what credit cards you will be able to use. There are also minimum scores for qualifying for a mortgage to buy a home. These vary, but 640 is a good guideline.
- The power of the credit score extends even farther than obtaining loans. Many employers look at credit as part of the hiring process, as do many mobile phone providers. In most cases, they can also be part of a landlord’s decision when screening potential tenants. (In some cities, credit scores can not be considered as part of a rental application.)
What Can You Do to Establish or Improve Your Credit Score?
If you don’t have a credit history at all, it can also create roadblocks. Here are some suggestions for establishing a score, or improving it if your score is holding you back.
- Make payments on time. Your payment history is one of the biggest factors in determining your score. Consider setting up automatic payments for recurring payments so you don’t need to think about it.
- Start small. If you usually use cash, start with one card or bill. You can use a card just for gas purchases, or put your phone bill on a credit card, and then pay it off every month.
- If you are carrying a balance on your cards, keep it at 30% of the limit. It’s best to pay your balance in full every month to avoid finance charges. If you do need to carry debt, try not to exceed 30% of your credit limit.
- Do not close your oldest credit accounts. If you have an old account you don’t use, consider leaving it open. A longer credit history can contribute to a good credit score.
- Pay off collections or judgements. If a collection is reported on your account, it can pull your score down. Paying off judgments allows the positive activity on your account to build your score faster.
- Do not create more debt if you do not have to. This is especially important with credit card debt, which can really balloon if you are not careful. Again, whenever possible, pay off the balance in full every month.
- Build credit using a secured credit card or credit builder loan. Many credit card companies offer credit cards designed to improve credit history specifically for individuals with low credit scores. These are called secured credit cards. Secured cards require a deposit and only allow you to spend up to the amount of this deposit. They generally do not offer the same benefits of other cards, but using one responsibly can set you up to qualify for much more favorable loans and credit cards in the long run. They are a good tool to build credit without acquiring debt. A credit build loan is a small loan for establishing credit. You make monthly payments, and when the loan is complete, you receive the funds.
You Don’t Have to Do It Alone
A low credit score can make life more expensive and harder than it needs to be. Understanding how these scores are calculated, and investing time into improving them, can make it easier to reach your personal goals. You can do it! But it’s often easier when you have help. Our Homeownership Advisors work with future homebuyers every day to create plans to improve credit, create budgets, qualify for a mortgage, and prepare for homeownership.
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About the Author:
Russell Star-Lack
I believe that working to support access to affordable housing is the only way to address our history of housing discrimination and residential segregation. As the Storytelling VISTA, my primary role is to collect and promote the stories of the customers who NeighborWorks has assisted in the past as part of our outreach. I enjoy listening to music, playing guitar, and reading history in my spare time.
