What are the 5 credit score levels and what does each one mean?
Maintaining a good credit score can affect how much interest you have to pay on a credit card or when you take out a loan. Here are the five levels.
Whether you are signing up for a credit card, trying to take out a loan, including for a car, home and higher education, or in some cases even looking to rent a place, your credit score can play a crucial role. Your credit score is a key indicator of how your credit history stands and can affect your ability to qualify for lower interest rates on credit cards and loans.
Thus understanding what it is and how it works can give you a leg up on keeping it where it needs to be in order to get better financial conditions.
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What are the 5 credit score levels and what does each one mean?
In the United States “the most widely-used broad-based” one is the FICO Score which is used by lenders to better understand the credit worthiness and risk associated with a particular customer. The system rank-orders individuals on the likelihood that they will repay the credit they borrowed as agreed.
Scores are represented by a three-digit number which is based on the information in your credit reports that entities provide that have lent you credit. According to the my FICO portal, the number is like a summary of your credit report which “measures how long you’ve had credit, how much credit you have, how much of your available credit is being used and if you’ve paid on time.”
In the case of FICO credit scores, they are calculated using various pieces of information from your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
Likewise, credit scores can be separated into five levels from the riskiest borrowers to those who have “exceptional” credit worthiness. The levels are as follows:
- Poor (less than 580): This score is below 580. well below the average score for US consumers and indicates a risky borrower.
- Fair (580-669): This score is slightly below average score, although some lenders may approve loans with this score.
- Good (670-739): This score is close to average or slightly above average, so it is considered a good score.
- Very Good (740-799): This score is above average, indicating a very reliable borrower.
- Exceptional (800+): This score is in the highest range, well above average score, indicating an exceptional borrower.
How to improve your credit score
Credit scores are not static but updated frequently as the information on each credit report changes all the time. There are some simple steps to maintain and even improve your credit score.
Experian offers five easy ways to boost your credit score. While there is no set timeline, the amount of time it takes depends on what is hurting your credit score and what you are doing to rebuild it.
Firstly, you need to have a credit file which is best done by opening new accounts with creditors that report to the major credit bureaus. It’s very important not to miss payments as this is the most heavily weighted part of your credit score and can stay on your history for up to seven years.
If you have fallen behind, catching up with payments can help. Likewise, reducing your credit utilization rate will improve your credit score. Those with the highest credit scores generally keep their credit utilization rate in the low single digits according to Experian.
Finally, while you need to open accounts to create a credit file, limit how often you apply for and open new accounts. Each time you do so could lead to a “hard inquiry” which could dent your credit score slightly.