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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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Last Updated on September 2, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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