Meet Claire. Claire is 23, she just got married, and she feels like she’s finally getting the hang of “adulting.” (She’s also not real, but that’s not important right now.)
Claire and her spouse want to buy a house and raise a family, but they’re nervous. They’ve heard your credit score impacts whether you can get approved for a loan on the house. Credit scores aren’t something Claire or her husband have ever paid much attention to, and they don’t even know their scores.
Claire decides to start looking for some help. After all, they don’t want to be retired before they can think about buying a house!
Claire really only has one question on her mind:
What is a good credit score, anyway?
What is Credit?
Trying to learn about credit scores leaves Claire feeling frustrated and anxious. She doesn’t know what “credit” even means. After getting confused by articles talking about “FICO” and “bureaus” and “hard checks” and “soft checks,” she decides to go back to the beginning.
First, Claire checks a dictionary. It’s no help, so she keeps looking. Eventually, she finds her answer.
In the world of finance, credit has a few definitions. The two that are most commonly used are the ones Claire is looking for.
“Credit” most frequently describes an agreement. One person borrows money from another person to buy something, with the promise to pay them back. This is what buying something “with credit” means. You’re borrowing money, and you’re promising to pay it back.
“Credit” can also refer to the amount of money someone is allowed to borrow. That’s why people can say things like, “I have great credit.” They’re talking about the amount of money (credit) they are allowed to borrow (credit) with their account.
What’s a Credit Score?
“Ok, that’s great,” Clarie thinks, “but where does a credit score come into all this? How do you even score something like that?”
After doing more research, here’s what Claire finds.
There are three main credit bureaus in the US: Equifax, TransUnion, and Experian. These three companies have records of around 220 million people. They work with most of the credit cards and loans that people use. These are also the companies that determine your credit score.
The purpose of a credit score is to give lenders an idea of how reliable you are with your money. Here’s an example of how it works.
Say Joanne asks Claire for $1 and says, “I’ll pay you back tomorrow!” Joanne doesn’t pay Claire back tomorrow. In a few months, Claire has forgotten about the $1, or maybe she decides that Joanne just isn’t going to pay her back.
Then, Joanne asks Claire for $1 more. She promises to pay Claire back in a week, but she doesn’t do that, either.
After this happens for the third time, Claire decides she doesn’t want to let Joanne borrow money from her anymore.
Joanne has bad credit with Claire.
Ok, back to credit bureaus. They do the same thing, but they work with millions of people and millions of dollars. To make things clear, easy, and fairer, they assign a number between 300 and 850 to anyone who wants to borrow money.
People who have a history of paying things back on time have a good credit score. People who have missed deadlines on paying things back have a bad credit score.
Some people haven’t ever borrowed money before. Claire wonders why those people have a low credit score. The answer is pretty simple: Bureaus want to be sure they can trust someone before they lend them much money.
What is a Good Credit Score?
Alright, now that Claire knows what credit is (the amount of money you can borrow) and what a credit score is (how likely you are to pay that money back), she comes back to her first question.
What is a good credit score??
Credit scores are generally divided into five categories. The numbers for a “Good” credit score can be different since there are a few different ways to score your credit. Claire decides to focus on the two biggest models: FICO and VantageScore.
First, a look at the FICO scoring model.
Poor: 300 – 579
Fair: 580 – 669
Good: 670 – 739
Very Good: 740 – 799
Excellent: 800 – 850
So using FICO, “Good” is between 670 and 739.
VantageScore structures things a little different so here’s their model:
Very Poor: 300 – 499
Poor: 500 – 600
Fair: 601 -660
Good: 661 – 780
Excellent: 781 – 850
According to the VantageScore model, “Good” is 661 – 780.
Since the higher credit number can’t hurt, Claire focuses on the difference between the lower number. A credit score of 662 would be “Good” with VantageScore, but only “Fair” on the FICO model.
So what should Claire aim for?
Right now, Claire’s goal is to buy a house in the near future. Claire doesn’t know which scoring model or credit bureau her mortgage lender will use. Since it’s impossible to know, Claire decides to aim for 700 as a way to split the difference.
Does Checking Your Credit Score Lower It?
Claire’s excited to have a goal, but she doesn’t know what her credit score is at the moment. She wants to check, but she’s heard that checking your credit score can lower it, and she doesn’t want that!
After doing some research, Claire learns that there are “hard checks” and “soft checks” of a credit score.
A “hard check” is what a lender will pull to check your credit score. This can lower your score since it’s associated with taking out more debt.
Fortunately, you also have the option to do what’s called a “soft check.” This is where you check your own credit, and it has no effect on your score.
After her soft check, Claire learns that her credit score is 602. That’s nearly 100 points below her goal, and she starts feeling discouraged.
How is she supposed to raise her credit score by that much without waiting years for her new home?
Ways to Improve Your Credit Score
To improve her credit, Claire needs to learn what determines her credit score. She finds there are five things that impact credit scores.
You probably expected this one, right? Whether you paid loans or credit cards off on time or late makes a big impact on your score.
When someone pays on time, their score goes up since it sets a precedent for being responsible and trustworthy with credit. When someone frequently pays late, their score goes down. The lenders aren’t sure whether they can trust the borrower to pay back on time or not.
“Usage” is how much of your available credit you’re spending. Say you can borrow up to $5,000, but you only use $500. This reflects well on your score since you aren’t using the full amount.
It’s kind of like when you offer someone a cookie and tell them to take as many as they want. If someone takes the entire plate from you, you aren’t going to offer them cookies again!
The next thing that impacts your credit score is how recently you applied for credit. Applying for credit cards and loans frequently hurts your score. This is closely tied to payments and usage since people who apply for lots, and lots of credit typically have a hard time paying it back since they use it all up.
“Credit mix” means the kinds of credit you’ve taken out — credit cards, car loans, mortgages, personal loans, etc. Having more than one kind of credit under your belt will boost your score.
Why does this matter? Well, if you can effectively manage several different kinds of credit, lenders can trust you to manage another. On the other hand, if you’re just barely making payments on time for one loan, it’s hard to tell how you’d handle another.
Finally, how long you’ve had credit accounts impacts your score. This is about building trust. Anyone can make a great first impression, but it takes responsibility and commitment to keep that up over the years.
Help With Improving Your Credit Score
After all that, Claire feels overwhelmed. She starts looking for some help. She finds three great options for free services that she can trust to help her with raising her credit score.
Claire had heard of Credit Karma before, so she decided to look up more information about it. She likes what she finds and decides to make a Pro and Con list so she can easily compare it to the other services she’s considering.
- Free credit monitoring and reports
- Uses VantageScore
- Offers credit card and loan options based on her credit history
- Security updates
- Offers recommendations on money management
- Makes money through ads, which can get frustrating
- Offers loans and credit card options that aren’t always relevant or money-smart
- Doesn’t offer a FICO score
Claire finds that Credit Sesame has a lot of similarities to Credit Karma. She builds up another pros and cons list to make it easy to compare.
- Goal setting feature gives tips on how to reach goals the user picks
- Free identity theft protection
- The “Key Factors Impacting Your Score” section helps you understand what you can change
- Free credit monitoring
- Uses the Experian National Equivalency scoring model, up to 33 points off from a FICO score
- Full credit reports are $9.95
- Targeted ads can offer options that aren’t helpful or money smart
Wait a second, wasn’t Experian one of the major credit bureaus from earlier? Yes! They also offer a free credit monitoring service. Claire makes a pros and cons list for Experian, too, so she can compare it to her other options.
- Uses FICO model
- Performs a one-time dark web scan to make sure her information is safe
- Monthly credit reports and score updates
- ExperianBoost adds phone and utility bills to your credit file
- Only checks Experian score
- Has a paid version of the service and can push it frequently
Credit Where Credit Is Due
Now, Claire can look over things with her spouse and pick the option that works best for her. She can confidently correct her credit and work towards the home of her dreams. (And lots of other things along the way!)
You might recall that Claire isn’t a real person, which is too bad because she’d have great taste in interior design.
There’s some good news, though. All the credit info and improvement options here are real. That means you can start to boost your credit without worrying about Claire putting down a bid on the house you’re looking at.
Improving your credit can feel overwhelming, but it doesn’t have to be. You just need to break it down into manageable steps and ask for help when you need it.
Your credit won’t improve overnight, but building good habits can have you cruising into the 700s without breaking a sweat. Getting started really is the hardest part. Now that you know the basics of what credit is and how you can improve it, you’re ready to start reaching those goals. Way to go!