What's a Good Credit Score?
Whether you’re a hardworking parent trying to make ends meet or a recent grad looking to pay off loans, you’ll likely need a line of credit someday.
A good credit score can empower you to make the major life purchases that can help you turn your dreams into reality. It’s not just about purchasing power, either – your credit score can also factor into certain job opportunities – some employers even run credit history checks on potential candidates for finance-related positions.
Your credit score represents your creditworthiness, essentially, how financial institutions view you as a borrower. With a high score, institutions will be more likely to give you favorable loan terms – like more money for a house or a lower interest rate on a car – because they trust you to pay them back on time and in full. A strong credit history indicates to lenders that you have been a trustworthy borrower in the past, and lenders can expect you to be one in the future. A low credit score, on the other hand, can be an obstacle to pursuing your goals. Don’t panic, though – there are ways to rebuild your credit score.
Late payments and overspending can knock your credit score down, so learning how to stay on top of your finances is a good habit to develop over time. Our in-app tools track and categorize your spending, so that’s a good start. Plus, N26 Spaces let you set aside money for important things each month automatically; it’s a great way to make sure you have enough saved for your monthly bills no matter what.
Any self-improvement plan has to start with a goal, and your credit journey is no exception. That brings us to the big question: what’s a good credit score? Unfortunately, the answer is a bit complicated – but we’re here to make it easier.
Whether you’re looking to turn around a low score or improve on a good one, it’s all about establishing and keeping good credit.
What should I consider a good credit score?
Your credit score is determined by information that credit bureaus collect. The three main credit bureaus in the U.S. are Experian, Equifax, and TransUnion. And what they do is compile data from your creditors to maintain your credit report. This data is then used to calculate your credit score and passed on to lenders.
Two of the most widely used scoring models for calculating a credit score were built by FICO and VantageScore. Different bureaus may use different scoring models to generate your credit score.
To get a bit more technical, both the FICO and VantageScore models produce a range of scores from 300 to 850. Each provides general guidelines for what a good credit score is.
For a FICO score:
Good credit: 670-700 range
Exceptional credit: Above 800
For a VantageScore:
Good credit: Starting around 660
Excellent credit: Above 781
How to get started on your credit journey
The following best practices will help you build good credit right from the get-go.
Use debit for everyday purchases
Rather than swiping your credit card without thinking about the debt you're racking up, use your debit card for everyday purchases. And using your N26 debit card can save you money on everyday spending with cashback Perks. Save your credit purchases for big experiences, like a trip to Thailand, or unplanned emergencies like car repairs or vet bills. This way, you will avoid sticky situations that could harm your financial well-being.
Pay your bills on time
We’ve all missed a few project deadlines or shown up late to work, but bills aren’t quite as flexible. When it comes to credit, it's good to say farewell to bad habits. On-time payments are heavily weighed when it comes to having a good credit score. Setting up automatic payments for any of your recurring bills is also an easy way to make sure you don't fall behind.
Watch out for high-interest rates
Before you apply for a new card, be sure to evaluate whether or not it's a good opportunity. We’re not saying you need to scour the fine print with a magnifying glass, but definitely do your research and know what you’re signing up for. According to WalletHub's Credit Card Landscape Report, the average credit card interest rate is 19.02% for new offers and 15.10% for existing accounts.
Don't exceed your credit card limits
We highly recommend avoiding spending anywhere near your credit card limit whenever possible. There will be exceptions, like emergencies, when you need to break this rule of thumb. But outside of extraordinary circumstances, it is advised to spend 30% of your limit or less to keep you from hurting your credit score.
Don't apply for too many lines of credit in a short period
Yes, having multiple accounts can help increase the amount of available credit you have. However, numerous applications within a short time will negatively impact your credit score. It’s generally considered a good idea to wait at least 90 days between credit card applications.
If possible, don't close your old accounts
Even if you're not using them, keeping existing accounts going will help with your available credit and improve your average age of credit. Of course, we don't advise keeping an account open that requires an annual fee or has a high interest rate. If you’ve been carrying around a credit card for years but rarely use it, consider keeping it open, doing so will improve your credit’s average age and utilization ratio. Don’t use the card for daily expenses, but if you plan to spend it on specific things like trips or event tickets – and pay off shortly after – you can keep that old credit line open and improve your score.
How often does my credit score update?
Don't worry, your score is not a minute-by-minute record of your credit history. If you're wondering how often your credit score updates, you will be glad to know that it's usually only about once a month. That said, there is no set reporting day. Each of your creditors is likely on a different reporting schedule, meaning the credit bureaus could get a trickle of new information throughout the month. So, in a sense, your credit score is being updated consistently, but not predictably.
Credit bureaus generate your credit score on request. When they receive a request, they will use whatever data is currently in your credit report to generate your credit score.
If a potential lender makes a request and gets an almost satisfactory score, the lender can request rapid rescoring. This typically happens with mortgages, if you’re close to the lender requirement but don’t quite meet it. Rather than making you wait for the next routine score update, the lender can ask to generate a new score on demand.
Not every creditor will report information to all three bureaus, so if you feel your credit score does not accurately reflect your history, it may be because that bureau hasn't gotten an update from one of your creditors.
What affects your credit score?
Now that you know what good financial habits to pursue, what exactly does affect your credit score? Both of the above scoring models use the same data but weigh it differently. Even within one model, the data may be weighted differently depending on your particular financial circumstances and the type of lender making the credit score request. Let's have a look at what information is used to calculate your credit score.
Your use of credit cards and loans will build your payment history. Other service providers like utilities, landlords, and medical facilities are less likely to report to credit bureaus, but they may do so if your account becomes significantly delinquent. It’s just as we said. If you have paid all your credit card bills and loan installments in full and on time, your payment history will positively impact your credit score.
Your credit utilization is the percentage of the total credit open to you that you are currently using. Lenders use this to measure how responsibly you utilize credit and typically look for your credit utilization to hover around 30%.
Length of credit
This simply is how long you have been using credit. Both the age of your oldest account and the average age of all your accounts impact your credit score. Generally, the longer your credit history the better, since that indicates you have plenty of experience managing your debt.
Types of credit
Lenders like to see borrowers using a mix of credit accounts, including credit cards, home loans, auto loans, and student loans. This demonstrates you are adept at managing different types of payment schemes.
Recent credit score inquiries
When a lender requests your credit score, the credit bureau records this as a hard inquiry. There is no clearly defined number of acceptable hard inquiries in a year, but an excessively high number can negatively impact your credit score. This is because it may indicate you are pursuing too many lines of credit at once. This does not mean you can't shop around for a loan. The bureaus know consumers need to compare loan terms and rates, so they typically count similar inquiries within a short time frame as one inquiry event.
Not all credit inquiries are hard inquiries, however. Some, like third-party sites that help you monitor your scores together, are considered “soft inquiries” and don’t impact your credit.
Build a good credit score with N26
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