What is a good credit score? There is no standard definition, but credit reporting agency Experian defines “good” credit as a FICO score ranging from 670 to 739. What is a fair credit score? That definition includes FICO scores from 580 to 669. You can reap huge benefits when you raise your credit score from fair to good, and we’ll show you how to do that right here.
Fair credit and real life
While FICO and Experian say that fair credit begins at 580, many creditors, including most mortgage lenders, don’t see it exactly that way. For most practical applications, fair credit begins at 620 and ends at 679. Many mortgage programs set 680 as the cutoff for better interest rates and less restrictive guidelines. If you’re currently in the low range of “fair,” you can open up a lot more credit opportunities just by raising your score to 620. That’s 40 points at the most — a completely reachable goal.
Related: What Credit Score Is Needed for a Personal Loan?
Why raising your credit score is worth doing
If you have improved your score from “poor” to “fair,” congratulations. You are probably already seeing the benefits — more credit opportunities and lower costs.
According to myFICO’s Loan Savings Calculator, going from poor to fair can save you $796 on a five-year new car loan. Your interest rate drops from 16.9% to 15.7%.
But moving into the “good” range benefits you much more — the average rate for borrowers with good credit is currently 10.9%, saving you an additional $3,703!
And for mortgages? myFICO’s calculator doesn’t even consider mortgages for people with scores under 620. However, there are non-prime lenders who do — at about 6.25%. For fair credit, you’d pay 4.9% with a 620 -639 FICO as of this writing.
But borrowers with good credit can get loans at 3.8% today. The difference between 4.9% and 3.8% over 30 years for a $300,000 mortgage is a whopping $69,950!
How about credit cards?
The best credit card rates for fair credit run between 21% and 27%. While the best rates for good credit drop to 14%. If you carry a $10,000 balance and make a minimum payment of 4% of that balance, it will cost $7,608 in interest at 21%. That drops to $4,034 at 14%.
So if you raise your credit from fair to good, you could, if you borrowed $20,000 with an auto loan, $300,000 with a mortgage and $10,000 on a credit card, save what you might earn with a part-time job over the years. Just under $80,000 altogether.
How to raise your credit score
Now that you see how much more money you could have with good credit, it’s time to make it happen. Here’s your action plan:
- Pull your credit report at www.annualcreditreport.com. You’re entitled to a free report from each of the three biggest credit reporting agencies every year
- Comb through it and look for two things: any inaccurate credit history or balances, and the “reason codes” showing why your score is less-than-perfect
- Dispute incorrect information. About one-fifth of credit reports contain errors serious enough to get the consumer denied credit or cause him or her to pay more for borrowing
- Address the reasons for your fair score –most involve bad credit history, using too much credit, or insufficient credit use or history.
Now it’s time to address these issues.
How to dispute incorrect information on your credit report
Items like these can harm your score.
- Balance reported is higher than actual balance
- Accounts discharged in bankruptcy are still showing as delinquent
- On-time payments are reported as late
- Account was wrongly sent to collection
- Account brought current still showing as delinquent
- Derogatory item reported belongs to another consumer
- Derogatory history is result of identity theft
First, contact the creditors that reported your account incorrectly. This may be all you have to do. Once they resolve the error, they should report correctly to the credit bureaus in the next cycle and you’ll see the results in a few days or weeks.
Alternatively, you can dispute an incorrect entry in writing with the credit bureau(s) reporting it. Send a letter or report the error online on the TransUnion, Experian or Equifax web site. Supply anything that proves your case, like an automated bill payment on your bank statement. And keep copies of any letters or documents sent.
Fixing errors can raise your credit score in a few weeks. The credit bureau has 30 days after receiving your dispute to investigate and verify information with the creditor. It must also report the results back to you within five days of completing its investigation.
Related: Avoid Identity Theft and Protect Your ID
Fixing bad credit history
You can’t improve your credit score if you are behind on your payments. That’s because as long as you’re not caught up, creditors will report you as late. Even if you’re making a payment on time each month.
But, if you contact your creditor and explain that you can make your monthly payments but just can’t catch up the past-due amounts, it may re-age your account for you. That means you don’t have to catch up. The creditor adds your past-due amount to your balance, and as long as you pay on-time in the future, you won’t get any more late payments on your credit report. Re-aging can raise your credit score very quickly.
Video: How to Fix Bad Credit History
What about missed payments in the past? Again, if you throw yourself on the mercy of your creditors, you may get relief. This is more likely if your history with them has generally been good. Write them a goodwill letter explaining the circumstances that caused you to pay late. Apologize and ask them to please remove the late payment from your credit history. You have a better chance of success if you are current, have a long-standing relationship and a good reason for being late.
Sometimes, the only cure for bad credit is time. Every month that passes makes a late payment less important because the greatest weight is given to the most recent entries. Keep making your payments on time for six months to a year and you’ll see a difference. Don’t increase your credit balances. Just devote yourself to paying on time and owing less. Monitor your credit and watch your score climb.
Decrease credit use
If you carry balances on credit cards, and those balances increase over time, you’ve created an unsustainable spending pattern. Eventually, you won’t be able to afford your bills. That’s why credit scoring models pay close attention to the amount of available credit you actually use. The relationship between the amount of credit you have and the amount you use is called utilization.
If you have $10,000 in available credit and use $6,000, that’s a 60% credit utilization ratio. Most consumers with good credit scores have utilization of 30% or less. You can decrease utilization by:
- Paying down balances
- Increasing credit limits (by applying for more cards or by asking your existing creditors to extend more credit)
- Replacing credit card balances with a personal loan (personal loans are installment loans, so paying off your credit cards drops your utilization ratio to zero, even though you still owe the same amount)
Don’t consolidate your debt with a personal loan unless you are confident that you won’t run your credit card balances back up.
Video: How to Reduce Credit Utilization
Build or rebuild a credit history
You can bulk up a “thin file” by opening a few accounts, charging small amounts and paying off the balances each month. But it can be hard to get credit if you haven’t had credit. There are a few tools to help:
- Phone a friend — get a co-signer
- Tailgate — with an authorized user account
- Borrow from yourself — with a secured credit card
Borrowing with a co-signer may allow you to get a better interest rate. Don’t borrow more than you can comfortably repay. Try a small personal loan, and pay on-time every month. Remember that late payments on your part can harm your co-signer’s credit report — and your friendship.
Authorized user accounts are safer. Your friend or family member who has good credit can share it by making you an authorized user on one or more credit cards. You don’t actually use the card. But when the account-holder pays the monthly bill, that good history shows up on your credit report and helps improve your score.
Secured credit cards are not really credit. That’s because you deposit money to cover your limit with the card issuer, and it can keep that deposit if you don’t pay your balance. But you do get a card, and your credit limit may increase over time. You may eventually even get your deposit back if you manage the account responsibly. Look for a card with low fees, and make sure the issuer reports to all three major credit bureaus.
Once you have taken care of the most serious reason codes on your credit report, continue making your payments on time and reducing your balances. You’ll continue to raise your credit score — until you blow through the “good” range and hit the holy grail — excellent credit.
