You can ask a lot of people about what creates good credit and you’ll get a lot of different answers.
Some say timely payments. Others say keep your balances low. Still others advise you to keep balances on just one or two cards. Making sense of all this can be overwhelming and even a little stressful because, as you’ve probably heard, bad credit can really hurt your chances of getting good deals on credit cards and loans.
We wanted to clear the air about credit, so we did a lot of research and talked with a number of experts to learn everything we could about what good credit score is, how you can improve it, the mentalities that hold you back from achieving it and how all this affects your financial well-being.
Over the next few minutes we’re going to talk about each of these topics.
What Exactly is a Good Credit Score?
You can look at good credit one of two ways: from your view as a consumer, or from the perspective of lenders who will give you loans or credit cards.
From the consumer’s perspective, good credit is a certain number (more on that in a second). But viewing your credit rating this way is only half the story, says John Ulzheimer, a nationally recognized credit expert.
The other half of this discussion is the lenders who are prepared to offer you credit cards, auto loans, mortgages and other loans. When it comes to these offers, consumers should remember that their credit score isn’t the end all. What actually matters most is how that score affects the kind of interest rates and loan amounts they can receive.
“A good credit score is any score that will lead to a lender to give you the best deal they offer. In some cases, that’s 700; in some cases, it’s 750 and in other cases it’s 780,” he said.
Now, even though what you can get out of a good credit score is really important, we know it’s also important for consumers to have a general sense of what a good credit score is. A “good” score is actually misleading because “good” is one of the categories used in credit-score scales.
According to Credit.org, a good score is between 680 and 740. But that’s not the highest tier of credit scores: “excellent” credit is anything between 740 and 850.
Your credit score determines whether or not you’ll get the absolute best interest rate and loan amount from lenders.
Is there really a big difference between good credit and excellent credit? Definitely, because it determines whether or not you’ll get the absolute best interest rate and/or loan amount from lenders.
The ultimate credit score is 780 or higher.
“If you want to put yourself in a position where you get the best deal from any lender you approach, be in the 780-plus range,” he said. “There’s nothing better than that. Your score gets to a point where, if you cross a certain line, you’re golden; that line is about 780.”
Now, that doesn’t mean that if you have a 740 you’re going to get a bad deal from your lender, but it does mean there’s a possibility that you won’t get the best deal from them.
And that’s where consumers need to remember that, as much as we like to focus on our scores, it’s how lenders respond to our scores that really matters. A good score, John said, is an indication that there’s very little risk involved in a car dealership, for example, giving you a loan for a new car.
“Auto lenders, mortgage lenders and credit card companies are leaning on your score as a tool to lend to you,” John said.
The implications of this idea are pretty huge, but we’ll get to more of that later in this article. For now, we’re guessing you’re wondering how you can get to the point where you can get the best possible deal from lenders.
How to Get and Keep a Good Credit Score in 4 Proven Steps
Most credit scoring systems put a huge emphasis on timely payments and low balances in relation to your overall credit limits.
We talked with Experian’s Public Education Director Rod Griffin about how these factors play a role in achieving a good credit score. Before jumping into a list of tips for bumping your score up, download your credit history, Rod said.
You can use the report to identify past late payments and also get stats about how much of your overall credit limit you are using.
Once you have a good sense of this, you can get a read on your past habits, and, as we pointed out a few seconds ago, those habits play a role in getting a great score.
“Consumers get their credit scores and they want to know that they can do,” Rod said. “In order to raise your score, you have to know what’s causing it.”
1. Maintain Low Credit Utilization
Usually, the two factors keeping your score from rising are late payments and high utilization.
“The two things we always see most are the presence of delinquencies in your credit report,” Rod said. “The other thing that tends to get people is their utilization rate because that’s the second most important factor in your credit scores.”
According to the Fair Isaac Corporation (FICO), the company responsible for one of the most-used credit scoring systems in the country, your payment history and your utilization make up 65% of your score.
The general rule of thumb with credit utilization, John Ulzheimer said, is to keep all your balances under 30% of your total credit limit.
So, if you have five cards with a total credit limit of $20,000, maintain an overall balance of $6,000 or less.
Now, this same rule applies to your overall credit limit and credit use. If you have a total of $50,000 in credit limits and your utilization across all cards hits 30% ($15K) then you’ll see your scores drop.
Because credit bureaus are looking at your per-card utilization and your overall utilization, it’s important for you to keep an eye on both.
One of the best ways to keep an eye on your utilization is to sign up for a free credit-score website like Credit Karma.
Their site helps you quickly access your overall utilization ratio and gives you free access to TransUnion and Equifax’s reports on each individual card’s balance.
2. Never Make Late Payments
Another huge factor in boosting your credit scores is paying on time every month. The easiest way to do this is to set your BillPay to pay your entire balance on the due date.
This trick does the double duty of paying on time and keeping your utilization low because you’re paying your balance down to $0.
If you pay one or two days late, don’t worry, your credit score won’t be affected. You’ll only see significant drops in your score if you pay 30 or more days after your due date.
The longer you wait to pay, the more impact your negligence will have on your credit scores.
These super-late payments are known as delinquencies, and they come in 30- 60- and 90-days, with each tier of lateness hacking more points off your scores.
3. Apply for Credit Cards Only When You Need It
Every time you open a new credit card, the card issuer will check your credit scores. These are known as “hard inquiries” and will drop your credit scores one or two points.
The holidays are a good example of our knack for opening new accounts. We make big purchases and, while we’re at the cash register, the sales associate tells us we can get 10 percent off our purchase if we sign-up for and pay with a store credit card.
That one-time savings, John said, isn’t worth it if your score drops.
“Apply for credit only when you need it, not all the time,” Ulzheimer said. “During the holidays, we tend to use our credit report as a discount coupon for getting store credit cards, but every time we do that an inquiry shows up on our report and it’s just not worth it.”
Keep in mind, though, that any credit score deductions you get for opening a new card will become less detrimental after 6 months and will disappear from your credit report after 2 years.
4. Find and Report Errors
According to the Federal Trade Commission (FTC), about 5 percent of consumers have an error on their credit report that can affect the offers they get from lenders.
Furthermore, about 1 in 4 consumers have errors on their report, minor or major.
Correcting these errors, the FTC said, has the potential to raise your score from anywhere between 25 to 100 points, although big jumps in scores are rare.
Perhaps the best way to identify errors is to use a site like Credit Karma. I’ve done this myself, using their credit histories to identify potential errors in my report.
What’s great about Credit Karma is that you can use links on their site to quickly and efficiently file disputes with the credit bureaus about information that may not be correct.
The tool, called “Direct Dispute,” is a great way to try and boost your scores. After I went through the dispute process, I was able to raise my scores by more than 20 points by removing multiple 60- and 90-day delinquencies I received from two student loan servicers.
As you build your score, your mindset is an important part of your success, and that’s what we want to talk about in the next section.
The Mindsets That Can Keep You From Having a Good Credit Score
What you believe about the factors that create a good credit score will influence how you manage your credit. A big trend these days is ditching credit card accounts and loans because banks are untrustworthy.
“This idea has gained a lot of momentum in the past five years. People are trying to live off the credit grid, meaning they believe that no credit is better than credit,” John Ulzheimer said. “A lot of people don’t like banks and hate credit cards.”
The “no-credit-is-better-than-credit” philosophy is a dangerous one, John pointed out, because it’s going to cause you a lot of problems when you go to apply for a mortgage.
Your lack of credit history could be a red flag to lenders and make them wary of giving you a mortgage.
Along with this line of thinking, he said, is the idea that having credit cards and checking your credit score is an incentive for getting into debt.
But, John said, that’s not how good credit works. If your goal is to build an excellent credit score, you’ll put a huge emphasis on paying on time and avoiding debt. Because, as we talked about earlier, the less credit card debt you have, the higher your score will be.
Now, if you’re free of these mentalities and you want to build good credit, you’re probably asking yourself if all this work is worth it. We think that’s an excellent question, because it brings up the focus of our next section: the benefits of good credit.
What Are the Benefits of Having a Good Credit Score?
In the wake of the financial crisis, there are lingering fears that the average consumer is at the mercy of the banks. And when you believe you are at the mercy of other people, you start to believe that your credit score is out of your control.
But as we’ve talked about over the past few minutes, you actually have a lot of control over your score. And when you have a lot of control, you can use your good credit score to your advantage.
To explain this principle, John talked about football free agents – players who reach the end of their contract and want to move to another team who will pay them more money. The better the player, the better the offer from other teams.
“Having a good credit score is like being a really, really good free agent. Every team wants you and each team wants to pay you an enormous amount to play for them,” he said. “You get to choose the best offer.”
The correlation to the credit world is pretty clear. If you have a great credit score, mortgage and auto lenders and credit card companies are going to throw their best offers at you because they see you as one of the all-stars among all the other consumers out there.
“If you have a fantastic credit score, every lender wants to do business with you and give you an amazing deal, and you, as the consumer, get to pick which one is best,” he said. “In terms of the financial services world, you are in the best possible position.”
Now think about this in reverse. If you have bad credit, most likely you won’t get to choose your offers. Your options will be limited and the ones you do have are plagued with high interest rates and terms that benefit the lender, not you.
“If you have poor credit, the number of “teams” who want you is low and the offers are bad,” John said. “You can be stuck using second-rate lenders … and even if you are able to get credit from a bank or a traditional lender, you are paying higher rates.”
So, if good credit gets you better rates, what kind of difference does that make for your financial situation? How much money does it actually save you, if any money at all?
The Financial Impact of Having a Good Credit Score
Both John Ulzheimer and Rod Griffin made a point to say that a good credit score isn’t just something you can share on Facebook; it’s actually a “powerful financial asset.”
- Rod: “A good credit score is a tremendous financial tool if you manage it well.”
- John: “Good credit is a wealth building opportunity. Having a solid credit report and score is not that different from picking the right mutual fund or choosing the right stock.”
Why is a good credit score a “tremendous financial tool” and a “wealth building opportunity?” The answer is based in the long-term consequences of the interest rates you’ll get from lenders.
How a Good Score Affects Your Mortgage
So, let’s say you apply at the bank for a $160,000 home loan. Your credit score is in the low 600s and the loan officer says you’ve been approved for your loan at 8.6%.
Now, let’s change the scenario a bit. Instead of a low-600 score, you’re sporting a 790. The loan officer gives you a rate of 3.9%.
That 4.7% difference may not look like much on paper, but think about how much of a difference it makes over 30-year life of the loan.
According to Credit.org, your low-600 score will make you pay about $229,000 in interest over the life of the loan. A 790 will result in about $89,000. That’s a difference of $140,000, which is about $388 per month.
The benefits of a good credit score are enormous and the penalties are very, very expensive.”
How a Good Score Affects Your Credit Card Payments
The same goes for credit card rates. Take the Bank of America Cash Rewards card, for example. Their APR’s range from 12.99% to 22.99%. We know that the average balance for someone who has credit card debt is about $7,700.
How much difference does 10% make each month? About $64. You’re paying nearly 70 bucks less each month just because of your good credit score.
How a Good Score Affects Your Auto Loan
Okay, so you’ve got your home loan and credit card and you’re happy because your great credit score has saved you about $450 in monthly payments. Let’s take it one (and final) step further.
According to the 2015 numbers from Kelley Blue Book, the average price of a new car was $33,560. There’s a good chance that a credit score of 790 will get you 0% financing from your new-car dealer, which means you won’t pay any interest on your loan.
Now let’s compare that to the average APR on a new-car loan that, at the time of our research, was 3.37%. What’s the monthly difference between the two if you get a 60-month loan? About $55 per month.
Based on our estimates, between mortgage and car payments, your good credit score could save you about $500 a month. Our recommendation? Do everything you can to raise your credit score. As we’ve discussed, it can make a huge difference in your monthly bills.
How to Get and Keep a Good Credit Score: The Bottom Line
Raising your credit score is a matter of creating good habits that show lenders you are a responsible borrower who will pay back your loans or balances in a timely, consistent way. To do that, you should:
Always pay your bills on time. Set up automatic payments through your bank, credit card company or loan lender to make sure you avoid 30-, 60- or 90-day late payments.
Keep your balances low. Aim to keep your overall utilization around 25%, but under 10% is the ideal situation.
Apply for credit only when you need it. Don’t sign up for one-time deals with store credit cards. There’s a chance the resulting score decrease could cost you percentage points on long-term loans for a home or a car.
Your mindset is also really important in managing your credit. Don’t get stuck thinking paying on time is the sole way to raise your score; there are several factors involved. Remember, by practicing good credit habits you can make the banks and lenders come to you with their best offers.
You have the ability to get the loan offers and interest rates you want, but it’s going to take some work to get your credit score into the high 700s and beyond.
The financial empowerment you get is worth the work, though. If you’re like the average consumer, putting in the time to get excellent credit can, at certain points, save you about $500 a month in interest.
If you’re still unclear about the basics of what a credit score is and how it’s calculated, take a look at our article, “Making Sense of Your Credit Scores: Your Comprehensive Guide.” You’ll learn how credit scores started, what factors into good and bad scores and how those scores affect your life.
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