5 Tips to Establish Good Credit

Your credit score says a lot about your reliability to pay your debt. Lenders, whether it be a credit card company, mortgage company, or loan provider, will use your credit score to determine their risk of not being repaid.

Establishing good credit is a must if you want to get a mortgage, credit card, loan, or pay less interest.

But what is the definition of “good credit?”

What Credit Score is Considered “Good?”

Credit scores make up five different categories. A “good” score is right in the middle. Let’s take a look at FICO score ranges, according to Experian:

  • Very Poor – 300 to 579
  • Fair – 580 to 669
  • Good – 670 to 739
  • Very Good – 740 to 799
  • Exceptional – 800 to 850

VantageScores have 661 to 780 as good, according to Experian. Every credit bureau has a slightly different definition of “good.”

  • Equifax – 600 to 724
  • TransUnion – 658 to 719

According to this data, good credit may be between 600 and 739. Establishing good credit means taking strategic steps to boost your credit.

5 Tips to Establish Good Credit

1. Use Your Credit Card Sparingly

When you make too many purchases, you are going to hurt yourself in two ways: taking on too much debt and increasing credit utilization. You need to change your buying habits and only charge items that you know you can afford.

2. Keep Utilization under 30%

If your credit utilization rate is too high or low, it will impact your credit score. Utilization is the ratio of how much debt to credit you have available. If you have $10,000 in credit and have a balance of $3,000, you are at a 30% utilization. Ideally, you should keep credit utilization to 30% or less.

3. Make Payments On-Time

Payments should be on time. Whether you are paying back loans, a mortgage, or a credit card, try and make your payments on time, every time. Missing payments will cause your credit score to fall. Minimum payments are ok, but when possible, try and pay a little more than the minimum amount.

You will pay less interest by making more than the minimum payment and will show creditors that you are serious about paying off your debt.

4. Make Small Purchases

Banks will quickly close a credit card account for inactivity. The closure of an account will cause your credit score to fall.

Since creditors want to see consistency in your credit report, be sure to make small purchases that you can pay off each month to keep your accounts open.

Charging gas or food to your card and paying it off each month allows you to keep your accounts open and demonstrates creditworthiness.

5. Consider Credit Repair

Delinquent payments, errors on your credit report, or having too many accounts open can negatively impact your credit score. Work with a credit repair company to help:

  • Remove debts that are not yours
  • Remove negative items from your report
  • Work with creditors on better repayment terms

A credit repair company will put you on the fast-track to boosting your credit score if you have bad credit. Obtaining your credit report, looking for errors, and fixing issues, are the first steps to improving your credit.

The Secrets behind the FICO Score

Your credit score is the secret number behind everything in your life. How much you pay for insurance, your car, rent and mortgage payments, utilities, and even whether you get a job or not, are ALL based on your credit score.

As important as your credit score is, do you really know how it works?
Well, the good news is you are about to learn the hidden secrets behind your credit scores…

Payment History – 35%

Your payment history is the largest aspect of your credit score accounting for 35% of your overall score.

This aspect of your total score calculation is based on your prior payment history with your creditors. Late payments, defaulted accounts, and all other NEGATIVE information on your credit report have the greatest effect.

The more paid-as-agreed accounts you have and the less negative accounts, the higher the credit score.

Percentage of High-Credit Used – 30%

The second largest factor in your credit score is the amount you owe on your individual accounts relative to your high credit limits on those accounts. This accounts for 30% of your total score.

You will be scored higher if you owe 30% or less of the high credit limit.

If you are carrying high credit card balances, you can actually hurt your credit scores almost as much as paying the account late every month.

Length of Credit History – 15%

Your “time in the bureau” accounts for 15% of your credit score. The longer you have had credit accounts for, the higher the score.

As you have more accounts throughout your life and your credit history grows over time, your scores will naturally increase due to this factor.

Accumulation of new debt – 10%

This aspect of your credit score is composed of how much new debt you are applying for. It considers how many requests you have for new credit within a 12 month time period.

If you go out today and apply for credit, that creditor requests information from the credit bureaus. This counts as an inquiry on your report.

If you have a lot of inquiries in a short period of time, your scores will be impacted.

Healthy mix of credit accounts – 10%

Your credit score takes into account the “mix” of credit items you have on your report.
This part of your credit score is affected by what kinds of accounts you have and how many of each.

The bureaus will score you higher if you have an open mortgage, 3 credit cards, 1 auto loan, and a small amount of other open accounts.

If you have a lot of credit cards, your scores will be lowered. If you have several mortgages, your scores will be lowered. Any, “unhealthy” account mixes lower your scores.

So, to obtain the best credit score make sure you pay your accounts on time, do not keep high balances on your open accounts, keep a healthy mix of credit accounts open always, and do not apply for too much new credit in a short period of time.

If you follow these steps you will be on your way to an exceptional credit score.

FICO versus VantageScore

When it comes to credit scores, there are two scoring models to be familiar with. You’ve probably heard of FICO and VantageScore and if you want to improve your scores, you need to understand what these are and how they determine scores. Let’s take a look. 

Fair Isaac Corporation, or FICO, leads the scoring industry in the United States but VantageScore is close behind. FICO was first available for lenders in 1989, so it’s been around the longest. Equifax, TransUnion, and Experian developed and introduced VantageScore in 2006. 

Both companies create software that determines a person’s credit score by collecting and analyzing the financial data on their credit report. They also generate consumer risk scores. These scores predict the odds of a person getting at least three months behind on a bill over the next couple of years. Banks and other lenders use this information to determine a person’s financial situation when considering them for a line of credit. 

Over the years, both FICO and VantageScore have evolved, so multiple versions of each are available. They’re both similar in some ways but the criteria they use to determine the scores vary. For this reason, your score may vary as well. 

For example, FICO uses five categories to determine your score. Each one of them represents a certain percentage of your overall score. The percentage determines the impact it has on your score.

The categories and percentages are as follows:

  1. The type of credit you have makes up ten percent
  2. New credit makes up ten percent
  3. The length of time your credit history covers makes up fifteen percent
  4. The amount of credit you owe makes up thirty percent
  5. Your payment history makes up thirty-five percent

VantageScore uses six different categories to determine your score. Some have a high impact while others don’t make a lot of difference. 

The six categories and the impact they make are as follows:

  1. Recent inquiries and credit behavior have a low impact
  2. The amount of credit you have available has a low impact
  3. The total amount of debt you owe has a moderate impact
  4. The type of credit you have along with your age has a high impact
  5. The percentage of credit you’re using has a high impact 
  6. Payment history has an extremely high impact 

Here are some other ways that FICO and VantageScore are different:

  • To generate a credit score using your credit history, FICO requires you to have a minimum of one account open for at least six months. VantageScore will generate your credit score using just one month’s worth of credit history.
  • To determine your credit history FICO also requires one of your accounts to send a report to the credit bureaus during the last six months. VantageScore will generate your credit history if one of your accounts reported to the bureaus during the last 24 months. This is great for people that don’t use credit frequently or that is new to building their credit history.
  • Hard inquires make a big impact on your credit. FICO will count all credit inquires done during the last 45 days as one single inquiry if they’re the same type of credit line. VantageScore counts all inquiries done within a 14-day period as one single inquiry no matter what type of credit you applied for. 
  • FICO credit scoring software uses the data they collect during the time the scores are being generated. VantageScore’s software uses the information that shows up in your credit history over the last two years.

Understanding the differences in the criteria that both FICO and VantageScore use when determining your credit score will help you understand why they vary. If you have a long credit history, FICO may offer the best score. However, if you don’t have a credit score due to having little or no credit history, then a secure credit card design to build credit may be the solution.