Finances

An easy guide to understanding credit scores for beginners

Thinking about the importance of having a healthy financial life, we made this guide to credit scores. This can be crucial in the matter of getting a new credit card or loan to accomplish your plans.

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Learn what is a good credit score and how to get there!

Learn all you need to know about credit scores. Source: Adobe Stock.

If you’re considering applying for a credit card or loan, this guide to credit scores is your first step. That is because your credit score is an essential requirement for almost all of them.

Many people don’t have any idea of how credit scores are calculated. You have to understand it to build a good or excellent one for yourself.

Having a healthy relationship with credit and finances will give you opportunities. A good credit score can help you achieve your dreams. Are you interested in this topic? Would you like to know how your credit score is built and how to improve it?

So stay here at The Credit Stacker. We have a guide for you. Keep Reading.

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What is considered a good credit score?

The first thing to know is that more than one credit score model exists. Also, there are more than one credit bureaux. There is no way to predict which one will be used, but they have close standards.

For example, at FICO, a good credit score ranges from 670 to 739. At VantageScores, it is called “fair” and goes from 601 to 660. We’ll tell you more about these levels in this guide to credit scores.

But above these numbers and names, a good credit score reflects responsible utilization of your credit. If you pay your credit cards and loans with no delays, always on time, you’ll have a better credit score.

If you have many credit accounts and always stay too close to your limits, you may lower your credit score. That’s because it will send the message that you’re frequently with financial problems.

The five major factors that compose your credit score are:

  • Payment history.
  • The amount owed (how much of your total credit limit you are using).
  • Length of credit history.
  • New credits, especially the more recent ones.
  • Credit mix (having different types of credit accounts).

The exact math of this score is not known, but if you pay attention to these factors, you’ll guarantee a good one.

5 levels of credit scores: what is it?

guide to credit scores
Check out what are the credit score levels. Source: Adobe Stock.

The credit score goes from 300 to 850. It is divided into five levels. Usually, the credit companies will demand a certain level, not an exact number.

They have different names and ranges at FICO and VantageScores. This may sound confusing (it is!), but we’ll put them side-by-side for you in this guide to credit scores.

These are the levels you can get:

Excellent

The name of this category is unanimous. At FICO, it goes from 800 to 850. At VantageScores, it goes from 781 to 850. This level will get you everything you want regarding lower interest rates and higher credit limits and loans.

Very Good or Good

This is also a desirable level. At FICO, a “very good” score goes from 740 to 799. At VantageScore, “good” means you have something between 661 to 780. Here you’ll have great chances to be approved too.

Good or Fair

The middle-range. At FICO, “good” equals 670 to 739 points. At VantageScore, Fair credit score is between 601 to 660. This level will give you access to some good credit cards and loans, but the premium ones. You’ll face slightly higher interest rates too.

Fair or Poor

FICO is more generous here, calling it a “fair” credit score. It means you are at 580 to 669. VantageScores calls it a “poor” credit score, the one that goes from 500 to 600. You’ll have a hard time getting reasonable offers with this one.

Very Poor

This is the bottom line, and you can’t go lower than this. FICO considers it from 300 to 579, and VantageScore, 300 to 499. Unfortunately, this credit score will let you in a bad situation. You get offers with really high-interest rates because lenders will see you as a considerable risk to them. We know you are not, but the numbers aren’t helping you here. It would be best if you improved it. Another option is to get a secured card that requires a cash deposit that equals the credit limit.

Maybe you don’t know how to do it. But don’t worry, we will tell you how. Keep reading to get these tips.

A guide on how to improve your credit scores

So, how to improve your credit score? Source: Adobe Stock.

Pay attention to these tips. They will help you to improve your credit score:

Lower your credit utilization percentage

This method can give you results in a short time. Pay your credit card frequently, don’t wait to pay it at once. This will keep your utilization rate far from the limit and improve your credit score.

Pay your debts

Payment history can make up to 35% of your credit score, so it is a huge factor. If you can make an effort to pay your debts, this will increase a lot your credit score.

After that, stay consistent with your payments. Remember to pay for everything on time. Otherwise, you’ll have debts on your history again. Keep a monthly track of your bills, or even put them on automatic debit on your bank account if you can. This will keep you from forgetting then.

Avoid frequently asking for new credit accounts

Each time you ask for a new credit card or loan, the company will inquire about your credit score. If they see a lot of recent inquiries, they will see it as a red flag. Banks will think you are facing financial problems, which will lower your credit score. You need to have a good strategy of which ones you’ll ask for, why, and when.

Have you enjoyed this content? We have a lot more here at The Credit Stacker. Remember to keep educating yourself about personal finances. This will make a tremendous difference in your financial life. Check the following article to learn more.

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