Through the years, the life of consumers has relied so much on the credit system. Public works, businesses, and private properties have been built mostly with the aid of credit. In our personal lives, we rely on credit to afford big purchases. One tool used by moneylenders and financial institutions is the so-called credit rating.
Our rating is a reflection of our payment history and our ability to repay our loans on time. Also, our score in this rating dictates the amount we can borrow, the interest rates of our loans, and other terms of our loan.
What Is A Credit Score?
A credit score refers to a numerical code between 300-850, which rates a person’s creditworthiness. A higher score means a person could be trusted with a more significant loan amount. They could receive better loan terms and deals. The credit score is based on a person’s credit history, including their number of active accounts, total debt, repayment history, and many other more.
In the U.S., 70 % of the consumers have FICO® Score rates higher than 650. If your score is 650, remember that it is very close to the Good credit score range, which is 670-739 points. By making some improvements, you may reach or even exceed the Good credit score range. This could mean more comprehensive options for credits and loans at more competitive interest rates for you.
Credit Score Basics
There are two central authorities in credit score ratings in America, namely FICO and VantageScore. This article primarily uses the FICO score. Note that a consumer’s score is categorized into individual sections, tier, or categories. Those who belong to lower score ranges would find it challenging to apply for loans and financing.
A low Fico score means a less-competitive interest rate, higher mortgage rating, and fewer loan deals. To show the lenders that you can be financially trusted, you have to increase your FICO score. Achieving a high FICO score serves as an assurance that lending you are not a risky business.
This table below explains what FICO Score means. As consumers, your ultimate goal is to belong to the highest score range. But, if your current score is 650, going up to the next tier (Good Credit score range) should be your goal. Improve your FICO score so you can apply for better loan deals.
|Credit Score Ranges||Rating||Description|
|<580||Poor||This credit score is well below the average score of U.S. consumers and demonstrates to lenders that the borrower may be a risk.|
|580-669||Fair||This credit score is below the average score of U.S. consumers, though many lenders will approve loans with this score.|
|670-739||Good||This credit score is near or slightly above the average of U.S. consumers and most lenders consider this a good score.|
|740-799||Very Good||This credit score is above the average of U.S. consumers and demonstrates to lenders that the borrower is very dependable.|
|800+||Exceptional||This credit score is well above the average score of U.S. consumers and clearly demonstrates to lenders that the borrower is an exceptionally low risk.|
How Are Credit Scores Calculated?
Know that your credit scores are calculated using a mathematical algorithm using data and information from your credit reports. Lenders and financial companies have their algorithms in computing a credit score. Two of the most common scoring models in the American market today are FICO and VantageScore.
For laypeople, all you have to understand is that most scoring models rely on these factors when computing score:
- the payment history on your loans and credit cards
- the revolving credit you regularly use
- the length of time your accounts have been open, the time you apply for a new loan or credit
- the types of accounts you have
Some scoring systems would use additional factors, but their loan or credit history is typical.
What To Expect In A 650 Credit Score?
A 650 Credit Score belongs to the Fair credit score range. Honestly, this score is not ideal. You are likely to be denied some loan and credit card applications. If in case your application is approved, you will have to pay a higher interest rate.
What you can do instead is to make some effort to score at least 670 points. A 650 credit score is shy of 20 points from a good credit score. You have to make some changes in terms of your credits and finances. From there, you can work on your credit rating, so you eventually reach an exceptional Fico score.
How To Improve Your 650 Credit Score?
There are multiple ways for you to increase your 650 credit score. Here are some of the few simple and easy things you can do now to achieve a good credit rating. Please take note that improving one’s credit score does not happen overnight. You have to be consistent with being a good borrower.
1. Pay Your Bills On Time
This step is essential yet straightforward when it comes to improving FICO scores. Do not ever miss a repayment schedule. You always have to pay in full and on time. To ensure that you never miss any repayment schedule, you can choose to apply for an auto-deduction from your bank account.
Note that your payment history plays a massive role in the computation of your score. If you missed a single repayment schedule, it would reflect poorly on your record. Do this on all of your credit accounts. It would help if you did not allow a single account to have an unpaid bill.
2. Get Credit For Making Utility And Cell Phone Payments On Time
While your utility and cell phone bills are not traditionally included in the computation of your credit score, you can choose to include them in the computation of your credit report. Look for companies that offer this tool so that your diligence in paying these bills reflect in your credit report. While this hack does not give a big jump of your FICO score, it can contribute to turning your 650 credit score into a good credit score range.
3. Apply For A Secured Credit Card
A secured credit card is a type of a credit card where you have to pay your bank a cash deposit before using the card. If you choose to deposit $300, your credit limit would $300. This type of credit is favorable to lenders and financial institutions because they face less risk than an unsecured credit card.
Having a secured credit card can be a stepping stone for having an unsecured credit card. But even without applying for a new credit card, you can still enjoy the perks of having a secured credit card. A year of being a good owner of a secured credit card send a positive image to credit bureaus. With this, you could increase your credit rating.
4. Visit Your Local Credit Union To Get A Credit-builder Loan Or Secured Loan
A credit-builder loan refers to a process where another party holds the about you borrowed until you fully repaid it. Credit unions and community banks often offer this type of loan. Even borrowers with no credit history can apply for this loan because it does not pose risks to the lenders. Hence, this is the right way of improving your credit score.
Having a credit-builder loan or a secured loan tells the credit bureaus that you can take loans. It is a great way to increase your credit score. Once you are granted any of these loans, be sure to repay them on time, so you do not get a bad credit report. Use these as a way to improve your credit rating.
5. Apply For, And Open New Credit Accounts Only As Needed
Opening a new credit account is beneficial for those who do not have a credit history or do not any credit account. But, for consumers who have existing credit accounts, opening a new one can negatively impact their credit score. Credit age is a huge factor in determining the FICO score. A younger credit account means a lower credit score.
You have to remember that opening a credit account is a huge decision. Before opening a credit account, you have to be sure first that be responsible in using it. You should never take granted even a single card.
6. Don’t Close Unused Credit Cards
Old credit cards increase credit score because FICO heavily considers credit age. Hence, you should not close old unused credit cards because they add to your credit score. Remember that you do not have to use these credit cards. Even if they remain unused, they still contribute to your FICO scores.
For others, they fear that having a credit card lures them to get more loans and spend more money. One technique to avoid this is to put away your card to a place where you cannot easily access it. In doing so, the card remains open and active, but you do not get new debts.
7. Don’t Apply For Multiple Credit Inquiries Over A Short Period
Of course, there is no rule saying that it is illegal for you to apply for two or more credit cards in a short period. But, you have to take note by doing this, you are showing to the credit bureaus that you are desperately in need of money. This is a red flag because this would mean that you are irresponsible in your financial decisions. You may be biting more than you can chew in terms of a loan.
While there is no sure way to tell how many points you lose when applying for multiple credit inquiries over a short period, financial websites guess that you are likely to be deducted of 5 points. As you apply for more loans, these points are accumulated. They could heavily impact your credit scores.
8. Dispute Any Inaccuracies On Your Credit Reports
A dispute does not necessarily increase your credit scores. What it does is that it allows companies to review your credit report. Aside from correcting details that they got wrong, there is a chance that they rectify specific errors in your payment records and other things. Note that you can only file a dispute if there is inaccurate information in your credit report. If you see no problem with the credit report, you cannot merely ask companies to review it.
Factors To Consider In Your Credit Score
After knowing what options you can do to increase your credit score, you also must understand what certain factors affect this rating. In so doing, you get to have a sound plan in achieving what a good credit score is. Upon knowing more about these factors, you will be able to examine your credit record. Thus, you will know which of these factors to improve.
1. Payment History
Your payment history plays the most significant role in computing your credit score – as high as 35%. This pertains to how many times you have paid in full and on time. If you miss repayment deadlines, you are likely to get a low credit score. Note that your credit record will note how many payment delinquencies you have committed through the years.
When it comes to your payment history, note that even your delinquencies from years ago get to be included in your score’s computation. To avoid any negative points, you have to kee a clean payment record. Be sure to do this across all your accounts. Make sure that you do not have any credit account that bears a missed payment.
2. Credit Utilization
The next most significant factor is credit utilization, which is 30% of your credit score. This refers to the amount you used from your available credit at a given time. The more percentage of the available credit you use, the lower the credit score you get. To increase your credit score, you have to maintain a low number always.
Your credit utilization is computed trough dividing the amount you currently owe by your credit limit. This is expressed as a percentage. To get a high FICO score, you have to get a low credit utilization percentage. In general, a reasonable credit utilization rate is around 30%.
3. Credit Age
This factor takes 15% of the credit score. It refers to the length of years that a credit account has been open. The longer the account has been in existence, the higher points you receive. This is the reason why it is best that you keep even your unused credit card accounts and other loan accounts.
This is another reminder that your financial history gets recorded in your credit report. An account or a card that you opened years ago gets to be included in your credit report. Thus, you have to make a commitment that you have to be a responsible account holder.
4. Different Types Of Credit
In order to score high, you must have a variety of credit types, including a credit card, student loan, auto loan, personal loan, or other. This factor constitutes 10% of the credit score. This is a reminder that applying for another type of credit is not necessarily bad. If you diversify credit record, you can increase your score.
If you have multiple credit types, make sure that all these accounts are managed well. None of them should have any problem. If one or more of these accounts have missed payments or charge offs, they will negatively affect your credit score.
5. Number Of Inquiries
Inquiring for a new loan account many times makes you look like a desperate borrower. In the eyes of the lenders, you are someone who has been applying for multiple loans, which he cannot pay. It would seem like you are not smart and responsible in your financial choices.
Also, having many loan inquiries makes you look like a scammer who is trying to get loans from as many lenders and financial institutions as you can. This reduces your credibility as a borrower. Hence, you must limit your inquiry or application for a new line of credit. Although still important, this factor only plays 10% of your credit score.
How Long Does It Take To Rebuild A Credit Score?
There is no definite length of time when it comes to rebuilding a credit score. For some, it takes years to rebuild a credit score. While for others, it may take decades to do it. The time you need to achieve high credit scores depends vastly on your credit profile and personal finance.
If you have a 650 credit score, it is a short leap toward a 670 credit score, which is considered a good rating. You have to focus on the significant factors when it comes to improving a credit score. Pay your credit on time and main a low credit utilization.
One important lesson here is that you have the power and the ability to improve your credit score. Reading about the factors that influence your credit score, you have to pay attention to which of these factors you need improving. You must come up with a plan of attack. Decide how you wish to manage your loans, credits, and finances.
You must realize the importance of credit scores. Know that it would be difficult for you to apply for loans without enough score, get competitive interest rates, and other loan deals. As you grow old, you will see credit scores dictates so much about our finances. With this, we should all aim to increase our scores.
Having a 650 credit score is not ideal. You will have to face challenges and difficulties when you apply for loans and credits. Hence, it would be best if you had a conscious effort to improve your FICO score. Make sure that you pay attention to all the factors that influence your score. Improve on certain factors where you are lacking.
To achieve an Excellent FICO credit score, you have to ensure that all your credit accounts are in order. Settle any unpaid loans and be consistent in repaying the existing ones. While it may take years before you achieve this feat, be assured that you will eventually improve your score.