All About Credit Scores: What They Mean and Why They’re Important
Raising your credit score can have a significant impact on your finances. A high credit score facilitates getting the best interest rates when borrowing money for a big purchase, such as a house or car.
Increasing your credit score in the new year is a realistic objective, regardless of whether you’re seeking to establish credit from zero or make improvements. However, getting an outstanding credit score takes time. We’ll help you understand the fundamentals of credit ratings and provide you with the resources you need to boost your credit in 2024.
A good credit score is what?
Your credit score is a three-digit number that shows lenders how well you manage debt. Your score can differ, but it’s based on information in your credit reports from the three big credit agencies:
- Equifax
- Experian
- TransUnion
Credit scores do not determine your total financial health. They basically serve to demonstrate to lenders your likelihood of repaying the money you borrow.
The most popular kind of credit rating is the FICO score. Usually, they fall around the 300–850 range. Here is an additional explanation of the meaning of these scores:
Less than 580: Inadequate
580–669: Equitable
670–739: Sufficient
740–799: Excellent
800 or above: Very good
Main Things That Affect Your Credit Score
The following factors determine your credit score:
- Payment history (35%): Whether you have a history of making on-time credit account payments is the most significant element affecting your FICO score.
- Credit usage (30%): The proportion of your available credit that you are using is your credit utilization ratio. You have 20% credit usage, for instance, if you have one credit card with a $10,000 limit and a $2,000 balance.
- Length of credit (15%): Long credit histories typically result in higher FICO scores. FICO takes into account the average age of all your accounts, the age of your newest and oldest accounts, the length of time since you closed particular accounts, and other characteristics. FICO ratings only take into account hard inquiries for the last twelve months, even though they show up on your credit report for two years after you apply for credit. To prevent accruing too many hard credit inquiries, it’s usually advisable to refrain from applying for credit more than once in a short period of time.
- Credit mix (10%): Generally speaking, having a variety of credit accounts, such as a mortgage, credit card, and installment loan, is beneficial to your credit score.Depending on which bureau is supplying the data, your scores may differ slightly. Furthermore, it is typical for credit ratings to vary significantly from one month to the next. However, not everyone possesses a credit score. The credit bureaus might not have enough data to determine your credit score if you haven’t had a credit card or loan account that reports to them in the last six months.
Beginning Fresh: How to Build Your Credit Score in 2024
In 2024, if you’re prepared to begin enhancing your credit, adhere to this plan.
1) Check your credit reports for mistakes
Although your credit reports are the source of the data used to determine your scores, they will not display your credit scores. Your credit score may increase if you find mistakes and have them fixed. Although AnnualCreditReport.com offers a free credit report every week, it’s usually not required to check your credit reports all that often. Examining each of your credit reports at least once a year—or more frequently if you want to finance a significant purchase soon—is a recommended practice. Additionally, if you suspect your personal information has been compromised or if you receive notification of being involved in a data breach, it is important to check your credit reports.
When examining your credit reports, the following are some items to be aware of:
- Mistakes in your address, phone number, or other identifying information.
- Accounts that you don’t know about or that you don’t think you own.
- Delayed payments that you paid on time.
- Inaccurate account balances or credit limits.
- The same account may be displayed more than once, which can occur when an account goes into collections or when its name changes.
- For new accounts you didn’t apply for, make hard inquiries.
- If you find errors in your credit reports, get in touch with the credit reporting agency as soon as possible to dispute the information. You can find out how to do this by looking at your credit report.
2. Make timely bill payments.
Since payment history is the primary credit score element, paying your bills on time is the best thing you can do to raise your credit score. One late payment, defined as a payment made 30 days or more after the due date (though late fines are sometimes assessed right away), can cause your credit score to plummet. Although the effect on your credit scores gradually diminishes, past-due or missing payments typically remain on your credit reports for seven years.
Only accounts that provide information to credit bureaus, such as credit cards and personal loans, will allow you to accrue payment history. Regretfully, since these payments are rarely recorded with the credit bureaus, paying your phone or electricity bill on time each month is unlikely to improve your credit. Missing a payment and having the account taken over by collectors will cause your credit score to suffer.
3. Request permission to use an account from a loved one.
An authorized user is someone who has been given authority by the principal account holder to make purchases on a credit card but is not accountable for payments. Your credit may improve if you are added as an authorized user to a person with excellent credit. On the other hand, if the account holder overpays or fails to make any payments, it may negatively impact your credit.
Ask a loved one who manages their finances well whether you can become an authorized user and benefit from their creditworthiness. If they say yes, then don’t misuse the privilege. Before using their card to make any actual purchases, get their consent.
4. Should you be without a credit card, get one.
There is a catch-22: It’s difficult to start developing credit without a credit card, but it might be difficult to get approved for the credit card you need to do so.
To achieve an excellent credit score, you should apply for a credit card if you don’t already have one. If you’re looking for your first credit card or haven’t had one in a while, here are some alternatives for you:
- Secured credit cards: These are authorized quite simply by paying a refundable security deposit that serves as your credit line. Once you establish a track record of timely payments, many secured credit cards allow you to convert to a regular credit card.
- Starter credit cards without security deposits: These credit cards cater to individuals with poor credit or minimal credit history.
- Store credit cards: Although the restrictions might differ greatly depending on the business, retail credit cards, notably closed-loop credit cards that are only valid at a particular store, are frequently easier to qualify for than standard credit cards.
- Student credit cards: Since student credit cards are intended primarily for those with little credit history, obtaining one while enrolled in school is a smart approach to starting to build credit.
Your first credit card approval usually comes with a high annual percentage rate (APR) and a modest credit limit. Lenders see borrowers who are new to credit as higher risks.
To avoid paying interest, try to limit the amount you charge to what you can afford to pay off in full by the deadline. Aim to maintain a credit usage rate of less than 30%. For instance, if you are approved for a credit card with a limit of $300, you should ensure that the debt does not exceed $90.
5. Seek out a loan that builds credit.
A credit-builder loan, which functions similarly to a loan in reverse, is another way to build credit. You pay your financial institution each month, and they record the payments to the credit agency. However, in contrast to a standard personal loan, the money is disbursed at the conclusion of the period following all payments rather than at the beginning.
Term lengths for credit-builder loans normally range from six to 24 months. The most probable places to locate them are nearby credit unions and smaller community banks.
6. Ask for an increase in the credit limit.
Consider requesting an increase in your credit limit from your card issuer once you’ve demonstrated your creditworthiness or if you currently have a credit card and a good payment history. As long as you don’t raise your balance, having more open credit will naturally result in a lower credit utilization rate. However, you should normally wait at least six months before submitting this request.
7. Make sure the credit bureaus receive your rent payments.
Even having the best rental history won’t often raise your credit score because the majority of landlords don’t submit rent payments to the credit agencies. However, if the credit bureaus have your rental history, they will report it.
Numerous rent-reporting businesses provide the credit bureaus with information about your rent payments. Enrollment usually requires permission from your landlord, and many of these programs have a nominal cost that you are responsible for paying. To demonstrate your history of on-time payment of what is probably one of your biggest invoices, the expense might be justified nonetheless.
The credit scoring model determines the handling of this data. When rental payments are reported, the more recent FICO scoring models take them into consideration, while the more traditional models, still used for mortgages, do not account for rental histories. When rental payments are available, VantageScore, an alternative credit score, includes them in all of its credit scoring models.
8. Refrain from canceling previous credit card accounts.
Don’t close old credit cards unless you have a good reason, such as a high annual charge, as the length of credit accounts for 15% of your credit score. Use your older credit cards for the occasional purchase or a minor regular fee, even if you have other credit cards with stronger rewards programs.
9. Use a strategy to pay off debt.
Paying off debt doesn’t always improve your credit score. Generally speaking, paying off credit cards raises your credit score more than paying off loans. Paying off a credit card decreases the second-most significant component affecting your credit score, credit use. You also save money on interest, as credit cards usually have higher annual percentage rates than loans.
But before you take on credit cards, pay off any loans you have that have outrageous interest rates. Payday loans, for instance, usually have annual percentage rates (APRs) of almost 400%, which might trap you in debt. While eliminating payday loans won’t likely improve your credit score because most lenders don’t report to credit bureaus, it will greatly improve your personal finances.
10. Check if you may save money by getting a debt consolidation loan.
With a debt consolidation loan, you can combine multiple high-rate loans into one, resulting in a single monthly payment with a lower interest rate. Consolidating debt with a personal loan could save you money. For instance, if you had three credit cards with interest rates of 16%, 18%, and 21% but were eligible for a personal loan with a 10% APR, Your credit score will probably increase as well since you will have less credit usage.
With interest rates expected to reach a 22-year high in 2024, consolidating debt may not be ideal. But you can still save costs and raise your credit score if you’re managing several high-interest credit card accounts.
Make sure you take the long-term interest savings from debt consolidation into account. Certain debt consolidation loans have longer repayment terms, which lower your monthly payments but result in higher interest over time.
Maintaining and Protecting Your Credit Score
Once your credit is good, you should maintain it and see further increases in your score. Your credit score will frequently continue to rise after you’ve proven your creditworthiness and developed sound financial practices. Maintaining a healthy credit score requires sticking to a budget and having reasonable debt levels.
Your credit score will keep rising as long as you have a track record of making your credit card payments on time and maintaining modest balances. When credit card issuers believe that you can be trusted to pay back debt, they may automatically raise your credit limits, further improving your score.
Having good credit takes time to establish. You may make 2024 the year your credit score really shines if you remain committed and take small measures.
Frequently Asked Questions (FAQs) About Credit Scores
What are the most efficient methods for raising your credit score?
Increasing your credit limit, paying off your revolving credit balance, and disputing false information are typically the fastest strategies to raise your credit score.What is the mean score for credit?
As per Experian, the 3 FICO credit score is 714. A credit score of 714 is in the FICO “good” score range.How many people’s credit scores are 800?
About 21% of adult consumers possess a FICO score of 800 or more, which is regarded as “exceptional” credit. The percentage of this generation with late payments on their credit reports is under 6%. This group’s average credit utilization is 11.5%.