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Published on June 26, 2020

What Is a Good Credit Score (And How to Get One)

What Is a Good Credit Score (And How to Get One)

A good credit score can make it a lot easier to borrow money to purchase a home or car, get a credit card, take out a personal or business loan, secure a student loan, and more. There isn’t necessarily a single credit score that’s considered “good,” however.

Instead, what constitutes a good credit score depends on the credit scoring model that’s used. We will analyze some of these and discuss how to improve your credit score no matter the model.

Types of Credit Score Models

A few different scoring models are used to calculate your credit score, with the Fair Isaac Corporation (FICO) score being a popular standard. Understanding the differences and factors used to calculate your score can help you improve your credit score over time.

FICO Credit Score

The FICO score is considered the most reliable credit scoring model because of its long-standing reputation. The model has been around since 1989 and has undergone numerous revisions during that time.

Currently, FICO credit scores range from 300 to 850. A good credit score is typically between 670 to 739[1], according to FICO; however, the required credit score to get approved on a loan or line of credit depends on the lender. One lender might offer its lowest interest rate to borrowers with a score above 730, while another lender might require a score of 760 to get approved.

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VantageScore

The VantageScore was created in 2006 and is another widely used scoring model, after FICO. VantageScore is used on credit reports across all three credit bureaus. This algorithm uses traditional data, like number of on-time payments, credit card balances, assets, and other factors to calculate your credit score. The VantageScore 4.0 scale is between 300 to 850, with 700 considered to indicate good credit.

This scoring model includes many of the same factors as the FICO score, like past payments and credit utilization, but it weighs each category differently. It also leaves out paid collections and reduces the weight of medical collections, so your score isn’t as dramatically harmed by these marks.

Other Credit Scoring Models

Depending on the purpose of your credit inquiry, other credit scoring models might be used to determine your creditworthiness.

For example, insurance companies use their own credit score to assess your plan premiums. Insurance credit scores range from 0-999, using similar scoring factors that are used for FICO, like your outstanding debt, age of credit, types of credit you have, and payment inquiries. These factors may be weighted differently, however, and the scoring model includes other factors that aren’t included in your FICO score, like homeownership.

How to Get a Good FICO Credit Score

There isn’t a magic solution to raising your credit score to “good” standing. Even maintaining it at that level or improving your credit to “very good” or “exceptional” takes work. Instead, there are a number of financially responsible steps you can take to ensure your credit score is strong enough to get you the credit that you need.

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Using the familiar FICO score[2] to determine what a good credit score is, here are a few tips to improve your credit score.

1. Always Pay Your Loans on Time

Your payment history accounts for 35% of your FICO credit score. Showing that you pay your bills on time instills confidence in lenders that you’re a good credit risk. Set up automatic payments or schedule reminders to ensure you do not miss any of your bill payments.

2. Avoid Getting Too Close to Your Credit Card Limits

“Amounts owed” is one of the five categories FICO looks at when it determines your credit score. This factor accounts for 30% of your credit score. Try to keep your credit card balances low compared to your total credit limit. In fact, it’s best to not carry a credit card balance at all by paying off your credit card statements in full every month.

If you must keep a balance on your card, it’s advised to keep your utilization rate (your total credit card balance divided by your total credit limit) below 30%.

3. Establish a Long Credit History

Having a long credit history is a positive mark for your credit score — as long as it’s a good, long history. Credit scores are partially based on your experience with credit cards and other loans — “length of history” makes up 15% of your FICO credit score.

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One way you might inadvertently harm your length of credit is by closing out a credit card that you’re not using anymore. Remember, the age of your accounts is a big part of your overall credit score. Fight the urge to close your active accounts, if they’re in good standing.

4. Only Apply for Credit When It’s Necessary

Yes, having an established credit history is beneficial, but you can negate that goodwill with too much credit access to your name — especially if you’ve opened multiple accounts in a short time. Having a lot of new credit in a short amount of time might suggest that you’re in a bad spot financially, and a high default risk.

Plus, every time you apply for a loan or credit card, an inquiry will show up on your credit report, whether you’re approved or not. The inquiry can drop your credit score five points, although this decrease is temporary. Try to keep your credit applications to a minimum and look for prequalification tools that perform a soft credit inquiry so your credit score isn’t adversely impacted.

5. Diversify Your Credit Accounts

Your “credit mix” comprises 10% of your FICO credit score. The more varied your credit mix — such as credit cards, a mortgage, and a car loan — the better your credit score will be, assuming, of course, that you are making all of your loan payments on time.

Student loans are another financial obligation that might be included in your credit mix. Even if your credit isn’t at the “good” level yet, you can still apply. For example, federal student loans do not require a credit check. If you’ve maxed out your federal student loans, scholarship and grant options, private student loans can help make up the difference. Bad credit can make it harder to secure a loan, but getting a student loan with bad credit isn’t impossible[3].

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6. Review Your Credit Report

Your credit report might have items on it that are pulling your score down. Credit score mistakes can happen because of an error on your credit report. It’s smart to regularly check your credit report for any errors, like a misspelled name, incorrect or old addresses, accounts that don’t belong to you, or adverse events that should have been removed. If you spot anything wrong or suspicious, contact the credit bureaus to dispute the errors.

You’re allowed to request a free credit report from each of the three credit reporting agencies (Equifax, Experian and TransUnion) once every 12 months through AnnualCreditReport.com. You can request all three reports at once or spread them out throughout the year.

The Bottom Line

Having a “good” (or better) credit score can open a lot of financial doors for you when you need to borrow money. Not only will your chances of approval increase with a stronger score, but you’ll have access to more competitive interest rates.

If you continue to make timely payments, keep the amount of money you owe low, and minimize your loan and credit card applications, your credit score will have nowhere to go but up.

More Tips on Getting a Good Credit Score

Featured photo credit: Avery Evans via unsplash.com

Reference

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Travis Hornsby

Founder & CFA, Student Loan Planner

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Published on January 8, 2021

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

Ever wondered whether your credit card debt is the reason you’re in a bad financial situation? You can’t enjoy any fun activities because a good chunk of your money goes toward debt payment. Heck, you’re even behind on some of your monthly bills.

The effects of clumsy debt management are too many to list here. This guide is going to help you discover how to pay off credit card debt fast and start chasing your financial goals.

Debt problems are the last thing anyone wants to encounter. But things can get out of hand when all the “little debts” you take accumulate in interests.

What if you knew some simple and proven ways to be debt-free quickly? Implementing them would mean better financial health for you. It becomes possible to free up cash for your “wants.” These include taking a trip or buying something you’ve always desired. All that while paying your bills on time!

Let’s not wait any longer. Here are 7 powerful tips for paying off credit card debt fast:

1. Pay More Than the Minimum Credit Card Payments

Many people only pay the monthly minimum on their credit cards. Truly, that’s the right amount for staying on good terms with your credit card company. But you need a different approach if you’re looking to achieve financial independence within a short time.[1]

Most of your payments go toward interest costs when you only pay the minimum amount. A substantial sum of your balance remains standing. As a result, it becomes more expensive to eliminate your debts.

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You don’t want to wait more than 10 years to get rid of debt while it’s possible to do it sooner. All you have to do is double that $100 minimum payment to $200 or go higher.

The good thing is that minimum credit card payments are affordable in most cases. By paying a higher amount, you reduce your interest costs, lessen your borrowing period, and boost your credit score.

2. Start With High-Interest Credit Card Debt

If you have more than one credit card debt, prioritize putting the extra money toward the ones with the highest interests. This debt pay-off strategy, known as the debt avalanche method, is essential for being debt-free quickly.[2]

First, you need to list down all the credit card debts you have in the order of their interest rates. Next, you choose the one with the highest interest and pay a significant amount toward it each month. It can be an amount twice or even thrice larger than the minimum payment.

At the same time, you make monthly minimum payments on the other debts. Their interest charges won’t be as costly as that of the first debt on your list. You only move on to the next high-interest debt after the first one is gone. Remember that your focus is on the interest rates and not the balances.

3. Revisit Your Budget

Budgeting is useful for tracking your financial moves. Once you create a budget, some tweaks along the way can make it work for you better. One situation that requires you to revisit your budget is when you’re struggling with debts. It might hurt a bit to slash some expenses. But you also don’t want to miss out on achieving financial freedom in the long run.

You can reduce some variable expenses to free up more cash for credit card debt payments. They’re the ones that change from time to time. Some examples are groceries, fuel, and clothing.

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Other opportunities for cutting down your spending lie in non-essential expenses. Instead of dining out all the time, you can cook at home more to save money. You can also share some subscriptions with friends and pay a fraction of the cost.

If you’re determined enough, you can eliminate all your unnecessary expenses and focus on paying off your credit card debt first.

4. Avoid Using Your Credit Cards

Do you want to know how to pay off credit card debt with a low income? One simple way is to stop using them. Having your credit cards everywhere you go means that you’ll be more tempted to buy unnecessary stuff. In this case, you spend money that you don’t really own and get deeper into debt.

The quickest fix to stop the debt build-up is spending with cash. You’ll be more aware of everything you can afford at any particular time. If you decide to keep one or two cards to ease the transition, always make wise choices. For instance, only use them when experiencing financial difficulties.

It’s best to categorize your fun activities under “discretionary spending” in your budget. This way, you won’t need more debt to kill your boredom. By halting your credit debt from accumulating, it’s easy to pay down what you already owe and be happy with the progress.

5. Start a Side Hustle to Boost Your Income

You’re probably turning away a lot of money by not monetizing your skills. Everyone has something that they’re good at doing. And you can use that to generate extra income for attacking your credit card debt.

If you look around your neighborhood, you can find several side hustle opportunities. It can be pet sitting, tutoring, or lawn mowing. You can start an online business by offering services such as digital marketing, content creation, and web development. Such skills go in high demand on freelance sites and job boards.

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Finding clients on social media is also a good strategy to utilize your skills and make more money. Facebook groups, Quora Spaces, and subreddits are some places to look for side jobs. You only have to join a niche-specific platform, share your services, and respond to any opportunities.

It’s possible to learn a skill, practice it, and earn from it. Use the free resources online or purchase some e-courses to get started.

6. Sell Your Used Items for Extra Cash

Starting a side hustle isn’t the only way to generate extra money. You can turn unwanted items into cash for paying off credit card debt. Whether it’s an old TV, book, or furniture, there is always someone itching to buy your used stuff.

A garage sale, as much as it’s old-fashioned, is perfect for getting your neighbors and passers-by to buy from you. You keep all the money because there are no business permits or taxes involved. While you may not make much cash, it’s better than leaving your stuff to go defunct in your storage.

Other than that, you can sell your used stuff on online marketplaces. Facebook groups are great places to start if you want quick approvals and hence sales. You only have to ensure that your listing follows Facebook’s commerce policies.

When selling any pre-owned items online, ensure they’re in good shape to avoid problems with your buyers.

7. Know When to Seek Help With Your Debt

Asking for help with your credit card debt can be challenging to do. But letting it drown you is a road you don’t want to take. While you may feel embarrassed at first, it’s the best way to get back on track when you run out of options.

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There are tons of non-profit credit counseling organizations that can offer you free guidance on how to escape the debt trap. An example is The National Foundation for Credit Counseling. They simply review your finances and help you determine the source of your financial problems. After that, they match you with an actionable debt management solution.[3]

In extreme cases, the debt solution can be:

  • Debt relief – where your debt is partially or wholly forgiven
  • Debt consolidation – taking out one loan to repay others
  • Debt settlement – the creditor forgives a significant portion of your debt
  • Bankruptcy – legal process for seeking relief from some or all your debts

It’s necessary to carefully weigh your options before deciding on the way to go. Find out how it might affect your credit score and any other risks.

Wrapping It Up

Debt is a major setback when you’re trying to prosper in life. Paying off credit card debt is essential if you want to reach your financial goals. That means having more free income, a good credit card score, and even a chance to retire early. You become more productive each day because of the peace in your mind.

So, you now have some tips on how to pay off credit fast. Go ahead and get rid of that good life progress killer!

More Tips on How to Pay Off Debt

Featured photo credit: rupixen.com via unsplash.com

Reference

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