A person's credit scores show up in many different parts of her life. Of course, when she applies for a loan, credit card or mortgage the lender reviews the credit report and the credit scores. Other companies review a borrower's credit score, even without the borrower's permission. Employers often review an applicant's credit history as part of a background check, and insurance companies sometimes base a policy's costs on a credit history and credit score review. Knowing what a "good" credit score and what a "bad" credit score is and change them is important.
Credit Score Ranges
The three major credit bureaus companies are Equifax, TransUnion and Experian. These three companies use information provided by creditors, public records and other data to calculate a credit score, often called a FICO score. The credit score predicts how well a person will repay a debt in the future based on their past credit history. Experian's scores range between 330 and 830. Equifax scores fall between 300 and 850, while TransUnion scores are between 150 and 934. Each company uses its own formula for calculating credit scores.
Credit Score Classifications
Higher scores are better than lower scores. As credit markets change, guidelines for defining "good," "excellent" and "bad" credit changes. Typically, "excellent" credit begins at 740 or higher. Good credit ranges between 680 and 740. Average credit includes credit scores of 620 to 679. Credit scores less than 620 are usually considered bad. Some mortgage lenders will not lend to anyone with a credit score less than 620. Each lender defines "good" and "bad" scores differently.
Negative Credit Items
Many items drive credit scores down. These include late payments on current debt. Missing payments hurts credit scores immediately. As the late payment ages, its effects diminish but are still felt for 24 months. Creditors view the amount of credit used compared to the maximum credit line amount when determining scores as well. People who use their entire credit card limit usually have lower credit scores than those who use 30 percent to 50 percent of their credit limits. Other negative items such as bankruptcy, collection accounts, judgments and foreclosures severely lower a credit score.
Turning "Bad" to "Good"
Raising a credit score takes time and effort, but is achievable. Make every payment on time. Missed payments hurt credit scores, but payments made on time help credit scores. Pay down high credit card debt to less than 50 percent of the maximum credit line. Avoid paying off the credit card to drive up credit scores. Having too much credit available can hurt the score as well. Ideally, credit card balances should be between 30 percent and 50 percent of the total credit line. Keep older credit accounts and avoid opening new accounts, as the age of the accounts on your report is also important. Check your credit reports for errors regularly (at least annually) and take advantage of your free yearly reports.
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