Back to Basics: Improving Your Credit Score
What’s the big deal about credit scores?
In short, your credit score determines the quality of fundamental needs available to you: housing options, the kind of car you can afford, and more. Because of this correlation, achieving strong creditworthiness is essential. We know this.
But did you know that a high score can also improve your overall well-being? Working on your credit as a form of self-care is not as crazy as you think!
A Harvard Business School study found that credit scores are uniquely associated with higher life satisfaction.(1) And, surprisingly, this association was even stronger than other financial factors that we normally associate with happiness, like wealth.
With your wellness on the line, it’s even more important than ever to take steps to level up your credit. Do it for you! And with an encouraging 48% of Americans hoping to improve their credit scores this year, there’s no better time than now to get to work.(2)
In this guide, we’ll get back to basics with a little credit 101 and help you get on track to achieve your personal financial goals.
What is credit?
Let’s start at the beginning. Generally, credit is a contract agreement where a consumer (borrower) receives money from a lender (a bank, for example) with an agreement to pay back in the future, usually with interest.
What is a credit report?
Your credit report is a detailed statement on your history and current credit situation. These reports contain identifying information like your name, current and former street addresses, birthday, social security number, and phone number. They also detail your active and historical credit accounts, including revolving (credit cards), mortgage, and some installment debts.
From these reports, lenders will be able to understand your behavior through things like previous credit limits, payment history, and current balances. Negative strikes like collection items, defaults, civil suits, and judgements will also typically be visible.
In the US there are a number of different credit bureaus with different reports, but the three that are most considered are Equifax, Experian, and TransUnion. Federal law allows you to get a free copy of your credit report every year from each of these three credit reporting companies.(3)
What is a credit score?
A credit score is a number between 300 and 850 that acts as a snapshot of your borrowing potential based on your credit report. A higher credit score demonstrates that you’re a reliable borrower who’s likely to keep up with your payments, while a lower score indicates that you might have had some issues paying in the past and are therefore more of a risk.
Here’s the thing: you don’t have just one. There are two scores to consider — your VantageScore® and your FICO® Score.
What’s the difference? These competing models have the same goal and both use data from consumer credit reports to generate scores, but often yield different results. That’s because they consider slightly different information.
VantageScore includes six categories of varying influence:
- Payment history: extremely influential
- Age and type of credit: highly influential
- Percent of credit limit used: highly influential
- Total balances and debt: moderately influential
- Recent credit behavior and inquiries: less influential
- Available credit: less influential
FICO groups data into five categories and assigns a percentage to each:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
What is considered a good credit score?
Considering all the varying factors, the most widely accepted answer is 700 or above. 800 and above? You’re doing amazing. Currently the average FICO Score is 716, eight points up from last year. This is good news, especially when you consider that this upward trend is getting most of its momentum from lower score ranges. For those consumers who had a pre-pandemic score between 550 and 599, their average score has gone up from 581 to 601 as of April 2021.(4)
Want to understand where you rank? Use the general ranges below as a guide:
Source: Forbes Advisor 2021
But we want to get more specific. What’s a good credit score for your unique goals? Here are the minimum scores for specific use cases:
- Buying a home: If you’re seeking a conventional loan to buy a home, you’ll want to have a minimum credit score of 620 and money saved for a down payment. An optimal credit score would be 700 or above.
- Obtaining a car loan: If you need a vehicle to get you from point A to B, you can get approved with subpar credit, but to give you a ballpark idea of what’s “good,” 65% of cars financed in a 2021 report were for borrowers with credit scores of 661.(7)
Optimal scores for these? To get the best rates and save you money in the long run, shoot for a score of 760 or better. Financial expert John Ulzheimer says that “The best published interest rates for auto loans are 720+ and for mortgages 760+.”(8) Aiming for the higher end of that range will make sure your approval odds are good for all loans.
How can I level up my score?
First, let us acknowledge that you are much more than your credit score. We understand that there are a number of factors outside of your control that can contribute negatively to how you’re represented on paper. Promising new techniques like sentiment analysis are being introduced to take these factors into account and paint a more holistic picture.(9)
But for right now, we’ve got to face the number assigned to us, fearlessly. Here are some tactics to do just that and improve your score. Let’s get you in good standing to achieve your financial goals.
- Make on-time payments: If you slip up just once, it can have an effect on your credit scores and stay on your report for seven whole years. The best thing to do if you know you’ll miss a payment is to give your lender a call. Addressing the issue head on is more likely to result in a positive outcome.
- Keep your credit card balances low: The percent of credit limit used, or credit utilization rate, is a telling factor. Those with excellent credit scores often have a lower overall utilization rate. Experts recommend keeping this rate below 30%. Extra credit if you can get it below 10%.
- Add bill payments to your report: This is especially helpful if you’re just starting out and don’t have much history. You can use Experian Boost to increase your credit score right away by including your on-time utility, cell phone, and streaming service payments in your credit report.(10)
- Ask for higher credit limits: Requesting a higher limit can automatically lower your overall credit utilization. If your income has recently increased or you have a good record of positive credit experience, you’re in a good position to make this ask. The risk? This may result in a hard inquiry which temporarily lowers your score. Always ask if that’s the case. And if you do succeed in getting an increase, don’t use it! Remember your goals and stick to ‘em.
- Limit how often you apply for new accounts: Typically, every time you apply for an account a hard inquiry will land on your file, resulting in a ding of a few points. This is only temporary, but these can add up if you’re applying left and right. Opening new accounts also has the potential to decrease your average age of accounts. The easy rule to follow? If you don’t need it, don’t apply for it.
- Dispute errors: Mistakes happen. If you see one on your credit report, you can always dispute it. For example, if your report lists a late payment and you have proof you made it on time, you can file a dispute. Credit bureaus will then take around a month to investigate and respond. This tip does take a while, but it’s worth it!
- Use Zip for big purchases: Instead of relying on credit cards for unforeseen purchases, you can pay in four installments without worrying about high interest rates or negatively affecting your credit.*
- Develop a budget to help keep you on track: Add improving your credit score to your budget plan. This might mean sacrificing your daily coffee run so that you can make larger payments on your debts.
Do it for you
Putting time and effort into improving your financial situation and credit score can be an intimidating endeavor. But it’s also a true investment in yourself. Remember, credit doesn’t just affect your ability to get a nice set of wheels (though this is certainly important as well). It has deep and lasting effects on your attitude and self-judgment too.
Taking steps to remedy a less than ideal credit situation has major benefits — when you’re more in control of your credit, you can live more fearlessly today. We can’t wait to see you up your confidence by upping your credit score!
Get started with Zip today
Zip’s editorial content is not written by a financial advisor. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.