Your credit score isn’t just a number – think of it as the key that unlocks your financial freedom. A good credit score is a skeleton key capable of snagging credit cards, loans, and housing rentals at the lowest interest rates. Having a bad score is like trying to pick a lock with a hairpin. It’s frustrating, time-consuming, and often doesn’t pan out.
Those with good credit know the benefits it can bring, but for some people who are building their credit for the first time, or recovering from financial hardship, the immediate benefits of building better credit aren’t immediately clear. All they see are the high interest rates and denied credit card applications, and wish they didn’t have to bother with their score at all.
But like it or not, many major life decisions, from buying a new car to sending your kids to college, revolve around and depend on that 3-digit number. So what range determines whether you’re stuck in financial prison or not?
Having a credit score below 620 puts you in the “bad” category. Whether you’re just starting out with your first credit card and have no credit history, missed multiple payments, or filed for bankruptcy, those in this bracket are going to have much higher fees and interest rates.
Those with a score between 620 and 680 are said to have fair credit. This is an average score, and most lenders still won’t trust you with better interest rates or credit cards.
Once you cross the threshold into the 680-740 range of good credit score, you’ll start getting lower rates and better credit card deals.
And, if you find your score above 740, you’re excellent credit rating will let you apply for premium credit cards with great rewards programs, as well as the lowest interest rates on car, auto, and student loans.
These ranges are always changing, so a bad score may not necessarily be bad a year from now, and a good score could downgrade to fair without warning, so it’s important to keep up with any changes so you aren’t surprised when you apply for your next loan or credit card.
How Much Does Credit Cost?
The difference between good and bad credit can mean saving or costing you several hundred dollars extra every month. Having a score in the mid-700’s or above is usually needed to get the best rates on car loans, mortgages, and student loans.
For example, someone buying a new car with a bad credit score could still get financing, but their monthly payments could be hundreds of dollars higher than someone with an excellent score buying the same car. A $20,000 auto loan can suddenly turn into a $32,000 monster with a bad score, but someone with excellent credit could find themselves driving off the lot with a 0% rate in some cases.
Likewise, mortgage rates, student loans, and credit card applications can all be denied or made vastly more expensive with a bad credit score. Credit card companies are unlikely to give you many benefits, if any, and your card will have a very low monthly spending limit. Student loans may be denied, even with a cosigner. And while mortgage rates aren’t nearly as bad as they used to be, someone with less than excellent credit will still face interest of nearly double the lowest rates offered to those with the best credit scores.
How Your Habits Affect Your Score
The bad news is, credit scores can quickly go south if you make mistakes and miss too many payments. The good news is, it’s relatively easy to rebuild and increase credit by being smart with your money and getting help when needed.
Getting bad credit, unfortunately, is pretty simple. While your credit rating won’t plummet if you make a couple late payments, forgetting or not being able to pay back the money you owe will definitely lower your score over time. Filing for bankruptcy also lowers your score a great deal.
To maintain good credit or fix bad credit, pay off your debts. Making payments on time for money you owe will steadily increase your credit rating, even if you fall into the “bad” category. Every time you use a credit card and then pay it off, your card provider reports that payment to a credit bureau. So, every on-time payment is like a note you’re leaving the bureau that says “I’m reliable.” The bureau factors in these little notes when they increment your credit score.
You’ve seen how expensive it can be to maintain bad credit, and how much money you can save by advancing into higher tiers of credit scores. The best way to manage your credit is by checking your score through one of the major credit bureaus – TransUnion, Equifax, or Experian – for free, once per year. Knowing your number will help you increase or maintain your score, and you won’t be surprised next time you apply for a loan or credit card.