After you have created your household budget and a plan to save and invest, it’s time to set your sights on rebuilding your credit!
Understanding Your Credit Score or FICO Score
In today’s lending environment, credit scores dictate interest rates as well as loan approval. In recent years the credit score requirements used for loan approval have made it tougher for borrowers to qualify. Understanding and rebuilding your credit is critical for those who wish to have good credit after a financial hardship.
Credit scores are reported by the three major credit reporting agencies—Experian, TransUnion, and Equifax. Each agency interprets your credit differently and reports a different score. Most lenders will consider your mid-score when a borrower is applying for a loan, which is the middle score reported by the three credit agencies. For example, if your three credit scores are 600, 640, and 650, your mid-score would be 640. The following outlines credit scores and how the lender treats each of them.
Excellent, 800+
Lenders and insurers view those with a credit score above 800 as an excellent credit risk. These individuals have a long history of credit and multiple credit or loan accounts that have been paid on time for years. A credit report with an 800+ score has no public records of bankruptcy or collection accounts. An individual with an excellent credit score is able to qualify for the best financing and/or credit options currently available.
Very Good, 750-800
Individuals with a credit score between 750 and 800 are considered very low credit risk. Someone with this credit score uses their credit accounts responsibly and pays on time each month. This credit score qualifies for some of the best offers and lowest rates available. A vast majority of individuals who have managed their credit properly have scores that fall within the 750-800 range.
Good, 700-750
Those with a credit score between 700 and 750 are considered low credit risk by lenders and insurers. These individuals have had one to two late payments in the past, but all accounts are currently paid on time. A credit report with a 700-750 score doesn’t have an excessive amount of credit card debt, but may be carrying some low balances each month. These borrowers qualify for very competitive interest rates and terms, but may not be the best a lender has to offer.
Fair, 650-700
People with a credit score between 650 and 700 are a moderate credit risk. Someone with this score may have older derogatory items on the credit report that are not hurting the score as much as it did in the past. Those without derogatory items, but a score in this range, may have higher than normal credit card debt or too many applications in recent months. They may be carrying balances on their credit cards, some close to their limit. Someone with this score is current and hasn’t missed any payments within the past two years.
Bad, 600-650
Many lenders and insurers consider those with credit scores between 600 and 650 to be high-risk borrowers. This credit score could be lower than average because of credit card debt and derogatory credit items in the past. A borrower with this score has had late payments, collections, and/or public records appearing on the report in the past. Excessive credit applications or high amounts of credit card debt may also create this range of credit score. It’s possible that this borrower may be declined for credit or insurance, but it depends on the circumstances.
Very Bad, 600 and Below
Most individuals with a credit score below 600 have most likely had a major financial hardship. Lenders consider this very high credit risk and will not approve credit applications. Those willing to lend will typically charge high interest rates and premiums. This score is caused by late payments, collection accounts, and public records such as foreclosure or bankruptcy. It will be difficult for this borrower to obtain new credit without a strong co-signer or large down payment. Someone with a credit score of 600 and below should focus on rebuilding their credit.
