In working with consumers related to life insurance coverage many applicants are surprised to learn that insurance companies routinely check credit and credit scores as part of the standard underwriting process.
This often brings up questions about personal credit and scores such as...
What is a good credit score? How can I check my credit score? Or… How can I improve my credit score?
These and other similar questions are understandable given the complicated nature of personal credit and credit scores. This article, Credit Scores: What is a good credit score? provides a basic overview of credit score basics, answers the question of what is a good credit score, discusses credit score indicators, and provides helpful credit tips.
Credit Score Basics
If you have ever tried to get a mortgage, take out a loan for a vehicle, or finance a piece of furniture; then you were likely faced with the importance of good credit.Having good credit can lead to better interest rates, higher lines of credit, and increased buying power.
Improving your credit score is a common goal for many people. However, you might be asking yourself, “What is a good credit score?” and “How can I make mine better?”
In the simplest terms, a credit score is a specific number that is earned by each person to assess their risk level for potential lenders. There are three major crediting bureaus that compile credit scores: Equifax, Experian, and TransUnion. Each bureau evaluates scores in their own unique way and the scores are not shared between the bureaus.
Scoring is based on two main methods, the FICO method and the Vantage method. FICO is the most common and is the method we will be going into detail on. However, a lender could choose to use either method, so it is important to know and understand both.
Additionally, large lenders can calculate their own custom score. They do this by taking your base score from one of the major crediting bureaus and applying their own risk factors and statistics. This means one person can have many different scores depending on where it is being pulled from, the scoring method used, and the loan type.
What is a good credit score?
As with most things, “good” is a relative term when it comes to credit scores and depends upon your individual financial goals and objectives.
In other words, if you are applying for a home mortgage you will likely need a significantly higher credit score that if you are setting up cell phone service.
An individual's FICO credit score can span from 300 to 850, the scores are then placed in a range from Very Poor to Exceptional:
- Very Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800-850
According to Experian, “for a score with a range between 300-850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent.”
Checking Your Credit
It is important to check your credit score consistently. At least a few times a year, but monthly is better. This will allow you to see significant positive or negative changes.Staying familiar with your credit score can also expose any red flags that might indicate identity theft or fraud.
It is important to note that checking your own credit score does not harm it. This is a common misconception and it prevents people from checking their score enough. Just make sure you are pulling directly from the credit bureaus or another reputable source.
The website AnnualCreditReport.com is a resource sponsored by Experian, TransUnion, and Equifax offering free credit reports from each respective reporting agency annually. So, if you request a free credit report from a different agency each quarter you could essentially monitor your credit and scores year-round. There are also paid credit monitoring services which allow 24/7 access to credit information, alerts, and other services.
Credit Score Indicators
If your credit score is lower than you would like, trying to bring it up can seem overwhelming, if not outright impossible.
However, it’s important to understand that credit scores are fairly complex, and even small changes can have a big impact.
Payment History (35%)
Making payments on time is one of the easiest ways that you can improve your credit score. Not only is it the highest weighted, you can start affecting it with your next payment. Showing lenders that you can make payments on time is crucial for determining your credit worthiness. If you miss a payment, it is still important to make it as soon as possible. Lenders report missed payments after 30, 60, 90, and 120 or more days late.
***Tip: Even if you are only making the minimum payment, make it on time every month. If you find that you are simply forgetting to make payments, try setting up an automatic disbursement so the payment is always released on time.
Amounts Owed (30%)
Using credit for purchases doesn’t automatically make you high risk. In fact, you must use some credit in order to have a credit score. However, using a large portion of your available credit can make you seem over-extended. This can be concerning for lenders and could prevent them from offering additional credit in the future.
***Tip: Work towards building your available credit slowly and try to avoid maxing out credit cards early on. Credit card companies will typically extend your credit limit once you prove you are a responsible borrower. As your line of credit is extended, you will have the flexibility to charge more without it impacting your amount owed ratio.
Credit History (15%)
This factor can be a little frustrating, especially if you are new to the credit world. To determine your length of credit history, lenders use the age of your oldest account and the age of your newest account to calculate an average. Luckily, if you make your payments on time and don’t over-extend your credit amount owed, you can still have a good credit score even with a short credit history.
***Tip: Research the best types of credit for your situation and find solutions that you will want to stick with. Once you have found credit options that work for you try to avoid frequently opening and closing accounts.
Credit Mix (10%)
To get the highest credit score you need to have a variety of credit types. This is another factor that might take time to build towards. As you continue to improve your credit score, look for ways to vary your credit. This could be done by taking out a mortgage, car loan, retail loan, or credit cards.
***Tip: If you want to improve your credit mix with limited risk, consider 0% interest credit promotions. Many retailers will offer these promotions on large purchases such as home appliances, electronics, and even tires. While interest bearing loans on your home or car might be unavoidable, using 0% interest lines of credit are a great way to improve your score without paying a ton in interest. Just remember to always pay off the full balance before the promotion ends to avoid penalties and accrued interest.
New Credit (10%)
Before you sign up for a bunch of new credit cards or loans to try to improve your credit mix, remember that lenders are also looking at your new credit balance. This refers to the amount of new accounts that you have opened recently. Having a slew of new credit inquiries all at once is damaging. Opening a new account can also hurt your length of credit history since it impacts the average of your oldest account and the newest account.
***Tip: Try to plan for big purchases and space them out if you are accessing a new line of credit. However, you will need to continue taking out new accounts to grow your credit score. So, don’t let the fear of new accounts prevent you using any credit, just be mindful when making decisions.
If understanding and improving your credit score still seems overwhelming, remember that nothing will change overnight. Try not to obsess about your credit score or scrutinize every credit-based decision you make. If your score goes down a few points, give it some time before making any major changes. Your score will likely fluctuate from time to time. However, if you follow best practices and make decisions with your credit score in mind, you will see improvements in the longrun.