Credit Score Management Basics

A good credit score can do wonders for your financial situation, which is why it’s important to know the basics of credit score management. However, from FICO® to VantageScore and credit utilization to negative events, it can be confusing to navigate the world of credit scores alone.

We’re here to simplify credit scores for you. In this article, we will go over what you need to know to understand credit scores, their various types, and strategies that can help you improve your credit score.

Understanding what a credit score is

The term credit score typically refers to your FICO® credit score, which is a three-digit score ranging between 300 and 850. Credit scores are calculated based on various factors, such as:

• If you are regularly fulfilling your debt repayment terms
• If you repay debt successfully
• How often you make late payments on credit card bills
• How often your credit is checked by a hard inquiry

Credit scores are used by creditors to evaluate your creditworthiness, which is how reliable you are when it comes to repaying debt. The higher your credit score, the better your chances of receiving a credit extension or personal loan with favorable terms.

The importance of credit scores in personal loan management

Effects of good credit

Easier to be approved for loans: Creditors are more likely to accept your loan applications. You might enjoy favorable personal loan terms.

Greater loan amounts: If you need a lot of money, having good or excellent credit helps significantly in convincing lenders to trust you with the loan.

Lower interest rates: This means that you can save significant money over time due to less accrued interest. This makes repaying a loan easier since your monthly payments will cost less.

Effects of bad credit

Harder to be approved for loans: Lenders will be more cautious about approving your loan applications. If you do get approved, you might be subjected to higher interest rates and stricter repayment conditions.

Lesser loan amounts: Even if you urgently need a large amount of money, lenders may be wary of granting you large loan amounts. They would doubt that you can properly repay the loan due to low credit scores and poor credit history.

Higher interest rates: This means that it will be more challenging to fulfill your loan repayment obligations. Your monthly payments will cost more, making it more stressful to budget for them.

Factors that affect your credit score

Credit history

Credit history refers to how long you have had credit tradelines (accounts). Having an old tradeline of many years makes you more likely to have a higher credit score. This is because a good track record of managing credit means a greater chance of being financially responsible.

However, at the same time, if this old account has a bad track record of repaying debt, it will more drastically hurt your credit score.

If you have made late monthly payments, it will affect your credit history for up to seven years from the date of delinquency (when there is no longer a grace period).

Loan defaults also show up on your credit reports for up to seven years. They can gravely affect your credit score, leading creditors to become more reluctant to lend you money.

Credit mix

Your credit mix is how many different kinds of accounts you have open. Credit mixes include:

• Credit card accounts
• Retail accounts
• Mortgages
• Unsecured personal loans

It can be beneficial to your credit score if you have a steady and diverse mix of credit. This is because it can show lenders that you can manage multiple different accounts without an issue.

Meanwhile, if you continue adding new accounts and keep failing to keep up with debt repayment schedules, this can seriously hurt your credit score.

Credit behavior

Responsible credit behavior can raise your credit score. This means taking action to repay a debt on time, handling your credit lines without problems, and managing a decent credit mix. Note that while a long time of good credit behavior can reflect positively on your credit score, just a single negative event can cause a dip.

If you have obtained a personal loan but expect to miss a payment or two, it can be a good idea to take proactive steps to maintain good credit. If you contact your lender in advance, you may be able to negotiate temporary financial relief or new terms so that it is easier to budget for your monthly installments.

Credit utilization

What percentage of your available credit you are currently using can affect your credit score. As a rule of thumb, it’s advisable to use less than 30% of your credit at one time. A credit utilization percentage greater than that may damage your credit score.

Using a significant portion of your credit might not necessarily hurt your credit score, but it can contribute to a credit score dip if you continue using a lot of your credit in the long run.

Situations that have a negative impact

If you have a history of negative events, it can make your score dip. These detrimental events include:

• Mortgage foreclosures
• Tax liens
• Debt collections
• Bankruptcy
• Other displays of poor financial management

How to check your credit score

You might need to pay to check your credit score, though tools exist for you to do it for free. Credit card companies and financial institutions might tell you your credit score. Credit scoring services can be found online, many of which are free.

If you want a credit report, you need to obtain it from one of the three main credit bureaus: Equifax, TransUnion, and Experian. Every year, you can get a free report from one of these credit reporting agencies (CRAs) for free.

Different types of credit scores

The two most widely recognized credit score types are FICO® and VantageScores. Both companies use complex scoring models to generate credit scores based on your credit reports. The higher the credit score that gets assigned to you, the better.

FICO® credit score

FICO® credit scores usually range from 300 to 850. They are based on various factors, including your credit mix, history, and behavior. The more reliably you have repaid loans and credit card bills, the higher your score.

To receive a FICO® credit score, you need to have a credit tradeline that is at least six months old, as well as another tradeline that has been recently updated in the past six months and is undisputed.

A credit tradeline refers to any account that shows up on your credit reports, such as a credit card or a loan.

FICO® treats credit checks made for the purpose of student loans, mortgages, and auto loans more leniently than other kinds of credit checks. As long as multiple hard inquiries of one type are made within 45 days of each other, FICO® treats them all as one single hard inquiry.

Excellent: 800+ Very good: 740 - 799 Good: 670 - 739 Fair: 580 - 669 Poor: 579 and under

VantageScore

VantageScores are the alternative credit score model. They usually range from 300 to 850. Your score is based on factors such as your credit history, mix, and behavior.

To receive a VantageScore, you only need to have one credit tradeline regardless of how old it is, as long as it has been active at some point. The requirements to receive a VantageScore are therefore less strict than those for FICO®.

VantageScore treats all hard inquiries the same. If different lenders check your credit within 14 days of each other, these inquiries will all be counted as a single hard inquiry.

Excellent: 780+ Good: 661 - 780 Fair: 601 - 660 Poor: 600 and under

How to improve your credit score

Increasing your credit isn’t something to be dramatically done overnight. However, good financial management habits can help you steadily increase your credit score over time.

If you take care of your credit by making regular, on-time monthly payments, cultivating a diverse credit mix, and keeping your credit utilization low, you will see credit score improvement.

Good habits that may help with managing your credit score include:

• Monitoring your credit reports–they can be obtained from CRAs
• If you notice any error or discrepancy in your accounts, it’s important to address them in a timely manner
• Setting up automatic payments for bills, so long as you know you will have enough money in your bank account to avoid fees or penalties

Common mistakes that can hurt your credit score

Missing monthly payments: If you miss an installment of your debt payments, it is important to make up for it as soon as possible. Being late on payments can seriously damage your credit score.

Excessive credit utilization: If your credit utilization ratio is too high, it can negatively affect your credit score. Try to balance your utilization so that you are using less than 30% of your credit at one time.

Closing unused, old credit accounts: Sometimes, it can be beneficial to your credit score to maintain an open tradeline. A common mistake that people make is to close an account once it is no longer actively being updated.

Applying for too much credit: Whether you are applying for loans or credit, if you do it too frequently over a certain period of time, it can hurt your credit score. Numerous hard inquiries can make your credit score dip quite a few points. However, if you can satisfy the FICO® or VantageScore special credit inquiry requirements, you may be able to have these credit checks count as a single inquiry, reducing its effects on your credit score.

Loan defaults: One of the worst things you can do for your credit score is to default on a personal loan. Defaulting on a loan means you have failed to adhere to the financial obligations that you took on upon signing the loan agreement. A loan default can stay on your credit report for up to seven years, which means it has a serious, lasting impact. If you have one or more loan defaults on your credit history, it can be a good idea to be prepared for questions about them. ** **

The role of credit utilization in credit scores

Essentially, having a high credit utilization percentage can negatively impact your credit score because it is often viewed as a credit risk. Creditors want to see that you can responsibly manage your credit, and if you have a significant amount of credit utilization, this may be a sign that you rely too much on credit or mishandle your credit.

A good credit utilization ratio to stay under is around 30%. For example, if you have a credit card limit of $5,000, this means you should stay beneath $1,500 in credit usage.

If you have multiple credit accounts open, such as several different credit cards, both your individual and total credit utilization are taken into consideration for your credit score.

The impact of missed payments on credit scores

It is highly detrimental to your credit score if you miss one or several payments. These payments may be for repaying loans, paying credit card bills, or other financial obligations you are expected to meet.

A late or missed personal loan payment may stay on your credit report for up to seven years.

If you want to manage your credit score effectively, it is important to stay on track of your payment schedules. For those who are having trouble tracking various payments and obligations, there are strategies that may be viable help.

Tactics include using a calendar, setting up automatic payments, using phone reminders, and choosing the same date each month for paying your installments.

It’s important to remember that even if your credit score might drop due to a missed payment, it is not the end of the world. There are various ways you can improve your credit score. Plus, even if you have poor credit, there are personal loan types that can still be suitable for providing you with funds in case of emergencies.

How long it takes to improve a credit score

There is no standardized duration required for you to improve your credit score. How long it takes for your credit score to go up can depend on factors such as:

• Your credit history length
• The presence of negative credit events, such as foreclosure and bankruptcy
• Your credit mix–do you have a diverse selection of credit accounts?
• Positive credit behavior

About The Author

Ru Chen

Content Writer

Ru Chen is a content writer with several years of experience in creating engaging and well-researched articles. She mostly writes about business, digital marketing, and law. In her free time, she can be found watching horror movies and playing board games with her partner in Brooklyn.

Articles by Ru Chen

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