April 21st, 2011

Credit 101: How Your Credit Score Range Affects Credit Card and Loan Options

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credit 101

*Welcome to our weekly credit lessons to brush up on your credit know-how!*

In last week’s post, we brushed up on the basics about credit score differences between credit bureaus and even within the same credit bureau. Now, let’s discuss the significance that three digit number might have to lenders looking at your credit.

Let’s take a look at your credit range, here based on TransUnion’s range used by Credit Karma, and how it influences your chance to access credit.

Poor Credit Score: 300 to low 500s

Your credit is in bad shape due to a derogatory remark on your credit, like a bankruptcy or foreclosure, or some poor credit choices in the past. Typically, lenders won’t extend credit to a consumer with a poor credit score. Consumers with scores this low are considered high-risk or subprime borrowers. Those who lend to poor credit score consumers are called subprime lenders and generally charge high interest rates and additional fees, often making a subprime loan a bad idea.

Your first step to improve your credit health is to establish and build credit with good credit choices. The good news is it’s easier for poor credit consumers to improve their credit scores than those with higher credit scores, so each positive action you take will have big benefits.

In order to build positive credit history, get a secured credit card. Most secured credit cards offer guaranteed approval and require a security deposit—usually of at least $200—that works as a buffer to keep you from defaulting. We recommend a low-fee card like Orchard Bank Classic MasterCard. Use your secured card sparingly and on purchases you’re already making, such as groceries. Pay your credit card on time and in full each month to build your positive credit history without building debt.

Fair Credit Score: mid 500s to mid 600s

With the national average credit score right around 665, according to Credit Karma data, you’re not far behind most consumers, but you still have work to do on your credit.

When it comes to getting a loan, lenders will be on the fence about whether or not to approve you. And if they do approve you for a loan or credit card, they’ll do so on their terms because they know you don’t have many options. They’ll likely offer you the highest interest rates, low credit limits, and additional fees.

Avoid applying for a loan or additional credit until you’ve paid off your debts. Credit Karma’s Credit Simulator demonstrates that consumers with a fair credit score in the mid 500s could stand to gain nearly 60 points just by paying off all credit card balances[http://blog.creditkarma.com/credit-scores/score-points-on-your-credit-score-in-5-minutes/]. Manage your expenses through a budgeting tool like Bundle so that you make sure you’re covering your necessary expenses, cutting back on unnecessary purchases, and paying down debt each month. Over time, healthy credit usage and a better score will show lenders that you won’t default on payments and you might be able to negotiate better loan borrowing terms.

Good Credit Score: high 600s to low 700s

If your credit score falls in this range, you have more options available to you when it comes to applying for credit. Your credit score tells lenders that it’s not likely that you’ll default on payments, so they’ll be more willing to lend to you.

Your loan options will begin to broaden as well. With a good credit score, lenders will more readily extend you credit for auto and home loans. If you’re in the market for a new home, make sure you compare mortgage interest rates to get the best one for your score. Once you’re approved, set up automatic bill pay for your mortgage payment so that your credit score will benefit from consistent on-time payments.

While its harder for higher credit score consumers to gain points on their score, it might be wise to apply for a new a credit card to increase your credit availability. With your good credit score, you can qualify for better interest rates and better bonus offers, like rewards points or airline miles, on credit cards. Take advantage of low interest cards and rewards like cash back with a card like the Freedom card from Chase Visa. Get rewards on purchases you already make, but remember to maintain that good credit score by always paying off your card balance on time and keeping your debt-to-available-credit ratio under 30%.

Excellent Credit Score: 720 and above

Congratulations! You’re in good shape for just about any credit you apply for with your excellent credit score. Your score proves to lenders that you know how to manage credit, and you do it well.

You’ll be offered great terms when it comes to home and auto loans, but make sure you shop around for the best rates before you settle on one. Credit card issuers will offer you the lowest interest rates out there and you’ll be approved for the best rewards points, cash back, and airline credit cards, so find the one that works for your credit and your financial lifestyle.

If you have excellent credit, there’s not always a lot of room for improvement; for many excellent credit consumers, their best bet at climbing higher is just longer credit history. But you have a unique challenge: you now have to work maintaining your credit score. To do so, make sure you’re checking your credit report and score regularly and avoiding a few common pitfalls, such as not using your credit, applying for too much credit, and overusing your credit.

Find out which credit score range you’re in by monitoring your score regularly. To determine what factors are affecting your score, check out “Anatomy of a Credit Score.” Once you’ve determined which bad credit habits are causing your score trouble, curb those actions and get your credit health back on track.

5 Comments

  1. This is yet another example of why I am losing confidence in Credit Karma — inconsistency. In this article, it clearly states that the “Fair” range is 550-639 while the “good” range is 640-719. Yet on my own Credit Karma report, my score of 682 is rated as “Fair”.

    Which is it?

    Karma User at 4:59 am on April 22, 2011
  2. Hi Karma User!
    I’m sorry for the confusion. Initially for this post, I was using the credit score ranges under our “credit cards” section, but realize this is actually an inaccurate representation when speaking in general terms. There is no consistent interpretation of credits scores. They vary from bank to bank, industry to industry, and sometimes economy to economy. For example in a good economy, a 720 might be considered excellent. In the recession, that definition required a score of 750. With Credit Karma’s credit card section, we use the guidelines that the credit card companies share with us although that might be different than mortgage lenders, auto loan originators, etc. I’ve since edited the post to reflect the ranges in a more general sense. Please let us know if you have any other questions!

    bethy at 3:31 pm on April 22, 2011
  3. Bundle is a great tool, thanks for the tips!

    Ann at 3:17 am on August 21, 2012
  4. You’re welcome!

    bethy at 11:54 am on August 21, 2012

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