A lot of people don’t know what a good credit score is, so I wanted to talk about what is a good credit score and more importantly, how do you get a good credit score!
The first thing you need to know is that most credit scores are based on FICO’s rating of credit.
According to FICO, a good credit score is a score between 700-749. Anything above this would be considered great credit to excellent credit.
If you ever checked your credit score and you noticed you fell in the range of 700-749, then you now know you fall into the good credit score range.
Anything below a rating of 700-749 would be considered “fair” credit and life will start to become a little more difficult when you try to get loans for reasonable rates. You should still be able to find loans and borrow money if you fall into the “fair” category, but it will typically come at a higher cost to you in terms of higher interest rates.
Generally speaking, the higher your credit score, the lower interest rate you’ll get. And the poorer your credit score, the higher the interest rate you’ll receive. People who lend money know that people with worse credit are more likely to not pay back their loans. And lenders need to compensate for this by lending people money with higher interest rates to cover the higher risk of that person not paying back their loan.
It’s how the credit and lending industry works. It’s kinda like car insurance where people who are prone to get into accidents will have higher insurance rates because they tend to drive more recklessly.
How Do You Build A Good Credit Score?
Building a good credit score is actually pretty easy. A lot of people have bad credit because they have bad behaviours and make really poor lifestyle choices. Maybe they simply weren’t taught how to use credit properly or they simply cannot control themselves.
All I can share with you today are some fool proof ways to build a good credit score quickly. As long as you keep up the good habits you should notice your credit score increase a little bit every few months or so. It’s something that simply just takes time. Time and good habits = great credit score in a few years (depending on where you start).
Here are my top 5 tips for getting a good credit score:
- Pay your bills on time always – This is the biggest factor in determining your credit score. You MUST pay your bills on time. Every time you miss a payment, it gets recorded and you get a little ding on your credit report. Your credit report has a list of all the credit types you have and the history of how you have been paying them back. Every time you miss a payment, you get a little ding for that month on it. Too many missed payments means too many dings on your credit report. And if you constantly miss payments on many types of credit related bills, your credit score is probably going to be really horrible.
- Pay your bills in full – You want to get into the habit of paying your entire bills as well. I know sometimes you can’t because you don’t have enough money. That’s fine. Then make sure you pay the minimum balance then. For example, your credit card statements will tell you what your minimum balance due is. If you simply cannot pay your credit card this month, then at least pay the minimum balance. As far as I know, this is better than missing the payment entirely. Along with paying your bills in full, especially revolving credit like credit cards, you will keep your credit utilization rate low, which is another big factor in determining what your credit score is.
- Have a variety of credit – When you’re starting off, I recommend getting credit cards to begin building credit. After you get a little bit older and already have a few credit cards, you can move on to getting other types of loans, like a line of credit or an instalment loan for a vehicle perhaps. These other types of loans will help show lenders you are responsible with many types of loans and it will diversify the types of loans you have – which should help increase your credit score. I did take out a large line of credit before just to have it. I don’t use it. It kinda just sits there. But the nice thing is it is a piece of credit on my credit report that shows I have different types of loans and I am not being irresponsible with it. I don’t recommend taking out loans for the sake of building credit, unless they are revolving credit types (like lines of credit or credit cards) and you are sure you will be responsible with it.
- Use your credit every month – It’s not enough to just have credit to build credit. You need to actually use the credit you have. For example, if you had 3 credit cards, get in the habit of using all 3 credit cards each month. It doesn’t matter how much money you put on each credit card. It doesn’t matter how often you use each credit card. As long as you use each credit card at least once a month, and pay it back in full each month, you are building your credit score optimally. The credit bureaus don’t care about the amount that you charge on your card. All they record is if you used the card and if it was paid in full. So you could charge a movie on one card, pay it back using online banking, and that is all you need to do to maximize your credit score with that particular card.
- Ask for more credit – This is a bit of a weird one for most people, but if you have MORE credit available to you, you should see your credit score improve, as long as you aren’t abusing the extra limits. For example, if you had a $10,000 limit on a credit card, and you called your credit card company for an increase in credit limit, and they increased it to $15,000 limit, then the amount of available credit to you has increased by 5,000. And lets say you continue to keep spending money like your normally do, which is $1000 a month on this card. Well, the further away you are from your limit the better your credit score will be. Since you increased your credit score to 15000, your typical 1000 monthly spending is much further away then the 10,000 you had initially. This is called credit utilization. The lower your credit utilization (how much credit you use compared to how much is available to you), the better your credit score will be.
So those are some big steps you can take each month to get a good credit score. Eventually, as you gain a long history of responsible credit, and you get a mortgage and car loan and all that stuff, and continue to pay it back fully and on time, you will trend up into the Excellent credit score range, which is in the 800-850 range. In this range, you will get the BEST interest rates whenever you need to take out a loan, and it could also help you secure a bigger loan.
Again, all this building a good credit score stuff isn’t that hard. It just takes time and discipline. If you’re young right now, start smart and get yourself at least 1 credit card and start building that credit while your young. Remember, it takes time to build credit so you need to start as young as you can.
If you’re in bad shape credit wise right now, then it’s even more important to start building your credit back up again right now! Pay back your debts and loans the best way you know how. Just by beginning to pay back your debts on time and fully will begin to reverse your credit score. It takes time…. but be consistent with it and you should see great results!
If you have any questions about getting good credit scores, leave a comment below and I’ll help you out.