Credit scores are useful because all factors that affect your credit are distilled into one easy to understand number. However, credit scores are also complicated — it seems like the more you try to understand the ins-and-outs of credit, the more confusing it gets. Everyone wants a simple answer to this question: is my credit score good or bad? What might seem like a simple question requires a somewhat complicated, nuanced answer.
What is considered “good” or “bad” credit is actually up to individual lenders. The range of credit scores depends on the scoring system. For FICO, the most prevalent system used today, consumers are scored between 300-850 with a higher number representing a better score. Lenders use credit scores as a numeric assessment of your likelihood to repay a loan. Your score will affect not only whether your loan is approved, but also your interest rate. Due to the inherent risk of loaning money, lenders compensate for financial exposure through interest rates. While lenders might be tolerant of poor credit, a loan hinged on a subpar FICO score will usually come with a higher than average interest rate.
While “bad” credit is a subjective term, there is a general hierarchy for credit scores. According to Experian
, one of the three major credit reporting agencies, credit scores are classified like this:
- 800-850: Excellent
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 300-579: Very Poor
What factors affect credit?
Many factors contribute to a lender’s assessment of your creditworthiness. While there is a great deal of variability in scoring credit, the following five elements are the most significant contributors to a FICO score:
- Payment history (35%)—The lender’s primary concern is whether they will be paid back, and payment history is a direct indication of a borrower’s ability to repay a loan. For this reason, it is the most significant credit score contributor.
- Amount owed (30%)—Also known as credit utilization ratio, lenders weigh how much debt you have against how much available credit you have. The more unused credit you maintain, the better the impact on your score.
- Credit history (15%)—A long, proven history of successful borrowing is a good indication to lenders that you can handle a line of credit.
- New credit (10%)—Several new lines of credit can be a red flag that someone is struggling to make ends meet and must borrow a lot of money.
- Types of credit (10%)—Another minor, but still important, factor that plays into your score is the types of borrowing you have on your report. Lenders look for variety in borrowing patterns to verify you have experience in many different types of credit.
If you want to improve your credit score
, payment history or amount owed should be a primary focus. Together, these two elements determine more than half of your credit score and should be priority number one during credit overhaul.
That’s not to say that the other credit factors should be overlooked. While credit length, new credit, and types of credit only make up around 35 percent of your score, taking your credit to the next level requires attention to all credit factors. A coveted top 10 percent credit score cannot be achieved any other way.
Why is my credit so bad?
Other factors might be affecting your credit as well. Anything from late payments or loan default to identity theft can weigh down your credit. If you're unhappy with your credit score, consider the following factors:
- Hard inquiries—Every time you apply for a credit card, lenders will check your credit, dinging your score just slightly for up to a year. In moderation, this won’t significantly affect your credit, but many hard inquiries in a short period of time can make you appear desperate for money and might convince lenders that you’re unfit to borrow money.
- Identity theft—Over 13 million people a year are affected by identity theft, and unfortunately, much of this all-too-common crime goes unchecked. Whether you fall victim to a mass security breach or are specifically targeted by a crook, your credit score takes a fall when identity thieves go unchecked.
- Only having credit cards—Credit cards are a great starting point. For those new to borrowing, “starter” cards are affordable and approval is easy. However, as you advance on your credit journey, credit card payments alone won’t significantly boost your score. Lenders want to see variety on your credit report, so use credit cards as stepping stones to more substantial lending like small loans and eventually a mortgage.
The value of credit repair
When faced with the seemingly overwhelming task of improving your credit, many people settle for daydreaming and stop short of proactively repairing their credit. Don’t fear — there are easy, affordable ways to get your credit back on track
The first step toward better credit is a long, hard evaluation of your lifestyle. Are you living within your means? Are there any areas in life that need to be scaled back? Try to get to the root of how you developed poor credit by assessing your day-to-day spending, saving, and borrowing habits.
However, in some instances, poor credit isn’t even your fault. Items on your credit report may be misleading, or simply false, which will negatively affect your score through no fault of your own. That’s when professional credit repair is especially helpful.
Whether your credit score needs a little attention or major repair, the best thing you can do is be proactive. Rome wasn’t built in a day, and FICO scores don’t jump 100 points overnight. Stay persistent, be patient, and seek out professional credit repair
if need be.