When you check your credit score, you might be used to seeing it described as fair, poor, good or excellent. Lenders see those categories, too. They just use different labels: subprime, non-prime, prime and super-prime.
Lenders decide what interest rates and loan terms they will offer you or whether they will offer you any credit at all, depending on what kind of credit score you have. That goes for any type of financing and all types of lenders: auto, credit card, mortgage and personal loans. There are credit products out there for consumers in all credit score categories, but the products available to folks on the lowest rungs of the credit score ladder are costly.
Once you understand how lenders see your credit score and how it affects what you pay when you borrow money, you'll probably want to commit yourself to some credit score resolutions to take your score to the next level.
Get familiar with how lenders view your score and the terminology they use in order to better evaluate where you stand when it comes to your credit profile. These ranges are a general guideline; each lender sets its own cutoff points for each category.
If your score is under 600, you have what's known as poor credit. You will be denied credit by some lenders because they see you as someone who may not pay the debt back as agreed. If you are approved for credit, you will be offered the very highest interest rates. This makes borrowing any money very expensive, costing much more than someone with prime credit would pay over the life of a the loan.
Some reasons your credit score may be so low (and there are usually several reasons):
- You may have multiple late payments in the past two years. Payments that have gone beyond 30 days, 60 days or 90 days are especially damaging.
- You may have collection-related judgements, account charge-offs or a repossession or foreclosure in the last two years or a bankruptcy in the last five years.
- You also probably have a high credit utilization.
Poor credit scores can also be caused by identity fraud or errors causing the negative credit behavior to turn up on your credit report.
- You may have a history of paying late, and you may also have collections within the past two years driving your score down.
- You may be using too much of your available credit.
- You might also have applied for many credit cards in a short time period, which tells lenders you are not using (or might not use) your credit responsibly.
It's possible that you've had some delinquencies or account charge-offs in the past seven years, but not in the past two years. Because of your positive recent credit usage history, you will receive credit approvals at acceptable rates, although you still might miss out on the very best offers.
Credit Sesame members with scores between 760 and 840 all had credit utilization below 15 percent (quite the opposite of those who are categorized as deep prime or subprime).
Now you're ready to see what you can do about raising your personal credit score to the next level.
1. Don't repeat financial mistakes
The good news is that after just two years of positive and responsible credit behavior, your score begins to rebound. As the negative items become older, your score continues to improve. Even better, after seven to ten years, negative accounts such as collections, charge-offs, foreclosure, repossessions and bankruptcies completely fall off your credit reports, allowing a substantial credit score increase. To protect your higher score, resolve to never repeat those mistakes.
2. Don't apply for credit if you have a poor or fair credit score
Give your score a chance to increase, especially if you are on the cusp of the next higher credit score category. Applying for more credit can lower your score. Make a resolution to live with your current accounts and improve your habits before you try to move into new credit accounts.
3. Be alert for identity fraud or errors
If your score has been decreasing and you haven't done anything to bring it down, look for errors on your credit reports and for signs of identity fraud such as accounts and inquiries you don't recognize. Make a resolution to monitor your credit regularly and dispute inaccuracies immediately after you discover them.
4. Always pay credit accounts on time
If late payments were your problem, make the resolution to pay all of your bills before the due date in 2016. When you stop paying late, your score will begin to improve within the first year, and substantially after two years.
5. Pay down your debt
Paying down balances (and leaving the accounts open) while not continuing to charge will lower your credit utilization ratio and your score will improve. Resolve to pay more than the minimum payment every month, or consider starting a debt snowball. Also, don't forget to pay off collection accounts.
6. Go from prime to super-prime in no time
If you already use credit responsibly, make the resolution now to open one new credit card account this year. Your average file age will go down, which might result in a slight dip in your score, but the dip should be more than offset by the lower credit utilization ratio (assuming your balances don't increase along with your total available credit). Also, now is the time to shop around for credit products that have better terms than those currently in your wallet. Let your good credit go to work for you.
This article was written by Credit Sesame CEO, Adrian Nazari. Visit Credit Sesame to read the original story.