Given the influence credit scores have on our lives, it may seem impossible that improvements can be made in just 30 days. Truth be told, members of the community who want to qualify for a car loan or mortgage can make significant credit score improvements relatively quickly. Your credit score ebbs and flows based on repayment history, credit utilization, income, and other wide-reaching factors. By knowing how a credit score is determined and how to make positive changes, it is possible to raise your credit score significantly in 30 days.
- Understanding Your Credit Score
- What is a Good Credit Score?
- How a Credit Score Impacts You & Your Family
- What Credit Score is Needed to Buy a House?
- What Credit Score is Needed to Buy a Car?
- How to Access & Read Your Credit Report
- How to Build Credit
- How to Improve Your Credit Score [12 Step Checklist]
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Understanding Your Credit Score
Everyday people usually think about their credit score in terms of borrowing power. Beyond the current credit score number, the fine details rarely matter to consumers. It may come as something of a surprise, but the more you know about the metrics involved, the better your chances of successfully raising your credit score.
A credit score usually refers to someone’s “FICO Score,” and it usually involves a number ranging from 300 to 850 that indicates your creditworthiness. Consumers do not necessarily apply to one of the three major reporting organizations to have a number assigned. Rather, this occurs organically as you take out loans, accept credit card offers, and repay these outstanding or ongoing debts.
Beyond debt repayment history, organizations that determine your credit score also look at debt-to-income ratios, the number of active accounts, and other factors. Based on these, credit bureaus project a lower credit score number for people with poor creditworthiness and a higher credit score number for those who repay debts on time, have appropriate debt to income ratios, and have enough experience handling debt correctly to prove creditworthy.
What is a Good Credit Score?
It’s important to understand that lenders have different loan qualifying criteria. Local credit unions typically offer highly competitive rates and are known to work especially hard to help community members, even those with less than perfect credit. That being said, the sometimes subtle differences between qualifying for a car loan, mortgage, or low-interest credit card can prove complicated. The practical answer to “what is a good credit score” rests on the lender’s criteria. Many lending institutions rank credit score criteria like the following.
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very Good: 740 to 799
- Excellent: 800 to 850
Lenders generally consider people with a credit score of 670 or higher as low-risk borrowers. Those with lower scores under 670 may be viewed as “subprime borrowers” and be subject to higher interest rates and less flexible repayment terms. The higher your FICO score, the more likely you are to qualify for low-interest loan products. That’s why understanding the details about how to build credit and increase your FICO score are crucial to you and your family’s financial health and wellness.
If you are looking for a more in-depth explanation of credit score ranges, review our blog, "What is a Good Credit Score? Credit Score Range Explained".
What is a FICO Score
The Fair Isaac Corp introduced the FICO score in 1989 as a way to quantify consumer creditworthiness. The terms “FICO score” and “credit score” became relatively interchangeable despite other organizations issuing different brands. The majority of FICO scores follow the 300 to 850 range, with some industry-specific scores starting as low as 250 and peaking at upwards of 900.
But for practical purposes, a consumer who wants to know how to build credit and increase their FICO score may be best served by understanding how the number is calculated. These are the baseline factors that influence your FICO score.
- Repayment History: The three major credit reporting agencies typically base 35 percent of your FICO score on repayment history. This ranks as the largest quantifiable portion of the equation.
- Debt Relative to Credit Limits: How much you borrow against existing credit limits also plays a large role. Credit reporting outfits assign a 30 percent value to credit usage when determining a FICO score.
- Age of Accounts: The average age of your accounts and length of time you’ve established credit has a 15 percent influence on your FICO score.
- Credit Applications: When people apply for loans or credit cards, a “hard inquiry” or “hard pull” is made on your history. These pulls on your credit score account for 10 percent of the calculation and can negatively impact a FICO score for up to six months.
- Forms of Credit: Approximately 10 percent of a FICO score involves the mixed type of accounts. Usually considered a positive, possessing credit cards, revolving lines of credit, and level repayment loans such as a mortgage indicate robust and diverse financial health.
When researching your credit score, it’s not unusual to discover the three major reporting bureaus issue slightly different FICO scores. That’s largely because Equifax, Experian, and TransUnion sometimes work from different reporting data. A local lender may weigh one credit reporting bureau’s FICO score more favorably than another or consider an average. But regardless of how lenders use their discretion, a fico score has a significant impact on you and your loved ones.
If you are looking for a more in-depth explanation of the difference between a FICO score and a credit score, review our blog, "What is a FICO score? FICO Score vs Credit Score".
How a Credit Score Impacts You & Your Family
The idea that simply a number generated by people at a credit bureau you have never met could profoundly impact your family seems counterintuitive. Believe it or not, the purely mathematical decisions made at Equifax, Experian, and TransUnion can prove incredibly personal.
Consider a scenario in which you need to borrow a substantial amount of money to cover the costs of a family member’s surgery. Imagine your children require braces, and you don’t have adequate dental coverage. What would you do if illness or injury sidelined the family’s primary wage earner for months?
These heightened scenarios would likely task you with securing a personal loan or home equity loan to cover the expenses. But a subpar credit score could result in you not qualifying for a standard loan product. If the credit bureaus assign a poor FICO score, you may have to borrow an extremely high-interest loan product because lenders see you as a lending risk.
It may be relatively easy to shrug off seemingly rare or extreme situations that theoretically put families in difficult positions. But those same principles hold true for ordinary borrowing practices as well such as qualifying for a mortgage or car loan. Higher credit scores mean lower more affordable borrowing options.
In addition to higher interest rates and limited loan solutions, low credit scores can impact other aspects of daily life including rental applications, job opportunities requiring financial management skills, and mobile phone contracts.
What Credit Score is Needed to Buy a Car?
A strong connection between your credit score and car loan opportunities exists for all lenders. Knowing your FICO score and discussing it with a loan professional before applying for the car loan is essential. You want to maximize your credit score to not only qualify for a car loan but also enjoy the best possible interest rate and repayment terms. These are things working families need to know when applying for an auto loan.
- Average Scores: When purchasing a pre-owned automobile or leasing a car, the average credit score hovers around 665. Families who secure loans for new vehicles typically possess scores of around 732.
- Car Loan Financing: Nearly two-thirds of all car loan borrowers enjoyed a credit score of approximately 661. Family members in the 501 to 600 range accounted for one-third of all auto loans. Only 2 percent of people with a FICO score under 500 typically secure a car loan.
A modest or relatively low credit score may not necessarily prevent families from qualifying for a truck, SUV, or car loan. Some lenders offer increased flexibility when large down payments and sound repayment histories are involved. What credit score is needed to buy a car may be a relative question, to some degree. But the relationship between a FICO score, interest rates, and repayment terms has a direct and discernable financial effect on you, your budget, and your paycheck.
For tips on how your credit score impacts your monthly car payment, review our blog, "What Credit Score is Needed to Buy a Car?"