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Everything You Need To Know About Inquiries

When you apply for a loan, one of the questions on the application may ask for your credit score. You should be able to give a fairly accurate guess. You most likely won’t be exact since credit scores can change monthly as accounts are updated. The question may cause you to wonder just what is a good credit score? There are many factors and differing opinions for the answer to this question. Before looking at these factors, you need to have an understanding of your credit score and its importance.

What is a Credit Score?

Your credit score is a number representing your creditworthiness. Financial institutions, credit card companies, and other lenders use it as an aid in determining approval for loans. You will be asked for your credit score many times in your life. Creditors, insurance companies, and some employers include this question on applications.

There are two scoring companies in the United States, FICO, and VantageScore. FICO, being the oldest, is the most commonly referred to when asked for credit scores. However, your FICO credit score can vary among the three credit bureaus, Equifax, TransUnion, and Experian, giving you three different FICO scores. On the other hand, VantageScore is based on cumulative information from the three bureaus.

Your credit score is a number that falls between 350 and 800 or 250 and 900, depending on which model is used. FICO has various models that are computed based on the industry requesting the score. For example, home and auto loans tend to use FICO scores that are modeled specifically for their industry. Standard FICO and VantageScore are used by many lenders that do not request specific computing models.

Just the Numbers

So, what is a good credit score? First, you should be aware of the 5 standard terms used in assessing credit:

  1. Excellent
  2. Good
  3. Fair
  4. Poor
  5. Bad

When you request your credit score, you not only will receive a number but also the terminology used by lenders. The point range can vary slightly depending on the company computing the credit score but is typically allocated as follows.

  • Excellent: 740 – 850
  • Good: 680 – 739
  • Fair: 620 – 679
  • Poor: 550 – 619
  • Bad: 300 – 549

So, in credit score language, “good credit” falls between 680 and 739 points. But, does this mean creditors consider this “good”? That depends on what you consider good. Additionally, depending on the model used, there may be variations, such as with FICO. FICO has “good” from 670-739 and “very good” from 740 to 799, which moves “excellent” to the 800 to 850 range. Looking at a variety of industries and credit score models, the average score for “good” is above 670.

For many people, good credit simply means they can get a loan or credit card. These people are not concerned with the interest rate reduction, higher credit limits, and other perks that accompany higher credit scores.

Making a Difference

Maybe you have a credit score of 670, just on the cusp of good. Perhaps you think you don’t need to work on your credit or that it matters. Then, you apply for a home loan. Your lender goes over your score and credit report. The good news, you are approved. The bad news, your interest rate is going to be higher than you anticipated. Next, you find out you don’t qualify for the full cost of the house of your dreams. Why? Good is not always good enough.

Lenders use the credit score scale to gauge fiscal responsibility. In laymen’s terms, as your credit score goes down the ladder, so does the amount of credit extended to you. Furthermore, interest rates go up, often way up. So, while being good can get you approved for a loan, the resulting loan is not always an appealing one. This is why you need to understand how your score is determined and how you can improve it.

Computing Credit Scores

Your credit report is a compilation of your financial health throughout your life. It is broken into sections with these being the critical sections used in computing your credit score:

  • Credit/Lender Accounts: In addition to the name and address, the date opened on each account is listed. This is used by credit models to determine the length of credit. The report also shows how often you paid on time as well as how many times you were 30, 60, 90, or 120+ days late. This section will also note if the account was closed and written off due to non-payment, placed in collections, or paid in full and closed according to the arrangements.
  • Inquiries: This section shows the names of agencies that have requested your credit score or full credit report. It is broken down into full inquiries, reviews, and assessments. Only full inquiries, often called hard pulls, are used in computing credit scores.

FICO and VantageScore credit score models each use these sections in slightly different ways for computing credit scores.

FICO credit scoring calculates your credit score using the data in the following order, listed from most important to least:

  • Payment history
  • Total debt owed
  • Credit history length
  • The mix of credit accounts (revolving and installment) plus new credit accounts

VantageScore calculates your credit score in a slightly different order:

  • Payment history
  • Credit history length plus the amount of credit limit in use and credit type
  • The total amount owed and balance on accounts
  • Inquiries and credit available for use

As you can see, your payment history is the most influential part of your credit score regardless of the model used in computing it. Your financial health depends on your responsibility in paying your bills on time, every time.

Some factors cannot be used in computing credit scores, even though some of this data is in your credit report.

  • Age
  • Sex, color, religion, marital status, race, or national origin
  • Employment history, salary, or other data related to employment – note that while this information cannot be used in computing your score, your lender can use it to make a final determination
  • Residence

Understanding the factors that are used in computing your credit score is beneficial for improving and maintaining a good credit score.

Improving Your Credit Score

When you find yourself in a situation where the lender wants your credit to be higher to approve your loan, there are steps you can take. Creditors and other lending institutions typically report to the credit bureaus every month. Some report to all three while others may choose to report to only one. Each month they report the following data:

  • When payment was made in relation to the due date
  • Amount of credit used and the total amount of credit available
  • Any other status changes that are pertinent to the account

Your monthly credit file is also updated with any new accounts you open as well as any hard credit inquiries. Lenders consider shopping around for loans and opening multiple accounts to be risky financial behavior when considering a new account.

If you need to improve your credit, there are several steps you can take.

  • Double-check your credit report. Check for errors and have them removed or corrected.
  • Make all payments on time. If you need to set up autopay to do this, then do it. On-time payments are the first thing creditors look at, they want to know they will get their monthly payments without having to hound you.
  • Reduce your credit card balances. Your debt-to-income ratio is another important factor in your credit score. If you have high credit card balances, consider a debt plan to pay them down. You should aim for a ratio of 10% debt-to-credit. Lenders will see this as being fiscally responsible and your credit will improve as well.
  • Close any unused accounts, but don’t close all your accounts. You need some credit history.
  • Use your credit cards only in an emergency and pay the balance when it is due. Many people believe the myth that you need to leave a small balance on your card to improve your score. This is not true. The only thing this does is give the credit card company an amount to collect interest.
  • Set up payment plans for any accounts that are in judgment or have been handed over to a collection agency. These companies will often offer reduced payoffs to clear the account. The collections agency may be able to help remove the account from your credit file; if not, they can mark it as paid. This shows potential lenders that you are making efforts to clean up your credit.

Some agencies purport to be able to improve your credit instantly. These companies should be avoided. First, they charge exuberant fees with no guarantee of success. Additionally, anything they do you can do for free. They are simply going to negotiate your past due accounts and try to have them removed from your report. There are no quick fixes to improve your credit score, it takes time and effort.

Lastly, in the past few years, credit boosting has become available. This service claims to boost your credit instantly. If you are considering a credit boost, there are some good and not-so-good important things to consider.

  • Boost is only available through Experian. This means it will only boost your Experian credit score.
  • You have to link your bank account to the service. It is a read-only service that scans your bank account for various accounts such as utilities and cell phone payments.
  • The service only pulls positive information. You can’t get a lower credit score using Boost.
  • Users of the service have reported up to 19 points.
  • Payment history is the largest factor in credit scores and on-time utility payments can increase that history – Particularly if you have limited credit on your credit file and need to increase the data.

If you have borderline credit or limited credit data, Experian Boost can improve your Experian credit score. Just keep in mind that it does not affect your score from the other two bureaus. In the end, if you need to improve your credit, take the necessary steps to do so and make maintaining your financial health a lifestyle change.

Negative Impacts on Good Credit

Your credit report will be with you forever. However, not all of the data remains on your credit file. All of your active accounts will be on your credit report. Additionally, all positive credit files remain. However, accounts that have been charged-off or closed due to judgment are removed seven years from the date of closing. This is a law.

Don’t get excited just yet. In the sixth year, the lender or collection agency can sell that account to another collection agency. This process is commonly referred to as zombie debt. Once your debt is sold, the seven-year period starts over. It is common practice for collection agencies to buy this type of account for pennies on the dollar. These agencies then hound you until you agree to a negotiated settlement. While they will often mark the account paid, they cannot guarantee the account will be removed from your report, although in most instances these will come off 10 years from the date paid in full.

It’s quite easy to see how bad entries on your credit report can cause problems for many years. All the more reason to work on getting and maintaining good credit.

Conclusion

What determines a good credit score is often in the eyes of the beholder, be it a bank or credit card company. Lenders use your credit score as an initial view of your creditworthiness. It is not the end all be all, but it is important in your financial health. While there are number rankings that determine good, good is not great, and great is not excellent. When it comes to your financial wellbeing you need to strive for more than just good. If you are on the low end of good, work to reach the high end. Keep paying on time, use less credit and check your report annually. Soon, good won’t be good enough for you either.

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