Lenders use credit scores to help assess the level of risk associated with borrowers, and some employers, landlords, and insurance companies also use them when making decisions about job applicants, potential tenants, or policyholders. When it comes to applying for a mortgage, a car loan, a credit card, or any other loan, your credit score can save you money if it is high or cost you money if it is low. Understanding your score is the first step to improving it if necessary or maintaining it if it already is healthy.
What It Means
Credit scores range from 300 to 850. The higher your credit score, the better your credit is. Some credit scoring models may use a slightly different range, but higher scores will always be better. In general, credit scores fall on the following range:
- Above 750: excellent credit
- 700–750: good credit
- 650–700: fair credit
- 600–650: bad credit
- Below 600: very bad credit
High credit scores mostly represent a history of paying bills on time and using available credit responsibly while avoiding major credit blunders. Lenders offer the best rates and the most perks to borrowers with the highest scores because they are low-risk. Borrowers with lower scores carry more risk for lenders, resulting in higher interest rates if they get approved.
A history of missed payments impacts credit scores negatively as does carrying high credit card balances. Defaulting on loans can drop score hundreds of points to a level where lenders are unlikely to approve an application, regardless of terms.
Good credit offers the option to be approved for credit cards with lower interest rates than typical cards and perks in the form of cash back or discounts on specific types of purchases. However, using credit cards irresponsibly can be a quick way to damaging your credit. Nearly one-third of your credit score is based on credit utilization, which measures how much of your available credit you actually use. For example, if you have three credit cards with $3,000 limits each, you have $9,000 of available credit. If the total of the balances you are carrying amounts to $2,700 or less, 30% of $9,000, you should be in good shape.
Carrying balances greater than 30% of your available credit is viewed as poor utilization of your available credit, while keeping your total balances below that mark is viewed as responsible use of your credit. One of the quickest ways to improve your credit score can be to pay down your credit card balances and keep them at an acceptable level.
Tips for Responsible Credit Card Use
- NO INTEREST: Pay off your balances every month to avoid interest charges. Credit card rewards are of little value if you are paying more in interest than what the rewards are worth.
- NO BORROWING: Use your cards only for purchases you could afford with cash. Think of your credit cards as conveniences and not as sources for easy loans.
- EMERGENCIES ONLY: Maxing out credit cards eliminates one of the key benefits they offer: the ability to pay for unexpected car repairs, medical bills, necessary travel, and more.
Getting Your Credit Score
You can order your credit score, which is based on information from your credit report, from a variety of sources. First, you can check your credit score for free through services like CreditKarma.com, CreditSesame.com, Quizzle.com, WalletHub.com, and LendingTree.com. Some banks, credit unions, and credit card issuers make your credit score available either on your billing statement or online. Finally, you can purchase your full credit report from any of the major credit bureaus: Equifax, Experian, and TransUnion.
When you order your credit score, all you have in front of you is a number. To help you understand your score, many companies that provide your credit score also will include a gauge that helps you read your credit score. That gauge helps you figure out whether you have good or bad credit and the factors that influence your credit score. For example, if your score is being dragged down by late payments, the service might highlight this fact so you can see why it is lower now than it was several months ago.
Conversely, something good might help your score, and the service will highlight that fact, too. Maybe you paid down your credit card debt enough to improve your score. By monitoring your credit score regularly, you can learn what actions push it higher or cause it to drop.