Why Your Good Credit Score Isn’t Good Enough – And How To Fix It

Man sitting at a desk using his computer

You might think that if you get approved for a loan, your credit score is strong enough.  Indeed, you should feel pretty good about being a responsible adult and having a decent score.  But don’t get lulled into complacency.   Even slight improvements in your score can help you get better rates, lower insurance premiums and a more promising career.

With so much at stake, let’s take a deeper dive into how your credit score impacts your life and what you can do about it.

What Your Credit Score Means

Large financial institutions gather tons of data about you, compile it, and try to figure out the likelihood that you’ll pay the loan back. There are three large national institutions that gather this information.  They are called credit bureaus.   

Each of these companies evaluates your file and based on their algorithm, they assign you and everyone you know a credit score. The output is a three-digit number that lets the entire world know how you stack up against everyone else. The higher the number, the more comfortable these firms are in your reliability.   The three companies have slightly different methodology but typically, the results are about the same.   

What do the credit bureaus look at when they calculate your score?   Again, the equation is different for each of the bureaus but they all look at your credit payment history, current amount of debt, how long you’ve had credit, the kind of credit you have, how seasoned your credit relationships are, the amount of debt you have relative to the available credit and the amount of debt you have relative to your income.   Even though each of these areas (and more) are reviewed, 35% of your credit score is determined by your payment history, 30% by the current amount you owe, 15% by the period of time you’ve used credit, 15% by the type of credit you have and only 5% by your current attempts to establish new credit lines.

While the 3 bureaus  (Equifax, TransUnion and Experian) all look at similar data, they weigh the inputs differently as I said.  That’s why your score is rarely the same with all three bureaus.

The gold standard in credit scoring is a FICO score – created by Fair Isaacs. The worst FICO score is 350 and the highest possible score is 850.   In practice, if you have 800+, you’re in the top 12% of the population and are considered a good risk.   If your score is between 750 and 700 you’re in good company.  About 27% of the U.S. population falls in that group and it’s considered a good score.

20% of the people have a score ranging from 700 to 749 and that score is OK.  If you have between 650 and 699 your score is fair (15% of the population) and anything below 650 will be considered less than average.  

To be more precise, if your score is below 579 you are considered to have bad credit.   Experian reports that 61% of the people with scores in this range are likely to default or become seriously behind on their payments in the future.  People with scores between 580 and 669 are considered fair.    Experian’s reports that only 28% of these people are likely to default or fall behind on payments in a serious way.

If you have less than 670 FICO score, creditors, vendors,  insurance company and potential employers will think you are a fair or poor credit risk.   As a result, they make it more difficult and more expensive to do business with.      That’s why it’s so important for you to have the best score possible.   Even if you have a good score of 700 plus, it’s still in your interest to do everything you can to improve it.   You are competing for financial services, mortgages and jobs and you’ll be in a much stronger bargaining position if you have the highest credit score you can.

Why It’s Important To Improve Your Credit Score – Regardless of How High It Is

Anytime you do anything financial, the people who you want to do business with probably check your credit score. So it’s especially important for you to boost your score before you apply for a mortgage.  But it  goes well beyond that.   Your credit is checked when you want to arrange for utilities to be hooked up at your new home, order phone service and open bank accounts.  You may also be surprised to learn that insurance companies check your credit score when you apply for life insurance and perspective employers check your score when you apply for a job.  If either entity thinks your financial life by the seat of your pants, they project out and assume you handle your finances accordingly.  As a result, the insurance company might charge you higher life insurance premiums and potential employers might move your resume to the bottom of the stack.

What You Need To Do Next

In order to have and maintain the highest possible score, your first action step is to wake up.  Don’t be complacent.  Just because you can open new credit cards when you want to, have a job and a mortgage doesn’t mean you can go to sleep at the wheel.  There may be a time where you’ll need to make an important financial change and when that time comes, you’ll need to have the strongest credit file you can.  

Now that I’ve got your attention, your next step is to get a copy of your credit report.  This is easy and free.   By law, the major credit bureaus are required to send you a credit report once a year at no charge.   I suggest you make a note in your calendar to reach out to those bureaus every year and get a copy of your report.

When you receive the report, go over it with a fine tooth comb.  Check for false negatives – derogatory information that should not be on your report.   Even if something is true but unfair, you can dispute the charge and get it removed.  Let me give you an example.

Let’s say you didn’t pay a bill because the vendor sent the bill to the wrong address through no fault of yours.   Did you pay the bill?  No.   But how could you if they never sent it to you?   Dispute the derogatory item and get it removed from your credit report.  If you follow the steps to get false information removed yet the credit bureau or vendor refuses to play ball; call in a legal firm such as Lexington Law that specializes in credit problems.  The credit repair industry is infamous for sleazy fraudulent operators so be sure to work with someone who is well regarded, has been working in this area for a long time and isn’t too expensive.  You’d be surprised how reasonable the right firm can be.

Once you’ve cleaned up your credit report, do everything in your power to maintain the highest score you can.   You can accomplish that by:

Paying all your bills on time.  If you have an issue with a bill, call the company and deal with it.   Don’t just ignore a request for payment.  Resolve these issues or pay them.

Hold on to old credit lines even if you don’t use them.

Don’t open up new credit cards every time you walk into a store or get an unsolicited card offer in the mail.

Pay off as much debt as possible.   Keep none or (if you must) a very low balance owed.

Your credit score is your calling card in the world of finance.  Make sure you have the best score possible even if you think your score is good enough.  Chances are, with a minor amount of work, you’ll be able to enjoy lower credit costs and have better financial opportunities ahead.