What is a good Credit Score?

It’s difficult to get exact answers to this important question. Every expert, credit bureau, and loan officer has a different opinion as to where the threshold between good and poor credit lies. In addition, “good” can be a relative term. Do we mean “good” as in excellent, or “good” as in “good enough”?You can start by comparing your score to national averages. According to FICO, the following proportions of consumers have scores in the following ranges:

• Up to 499: 2%
• 500-549: 5%
• 550-599: 8%
• 600-649: 12%
• 650-699: 15%
• 700-749: 18%
• 750-799: 27%
• 800-850: 13%

You can see that over 50% of the population has a credit score over 700, with 42% scoring below that level.

Lower credit scores aren’t always the result of late payments, bankruptcy, or other negative notations on a consumer’s credit file. Sometimes, a consumer who doesn’t have enough information on his/her file will have a low score. This can happen even if you had established credit in the past; if your credit report shows no activity for a long stretch of time, items may ‘fall off’ your report. (This is because your credit score must have an update provided by your creditor within the past six months; if you creditor stops updating an old account you don’t use, it will disappear from your credit report and leave FICO with too little information to calculate a score.)

Similarly, consumers new to credit will have no established credit for FICO to use when calculating a risk score. If there is just a little bit of information, you may get a score, but it may be low. This low score wouldn’t be because you made any mistakes, but because you are considered a risky borrower because the credit bureaus don’t know enough about you.
Let’s explore the numbers. Credit scores range from 300 to 850, with higher scores being better. Here’s a rough guide to what various score ranges mean:

300-550: Poor credit. It is generally accepted that credit scores below 550 are going to result in a rejection of credit every time. If your score has fallen into this range, you need to work to improve your score. Often a bankruptcy filing will bring a score down to this level; over time, the score will improve if you make your payments on time, every time. Statistically, borrowers with scores this low are delinquent approximately 75% of the time.

550-620: Subprime. It’s possible to get credit in this range, but not guaranteed. If you do get a loan, it will be at very disadvantageous terms: you will pay much higher interest rates and penalty fees. In this range it is worthwhile to address any specific credit problems you have and try to boost your score before applying for credit. In this range, borrowers typically become delinquent 50% of the time.

620-680: Acceptable. Scores in the mid 600’s mean you will most likely be given credit when you apply for it. You still won’t get the best interest rates, but borrowers with scores over 620 are considered less risky and are therefore likely to be approved. In this range, borrowers can expect to qualify for a prime rate. Traditionally, “Prime” loans could be easily sold to Fannie Mae or Freddie Mac. Delinquency rates in this range are between 15 and 30%.

680-740: Good credit. Scores around 700 are considered the threshold to “good” credit. Borrowers in this range will almost always be approved for a loan, and be offered very good interest rates. At this credit score, lenders are comfortable with the borrower, and the decision to extend credit is much easier. According to FICO, the median credit score in the U.S. is in this range, at 723. Borrowers in this range are only delinquent 5% of the time.

740-850: Excellent credit. Anything in the mid 700’s and higher is considered excellent credit, and will be greeted by easy credit approvals and the very best interest rates. In this high-end of credit scoring, extra points don’t improve your loan terms much. Most lenders count a credit score of 760 as just as good as a score over 800. Some people take this to mean that it’s not worth the effort to continue to improve your score after you get into this range, but as always, the higher your score, the better. Even if an extra 50 points in this range doesn’t help you get a better interest rate on your next loan, they can serve as a buffer if you have a negative item show up on your report (maxing out a credit card can penalize you 30-50 points. If your score is near 800, the resulting damage won’t push you down into a lower tier). The delinquency rate in this range is approximately 2%.

Of course, different lenders have different standards, and your experience may vary. You may have a high credit score, but a negative public record on your credit file may hurt your chances of getting a loan. And remember, while credit scores don’t take your income into account, lenders will, and if they feel you simply can’t afford the loan you’re applying for, they won’t approve you no matter how good your score.

So you can see that getting to a score in the mid 600’s might enable you to qualify for credit, but a score of 680 or above is the threshold for “good” credit. And if you can get your score up to the mid 700’s, your credit will be considered excellent, and you will have few worries when it comes to qualifying for credit at favorable rates.

Credit Repair Complaints

If you think consumers are filing countless complaints against credit repair scams, you’d be mistaken. According to the Federal Trade Commission’s 2011 Sentinel report, credit repair complaints make up no more than 3% of the complaints to the FTC, the FBI’s Internet Crime Complaint Center, the Better Business Bureau, the US Postal Service, the Canadian Anti-Fraud Centre and several state agencies.

And even for that report, credit repair was lumped together with advance fee loan scams and credit card balance protection services. An advance fee loan scam is a promise of a loan or credit card that requires you to pay a fee in advance. Credit card balance protection is quasi-insurance that purports to pay your credit card balance if you lose your income. Point being, the 3% of complaints isn’t all credit repair specific considering with it’s being paired with.

Pay down credit cards not pay off! Here is why!

Did you know that payog off a credit card tells the credit card holder you no longer want the card and after lets say 30-60 days of inactivity the credit card holder will cancel your card. Which will hurt your credit.  When paying off debt here are the do's and don'ts:

Do:

• Pay the balance down to 15% of the credit line.

• Do use the card every month.

• Revolving cards are interest hogs and while you are trying to bump your score you need their reporting capabilities.

• Pay on time.

• Ask for a goodwill adjustment on any past negative late payments or overage charges such as late fees and or over credit line balances.  These little marks stay on your credit for 2 years hurting your overall score.  Creditors love helping current customers who are on time and have been for at least 4-6 months. 

• If they offer you a credit line increase take it.  This will reflext positvely on your credit and will bump your credit score.  

DONT's

• Pay off completely.  Unless it was an installment you were paying the same amount on each month.  How do you tell the difference on installment and revolving?  Explained below. 

• Close revolving account(s).  Your credit scores are determined by a mix of open and revolving credit by closing accounts your scores can no longer use the once opened accounts to calculate your scores and therefore if you closed all of your once opened revolving accounts will drop your credit scores drastically. 

• Transfer balances within 2-4 months prior to applying for a mortgage. This is very damaging and can hurt your scores.  The old creditors may not display the accounts correctly as closed or paid and could show that you are over extended credit wise and drop your scores.  

• How much credit were you given? 
• How much of that have you used?
• In what time frame have you used up the credit line?
• Have your payments been timely?

Look at it this way:

These are the things that determine a credit score.  

Installment Credit:

Perhaps the most distinguishing features of an installment credit account are a predetermined length and an end date, which is sometimes referred to as the term of the loan. The loan agreement usually includes an amortization schedule, in which the principal is gradually reduced through installment payments over the course of several years.

Common installment loans include mortgages, auto loans, student 

loans and private personal loans. With each of these loans, you generally know how much your monthly payment is and how long 

you will be making payments. An additional credit application is required to borrow more money.

Installment credit is considered to be less dangerous to your credit score than revolving credit.

Revolving Credit:

Credit cards and lines of credit are two familiar forms of revolving credit. Your credit limit does not change when you make payments on your revolving credit account. You can return to your account to borrow additional money as often as you want, as long as you do not exceed your maximum.

Because you are not borrowing a lump sum when the account is opened, there is no set payment plan with revolving credit. You are merely being granted the ability to borrow up to a certain amount. However, this flexibility often results in lower borrowing amounts and higher interest rates. Unsecured revolving credit account interest rates often range around 15-20% or more. The interest rate is rarely locked in, and creditors have the right to increase your rate if you fail to make payments.

Revolving credit is considered a more dangerous way to borrow than installment credit.  Carrying high balances drags down your score.

Paying down credit card debt may be the most actionable way to improve a credit score. 

Why are my all of my credit scores all different? Ugh!!!

  I get asked this question time and time again...

In the U.S., there are three national credit bureaus (Equifax, Experian and Trans Union) that compete to capture, update and store credit histories on most U.S. consumers. While most of the information collected on consumers by the three credit bureaus is similar, there are differences. For example, one credit bureau may have unique information captured on a consumer that is not being captured by the other two, or the same data element may be stored or displayed differently by the credit bureaus.

A predictive FICO scoring system resides at each of these credit bureaus from which lenders request a FICO® Score when evaluating a particular consumer’s credit risk. The FICO scoring system design is similar across the credit bureaus so that consumers with high FICO Scores on bureau “A’s” data will likely see a similarly high FICO Score at the other two bureaus and conversely consumers with lower scores at bureau “A” will likely get a low FICO Score at the other two bureaus when the underlying data is the same across the bureaus.

When the scores are significantly different across bureaus, it is likely the underlying data in the credit bureaus is different and thus driving that observed score difference. However, there can be score differences even when the underlying data is identical as each of the bureau’s FICO scoring system was designed to optimize the predictive value of their unique data.

Keep in mind the following points when comparing scores across bureaus:

• Not all credit scores are "FICO" scores. So, make sure the scores you are comparing are actual FICO Scores.
• The scores should be accessed at the same time. The passage of time can result in score differences due to model characteristics that have a time based component. Comparing a score pulled on bureau “A” from last week to a score pulled on bureau “B” today can be problematic as the “week old score” may already be “dated”.
• All of your credit information may not be reported to all three credit bureaus. The information on your credit report is supplied by lenders, collection agencies and court records. Don't assume that each credit bureau has the same information pertaining to your credit history.
• You may have applied for credit under different names (for example, Robert Jones versus Bob Jones) or a maiden name, which may cause fragmented or incomplete files at the credit reporting agencies. While, in most cases, the credit bureaus combine all files accurately under the same person, there are many instances where incomplete files or inaccurate data (social security numbers, addresses, etc.) cause one person's information to appear on someone else's credit report.
• Lenders report credit information to the credit bureaus at different times, often resulting in one agency having more up-to-date information than another.
• The credit bureaus may record, display or store the same information in different ways.

Credit Scores, what are they, and how did they come about?

Credit scorecards are mathematical models which attempt to provide a quantitative estimate of the probability that a customer will display a defined behavior (e.g. loan default, bankruptcy or a lower level of delinquency) with respect to their current or proposed credit position with a lender. Scorecards are built and optimized to evaluate the credit file of a homogeneous population (e.g. files with delinquencies, files that are very young, files that have very little information). Most empirically derived credit scoring systems have between 10 and 20 variables.^[1] Application scores tend to be dominated by credit bureau data which typically amounts to over 80% of the predictive power from closer to 60% in the late 1980s ^[2] for UK scorecards. Indeed there has been an increasing trend to minimize applicant or non-verifiable variables from scorecards which has increased the contribution of the credit bureau data.

Credit scoring typically uses observations or data from clients who defaulted on their loans plus observations on a large number of clients who have not defaulted. Statistically, estimation techniques such as logistic regression or prohibit are used to create estimates of the probability of default for observations based on this historical data. This model can be used to predict probability of default for new clients using the same observation characteristics (e.g. age, income, house owner). The default probabilities are then scaled to a "credit score." This score ranks clients by riskiness without explicitly identifying their probability of default.

There are a number of credit scoring techniques such as: hazard rate modeling, reduced form credit models, weight of evidence models, linear or logistic regression. The primary differences involve the assumptions required about the explanatory variables and the ability to model continuous versus binary outcomes. Some of these techniques are superior to others in directly estimating the probability of default. Despite much research from academics and industry, no single technique has been proven superior for predicting default in all circumstances.

So You Repaired your credit? Now What?

Once you’ve gotten your credit established, you can’t just set it and forget it. If you’re ready to amp up your score by 100 points or more, here’s what you need to do next.

1. Wipe out your credit card balances

The fastest way to send your score shooting up is to pay off your credit card debt. Carrying too much debt drags down your credit utilization, which means how much of your total credit line you’re using.

The lower your balances are, the better where your score is concerned.

2. Ask for more credit

Aside from paying down your credit you can also improve your credit utilization by asking for a limit increase. This is tricky, however, since your credit card company might want to pull your credit report before they approve you.

Every time a lender checks your credit it knocks a point or two off your score so you want to avoid a new inquiry if you can.

3. Keep your accounts open

Once you pay off your cards you might think of just closing them for good but that could be a mistake. The older your account history is, the better your score should be so you may want to consider keeping old accounts open and active.

Use your card every once in awhile and then pay it off to keep the account active.

4. Slow down on new credit applications

Every time you apply for a new card, a new inquiry hits your credit report and your score drops by a few points.

To keep your credit score from slipping too much, scale back on how often you open new accounts.

Bad Credit, Good Credit, No Credit, Which are you?

When it comes to credit, most people fall into one of three groups. You’re either trying to build credit for the first time, maintain your existing credit score or bring bad credit back from the brink.

Regardless of what your goal is, you’ve got to have a solid plan for reaching it.

Here is a a road-map for every stage of the way so read on to find out how to get there. Regardless of what your goal is, you’ve got to have a solid plan for reaching it. 

Before you start with the road map, the first thing to do is to monitor your credit score regularly and review the credit report summary to understand factors and behaviors affect your credit score.

To build your credit score, you need to get some credit but if it’s early in the game your options might be limited.

Here are four ways you can get the ball rolling:

1. Try a Credit Builder Loan

A credit builder loan is a short-term loan that you can use to establish credit. These loans are offered by banks and credit unions and they’re typically for a small amount, usually no more than $1,000.

Instead of actually getting the cash in hand, it’s parked in an interest-bearing account. Once you pay the loan off, you’ll get the money back along with any interest earned. Not only that, but you’ve also built up a positive payment history in the process.

2. Get a Secured Credit Card

A secured credit card is a stepping stone to building credit. With this kind of card, you have to put up a cash deposit to get a card.

You can use a secured card to build credit, but they’re not hassle-free. These cards tend to charge higher interest rates and fees compared to a traditional credit card so you need to make sure to review the rates and costs carefully before you settle on one.

3. Ask to Be an Authorized User aka Piggy-Backing

An authorized user is someone who has charging privileges on someone else’s credit card account, like a parent or a spouse. You get your own card with your name on it and you can reap some positive credit benefits even if you don’t use it.

The reason? The original cardholder’s account history for the card will get transplanted onto your credit report. If they’ve always paid on time and kept the balance low, it’ll help to bump up your score.

4. Open a Store Credit Card

If you’ve ever been shopping at a major retailer you’ve probably been offered a store credit card at some point. These are cards that are branded to specific stores like Macy’s or Target.

These cards have some drawbacks, since they usually have higher APRs and lower credit limits, but they’re great for newbies who are trying to build credit. It’s usually easier to get approved for a store card, even if you have a lower credit score.

The fact that you have limited charging power is also a plus since it keeps you from getting in over your head with debt. Just remember to pay your card off in full each month so you don’t get gouged on the interest.