A good credit score is a relative term, depending on what you're planning to do with your money. Generally, the higher your score the more chance you have of securing a credit card, loan or mortgage agreement.
Your score doesn't have to be incredible to get approved for every form of credit — just high enough to show creditors you've got a good history of repayments (although for auto and mortgage loans, you'll likely need a high score). The good news is that anyone can reach this goal, given enough time. However, we should warn you that a good credit score alone doesn't guarantee a loan — you'll still need to prove income, job status, savings, dependents, etc.
In this blog, we'll dive into what you can do with your credit score and how to go about improving your score to help secure loans.
What are credit scores?
Credit scores are numbers based on all your financial transactions, including any bills you pay. They help lenders decide whether you should be allowed to take out a loan or what interest rate you should get, based on your behaviour with previous loans, bills and monetary sums.
Credit scores are numbered between 0-1000 and fall into several ranges. Each range indicates a different level of risk that a lender will take on should they allow you to borrow credit. Ranges are not exact measures, however, and they depend mainly on the type of lender or credit provider you deal with. Each lender will have their criteria, depending on what type of customers they want. So you may still be able to access credit if you're not in the best range.
A low credit score can also indicate that you haven't got a long history of credit transactions yet. There's no quick way to fix this, as it takes years to build a history of positive credit repayments.
Once you jump over into a new range, even if it's just by a point, you'll likely be considered for more credit options, often with lower interest attached. This is because interest is worked out based on the 'risk' you pose of not repaying what you've borrowed.
Making sense? Let's discuss the credit ranges in more detail.
0-299
Usually, this range indicates that you haven't been great with your credit or perhaps you have no financial history (which can happen if you're just starting to borrow money now).
Under 300, or even 350, it may just be that you haven't established any credit history, so lenders have no information to go off. Once you set up your first loan or credit card, your history will be tracked — so start this new history by paying all your bills on time.
You can still technically apply for loans, particularly from payday lenders, but you'll likely be paying high-interest rates when you do. Our tip (and we're not legal advisors) is to wait it out for now until you can secure better loans.
Tip for under 300's.
Build up a credit profile first before you engage in any borrowing activity.
300-499
This is a better position to be in — but you're still not in the prime (or even average) credit range.
At this level, you at least proved you've some credit history (although it might still be pretty poor). You may have to put up with secured loans if you need to begin lending. A secured loan is where something big that you own, like a car or house, acts as collateral (security in case you default on payments). If you manage to repay your debts, the collateral lies untouched, but if you default it can be used to cover the costs of the original loan.
But, if you wait for a bit until your score improves, you can skip this stage.
Tip for under 500's.
Check your monthly bills and credit applications. A poor repayment history, particularly any missed payments, will prevent your score from rising further.
Another tip — check what you're paying for and start making a budget.
This is only for the short term to help you get into a situation where you can begin your new credit goals. If you start budgeting and improving your score now, you'll be free to take better loan deals later on, which means that repayments on loans (including interest rates) will be less steep and more manageable, since you're not as much of a perceived risk.
As a precautionary note, remember to check for anything unusual on your credit file, as credit reporting agencies can make mistakes.
500-700
At this range, you're considered about average — maybe you have a few applications for credit open, but not so many that you look like you're desperate for a loan.
Around this range, particularly if you hold out until you reach 600 or above before beginning a credit application, you'll likely get approval from lenders for smaller loans. However, this also depends on your savings and other information you may be required to display.
You're also less likely to need security deposits, which is where an asset (including money) may be required upfront before securing any credit. Those with more significant credit scores can often avoid this, as their score indicates that they're already less of a lending risk.
Tip for under 700's.
Keep going. In the 500-700 range, it's not necessary to dive into a home loan just yet, as you can still improve your score. That said, you may wish to begin enquiring for credit to see what you could secure. However, an enquiry will lower your score a little every time you make one — so don't make too many of them in one go. Repaying an accepted loan will increase your score again, but just making a loan enquiry is no guarantee you'll be accepted, which is why we caution against making lots of enquiries in one go.
Whatever you ultimately choose to do will be a balancing act. You could wait till your score improves to get access to lower rates, or you could take a gamble on the housing market if you like what you see. Whatever your choice, don't overextend your applications — otherwise, you're playing a dangerous game with both your credit score and savings.
700+
Over 700 is nearing the top tier of credit scores.
At this level, you're likely to have no trouble getting low-interest rates, depending on your other savings information.
Tip for over 700's.
Continue the excellent work. At this level, particularly over 800 (and up to 1000), you're considered something of a rarity to lenders — the nearest thing to a safe bet.
It's a lofty goal to reach, so don't be concerned if you're not there yet. Often it takes people a lifetime of savings to achieve this goal or a spotless credit file. However, if you find yourself here, don't hesitate to enquire after considerable credit amounts, as this will lower your score.
In short.
Good scores depend on where you want to be. Do you want the lowest interest rates on your mortgage? Or maybe you want a good car loan without the security deposit added? The higher your score, the more chance you will achieve your goal — especially if that goal involves a large sum of money.
It could be a good idea to wait it out if your score is below 500 — but don't let that stop you from having a credit history. Sometimes having no history can be worse overall, as it gives lenders nothing to go on when it comes to checking what you're like with your finances.
