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Credit Scores: What’s Involved in Calculating and Improving Your Credit

Credit Scores: What’s Involved in Calculating and Improving Your Credit; The first step in improving your credit score is understanding how it’s calculated. Read on for more about how to maintain a good credit score.
Sheryl Nance-Nash
Sheryl Nance-NashUpdated June 15, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
It’s all about your credit score. This three-digit number, which typically ranges from 300 to 850, is important in your financial life and even beyond it. The credit score has become the yardstick by which you’re measured for many things, whether it’s getting an apartment, obtaining good terms on a mortgage, receiving a lower premium on your homeowners’ insurance, and more. And a strong score probably earns you a better interest rate when you apply for loans.Whatever your financial goals, getting and maintaining an excellent credit score should be high on your list. If your credit score isn’t where you want it to be, read on to learn more about what makes a good credit score.

Where Do You Stand?

First things first. You probably already know what your credit score is. But if not, you may be able to find it on one of your credit card statements or through the app of one of your financial institutions. You may also be able to get your credit score through a credit monitoring service. These services may be free or may require a fee, and they can help you monitor your credit by alerting you when there’s a change. If you’re a small business owner, it can also be worthwhile to stay on top of your business credit score.Once you’ve found out what your number is, you’ll need to figure out how it ranks. For FICO® scores (the ones you’re probably going to see), the breakdown is as follows. 
  • 300-579 = very poor
  • 580-669 = fair 
  • 670-739 = good 
  • 740-799 = very good
  • 800-850 = exceptional
The credit bureau Experian reports that most people have credit scores that are typically considered good or better. But 17 percent are in the fair range and 16 percent are considered poor.   Ultimately, however, it’s important to remember that creditors can have their own definitions for good and bad scores and may consider other factors as well.

6 Tips to Help You Manage Your Credit Your Credit Score

If your score disappoints you, you can work to make a course correction. It helps to know what factors typically go into calculating your credit score. Bear in mind, however, that even if you try to address these factors, you’re unlikely to see an overnight change in your score since your past behavior can remain on record for a while. Closing an account, for example, or maxing out a credit card can affect your credit score for three months, on average, while a bankruptcy averages more than six years. 

1. Check the Accuracy of Your Credit Reports

First of all, it’s a good idea to be sure that the information in your credit reports is correct. Your credit score is based on what’s called your credit report, which is a compilation of your credit history. The three major credit bureaus that track this information are Equifax, Experian, and TransUnion. You can get a copy of your credit report from each for free at annualcreditreport.comExamine each report for inaccuracies, like accounts that you’ve closed that are still listed as open or don’t indicate that you’re the one who closed them. If you find any, report them to the credit bureaus, which can correct them. Ultimately, any relevant corrections should be reflected in your credit score.

2. Prioritize Bill Payments

Approximately 35% of your credit score is based on your payment history. So paying your bills on time is an important part of your credit score. And it’s a good practice to adopt in order to stay on budget and on top of your finances generally.In our age of smartphones, forgetfulness is no longer an excuse for being late—there’s an app for that. You can set up a calendar reminder to alert you ahead of time when bills are coming due. Or you can set up automatic payments from your bank account so that you leave nothing to chance. If your late payments are due to lack of funds, you might consider taking a part-time job or monetizing a hobby to bring in extra cash. It may help to apply any extra cash like a tax refund or bonus toward paying off your debt. 

3. Pay Down Credit Balances

As you work on paying your bills regularly, bear in mind, too, that how much you owe is also important. In fact, it accounts for approximately 30% of what’s considered in your credit score. So if you can, you’ll want to pay more than the monthly minimum on revolving credit, attacking the highest interest rate card first. If you’re having trouble coming up with the money to make payments or pay off accounts, you may benefit from letting your creditors know that you’re having difficulty. It may feel awkward or embarrassing, but it can be helpful to explain your situation to them, either by letter or on the phone. If you let them know your situation, you may be able to negotiate with them to modify your minimum payments, at least temporarily. Try to work this out earlier rather than later, though. Once your account has gone to a collection agency, it may no longer be possible.

4. Don’t Open or Close Credit Accounts

There are a few other factors typically considered in the compilation of your credit score. The length of your credit history can count for approximately 15% of your score. Generally, the longer a history you have, the better for your score. Bureaus may look at the ages of your oldest account and your newest, as well as the average age of your accounts.Another factor is how much new credit you have, which accounts for about 10%. Bureaus may feel that if you’ve opened several new accounts within a short period of time, that could suggest a credit risk. Your mix of credit types can also play a small role (about 10%) in your credit score. But while having a variety of types of credit can be a plus, that doesn’t mean you should take out unnecessary credit for the sake of your mix. And know that, regardless of your credit mix, not all types of credit are good for your credit score. Some scoring models ding you for loans you may have from finance companies, for example.

5. Pay with Cash or a Debit Card

Consider not using your credit cards for a time. This could help improve your credit utilization ratio, another metric in your credit score. It measures how much of the total credit that’s available to you you’re actually using, and the lower it is, the better.

6. Keep Track of Credit Inquiries

Many scoring systems look askance if you have what they consider too many applications for credit in a short period of time. They gauge this by how many inquiries are made about your credit. But the situation is a little more nuanced than that.There are two types of inquiry: “hard” and “soft”. A hard inquiry happens when you’re actively looking for credit, like when you apply for a credit card or a mortgage, and it can affect your credit score. A soft inquiry might occur when you check your own credit or when you get a new job and your new employer checks it. That typically won’t affect your credit score. In addition, generally, credit bureaus allow for what’s called “rate shopping”. So if you’re looking for a mortgage, say, and there are several mortgage-related inquiries within a short period of time, that may not count against you. But if you have multiple credit card applications in a short period of time, that might be considered as a sign that you’re having financial trouble and might lower your credit score. 

What Credit Score Do You Need to Buy a House?

Ideally, you should check your credit score six to 12 months before you start home-shopping. That would give you time to work on fixing errors and changing behaviors to enhance your score.But you may not have the time to do that. Regardless, it’s probably encouraging to know that you don’t have to be in the 800+ credit score club to get a mortgage. In fact, you may be able to get an FHA mortgage with a 3.5% down payment and a credit score of 580.Just realize that while you will likely be able to get a mortgage, you won’t necessarily be offered the lowest mortgage rate or best terms without stellar scores.

Typical Minimum Credit Score by Mortgage Loan Type

When it comes to the minimum credit score you might need to get a mortgage, much depends on the type of loan you get. According to Experian, credit score expectations for different kinds of loan run as follows.
  • Conventional loans typically require a minimum of 620-660 or higher
  • Jumbo loans typically require 700 or higher
  • FHA loans require 500 with a 10% down payment and 580 if you put up 3.5% 
  • VA loans (insured by the U.S. Department of Veterans Affairs) typically require 620 or higher
  • USDA loans (backed by the U.S. Department of Agriculture) typically require a minimum of 580

Can You Get a Personal Loan With Bad Credit?

Even when your credit isn’t great, getting a personal loan isn’t impossible, whether you’re starting a business or just looking to remodel your kitchen. However, if your credit score is below 500, you may have more difficulty getting a loan or find it harder to get one with a good interest rate or terms.You might take a few months to work on upgrading your credit score. But of course, you may not have that much time. In that case, it might be tempting to take out a payday loan, but the terms on those can often be considered predatory and they may not be a good option. Another option might be to consider asking a trusted friend or family member with a higher credit score to cosign your loan. That might get you better terms, but it also means that your cosigner is liable if you default on your payments. 

Can You Get a Business Loan with Bad Credit?

If you’re a small business owner and your company needs funding, your bad credit may come into play here, too. Especially if you’re running a startup that hasn’t had time to develop a credit history of its own yet, potential lenders may want to see your personal credit score when they’re deciding whether or not to offer you funding. Nonetheless, it may well be possible for you to get a business loan, even with bad creditOnline lenders may be more willing than traditional lenders to loan to you even if your credit score is lower. Or you may be able to get funding that involves some kind of security, like a merchant cash advance (if your business involves credit card transactions), inventory financing (if you need the money to increase inventory), or equipment financing (if you want money to buy equipment for your business).

The Takeaway

The good thing about credit scores is they aren’t forever. Where you are today isn’t where you have to be six weeks or six months from now. You can hit the reset button and begin building your credit management skills one step at a time. When you’re ready to look at what loans are available to you, Lantern Credit lets you fill out one simple form and get a range of offers from our network of lenders so you can get the best fit for your particular needs.

About the Author

Sheryl Nance-Nash

Sheryl Nance-Nash

Sheryl Nance-Nash is a freelance writer specializing in personal finance, business, and travel. Her work has appeared in Money Magazine, Newsday, The New York Times, Business Insider,, AARP the Magazine,,, among others.
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