How Credit Score Ranges Matter

How Credit Score Ranges Matter - PinterestFinancial and lending institutions use credit scores to determine how likely someone is to repay a loan. According to FICO, the average credit score in the United States stands at 716, but that number varies significantly by state. Credit scores range from 300 to 850, and each number corresponds to a different level of credit risk.

A high credit score means you’re a low-risk borrower, which could lead to lower interest rates on loans and other lines of credit. On the other hand, low credit scores could mean higher interest rates and a greater chance of not being approved for a loan.

While most people know they have credit scores, they may not understand why these score numbers matter or how they are determined. Read on as we explore how different credit score ranges map to financial situations and tips on how you can improve your credit score.

What Credit Score Ranges Should Mean To You

Different credit score ranges correspond to varying levels of risk. Knowing your credit score is incredibly helpful when it comes to determining whether you will qualify for a loan or credit card.

Credit card companies and lenders use credit scores to determine your loan qualification, credit limit, and applicable interest rate. Lenders often give more appealing interest rates to people with high credit scores because there is a lower chance of the debt not being repaid by the borrower.

Since people with low credit scores are considered high-risk borrowers, they may have trouble getting approved for various financial products, including personal and credit cards. As a result, they could be charged higher interest rates or denied credit entirely.

What Are the Credit Score Ranges?

Credit scoring companies like FICO use multiple credit scoring models to determine your credit score. FICO scores dominate the market, and the most popular versions range from 300-850, with each number indicating how likely you are to be a responsible borrower. Below are the different credit score ranges and what they represent financially:

FICO credit score ranges

Commonly used FICO credit scores range from 300 to 850.

Exceptional 800-850

Consumers with exceptional credit scores have consistently excellent credit usage behavior. They have low balances on their credit card accounts, maintain their credit utilization ratios around 10% or lower, and have a long history (decades) of on-time monthly payments. Borrowers within this range are offered higher credit limits and can qualify for lower rates on personal loans, credit cards, lines of credit, and mortgages.

The highest possible credit score you can have on the FICO scoring system is 850. While it is possible to obtain a perfect 850 credit score, it is not necessary to do so in order to get the best credit offers, nor is it a practical goal. Getting an 850 credit score requires that every single credit scoring factor must be perfect, which is simply not possible for most consumers.

Home mortgage credit score range

Consumers with credit score ranges that are very good or exceptional will get the best interest rates on mortgages and other loans.

Very Good 740-799

A score between 740 and 799 is in the very good credit range. These borrowers generally have good financial responsibility regarding credit and money management. They have lower credit utilization ratios, a good history of on-time payments, and few derogatory marks on their credit reports.

Most lenders are still comfortable extending lines of credit to these borrowers, so people within this range are likely to get approved for loans and other products with favorable interest rates.

Good 670-739

A FICO score falling between 670 and 739 is considered a good credit score. The national average credit score stands in this range. This score indicates that you have generally been responsible with credit in the past and paid your bills on time. You may qualify for average rates, but it may become more difficult to be approved for some types of credit. You’ll likely have to shop around in order to find the best interest rates.

Fair 580-669

Individuals with credit scores within this range are below the national average and may have negative marks on their credit reports. If you have a FICO score in this range, you’ve likely missed payments or shown signs of high credit usage and delinquencies. This means you may not qualify for some types of credit, such as loans or credit cards. Few lenders will likely extend a credit line to you but offer high-interest rates.

Poor 300-580

This range is the lowest credit score rating on credit reports and is considered to be very bad credit. People with a FICO score in this range are seen as high-risk borrowers and may be unable to get approved for loans, lines of credit, or mortgages. They have several cases of missed payments, high balances, and high credit utilization ratios. Poor credit scores may also result from filing bankruptcy or having debt in collections.

Credit invisible

“Credit invisibles” are those who do not have a credit score, which can be equally as problematic as having bad credit.

No Credit Score

It is possible to not have a credit score at all, which is known as being credit invisible. If you haven’t had a loan or credit card for several years, your credit score may not be able to be calculated because there is insufficient information on your credit reports.

Lenders may still allow you access to credit based on your other assets, but it usually requires additional verification of your assets and income.

How To Build Credit & Earn A Better Credit Score

Building and improving your credit score can be a challenging but rewarding experience. Your credit score will increase your access to financing products with lower interest rates and fees on everything from loans to mortgages. Below are some tips that can help improve your score:

Make all of your monthly payments on time – One of the most significant factors that go into calculating your credit score is your payment history. A history of on-time payments will help boost your credit score. If you miss payments, this can be reported to credit reporting agencies and damage your credit score.

Pay more than the minimum payment – By only making the minimum payment each month, you make it easier for yourself to accumulate more and more debt. Not paying your balance in full also increases your utilization ratio, which impacts your score negatively the higher your utilization becomes. Focus on paying off as much of the balance as possible each month.

Keep credit card balances low – Again, carrying large balances negatively impacts your credit score, so it is important to consistently keep your balances low if you can. If you have large outstanding credit card balances on your accounts compared to your available credit, lenders are also more reluctant to give you a new line of credit because they may view you as financially over-extended.

Wallet with credit cards

Keeping your credit cards open while maintaining low balances helps your credit utilization and, by extension, your credit score.

Keep your credit cards open – Closing a credit card account can hurt your credit score because you no longer get the benefit of its credit limit. Keeping your credit cards open even if you are not using them much allows the cards to help out your credit utilization metrics, boosting your credit scores.

Only apply for credit when you need it – Each time you apply for a new loan or credit card, lenders check your credit report, which results in a hard inquiry being added to your credit report. Having too many hard inquiries within the past year can impact your score negatively. If lenders see a lot of inquiries in your credit history, they may be concerned that you are taking on too much new debt and might not be able to make all of your payments on time.

Why You Should Never Trust a CPN to Boost a Credit Score Range

If you’re looking to boost or reset your credit score and come across a company that offers Credit Privacy Numbers (CPN), it’s best to stay away. A CPN is a nine-digit fake or stolen Social Security number that credit repair companies sell to people who want to repair their credit scores.

These companies instruct you to use the CPN in place of your Social Security Number when applying for credit. CPNs are generated randomly or stolen Social Security numbers, mostly from children, inmates, and senior citizens. Using a CPN is illegal, and when caught, you can face a hefty fine or even jail time.

Using a CPN instead of a stolen Social Security number, you may be committing an identity theft crime. Depending on your state and the statute of limitations, you could be jailed for a maximum of 15 years and face thousands in fines. Using a CPN to reset or boost your credit score is not worth the risk.

7 Fast Credit Building Strategies to Influence Your Credit Score Range

Credit scores have become an essential part of today’s society. It’s no longer just used for loan applications. Employers and landlords may also ask to review your credit score or credit history. In some cases, you may not get access to housing, utilities, or insurance if you have a low credit score.

If your credit score isn’t your ideal number, or is below the average credit score, there are several things you can do to help increase it. Here are seven fast strategies to help improve your credit score range:

1. Develop Your Credit File

Creating a positive credit file is the first step in building credit. This can be done by opening a credit line that is reported to the major credit bureaus. If you make on-time monthly payments and keep your revolving utilization ratio below 30%, this demonstration of good credit behavior will increase your credit score and, in turn, boost your credit score range. Higher credit scores will open doors to better financing options and lower rates.

2. Check Your Credit Reports

When building your credit score range, it’s critical to check your credit reports to know where you stand.

As mandated by the Fair Credit Reporting Act (FCRA), you can get your credit report for free once a year from each of the three credit bureaus. Additionally, during the COVID pandemic, the credit bureaus have volunteered to provide free credit reports to everyone on a weekly basis. This 

Review each credit report for inaccurate information and dispute errors as necessary.

3. Dispute Credit Report Errors

Your credit score can be significantly lowered if your credit report contains erroneous negative items. However, the credit bureaus can be contacted if any errors are found. Your dispute letter must be investigated and responded to by the credit bureau within 30 days. If you find the information to be inaccurate, you can request that it be removed or corrected on your credit report.

4. Pay Your Bills on Time

Payment history is the most critical factor in your credit score, accounting for 35% of your score. No credit-building strategy will be effective if you do not consistently pay your bills on time. Late payments can remain on your credit report for up to seven years.

If you do this successfully, having a long history of on-time bill payments will help you achieve excellent credit scores. To avoid accidental missing or late payments, you can set up reminder notifications and automatic bill payments with your lenders.

5. Increase Your Credit Limit

Paying off credit cards and other revolving accounts may help boost your credit score range, but having a high amount of available credit will add points to your score. Consider increasing the limit on your lines of credit to decrease your utilization ratio. An ideal time to do this is after building up a history of responsible credit usage or when you have started a better-paying job.

According to the Consumer Financial Protection Bureau, your payment history, credit mix, debt owed, and length of your credit history are some important credit factors a credit card issuer will look at when determining your credit limits.

6. Catch Up on Delinquencies and Past Due Accounts

If you have missed payments in the past, try to resolve them as soon as possible. Bringing your delinquent accounts current will help improve your credit score, and paying off collections may help your score depending on which credit scoring model is used.

Since most negative information like late payments remains on your credit report for seven years, it’s important to start repairing your credit history as soon as possible.

If you have trouble with credit card debt, consider talking to a credit counselor to create a debt management plan. They may be able to negotiate lower monthly payments and interest with your creditors and help you pay off old collection accounts faster. Some may even work to get these negative marks removed from your report.

7. Get a Secured Credit Card

If you are just starting out or have had credit problems in the past, applying for a secured card can help you improve your credit score. When you apply for a secured card, you make a security deposit that the issuer will use as collateral if you are unable to pay.

Monthly payments on a secured credit card will help build your credit score. You should look for secured cards that report to all three major credit bureaus in order to take advantage of the credit-building benefits of credit cards.

The Dollar Differences in Credit Score Ranges
Dollar cost of low credit score ranges

The difference between good credit and bad credit can add up to thousands of dollars of interest over your lifetime.

The higher your credit score range, the less risk you pose to lenders and the more likely you are to be approved for a loan with a lower interest rate.

For this reason, having a good credit score can save you thousands of dollars in interest costs.

However, those with low credit scores will have trouble getting approved for a loan, and those who do may be required to pay a higher interest rate to offset the increased risk of lending. Therefore, having a low credit score means you pay more for financing big-ticket items like a car or a home.

Why You Should Share What You Learned About a Credit Score’s Range

Sharing your knowledge about credit score ranges will help people understand the importance of maintaining a good credit score. To get financing for big-ticket items or a dream home, your credit score must reflect your financial responsibility. In the long run, consumers will save money and have easier access to credit when they have a history of good credit habits. 

For lenders to feel confident that you are financially responsible, you should maintain a good credit mix of accounts including a checking account, savings account, and an investment portfolio.

Follow the credit tips above, such as maintaining a low credit utilization rate, making on-time payments, and not opening too many accounts at one time so that you can maintain a good credit score.

Conclusions on Credit Score Ranges

It’s important to understand credit score ranges and realize that they are a reflection of your creditworthiness. 

Positive credit habits can open doors to financial opportunities that you would not be able to access otherwise, so start building up your credit history and credit scores now. Finally, make sure to keep up your good credit habits consistently to set yourself up for financial success in the future.

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How to Use Credit Cards Responsibly Without Going Into Debt – Credit Countdown With John Ulzheimer

How to Use Credit Cards Responsibly Without Going Into Debt - Pinterest

Credit cards are often vilified for their high interest rates, which can be very costly to consumers who carry a balance from month to month rather than paying off the full balance that was accrued. Credit expert John Ulzheimer believes that credit cards do not deserve the bad reputation they have earned.

In a Credit Countdown video on our YouTube channel, John explained why credit cards are not necessarily as bad as they are made out to be and how to use them responsibly without going into credit card debt.

Keep reading to learn more on this topic and watch the video below!

Credit Card APRs

It’s true that credit cards do have high interest rates compared to other forms of credit, even if you have a good credit score. For this reason, once you get into credit card debt, it can be a very deep hole to climb out of, because the interest charges keep adding to your total amount of debt. 

However, as John points out in the video, no one forces you to open a credit card or go into credit card debt, so in his opinion, it seems unfair to blame the credit cards with high interest rates for actions that consumers choose to take.

If you choose instead to pay off your balance every month, then you do not have to pay interest on your purchase, so the APR of the card is irrelevant. Therefore, if you are going to use credit cards responsibly, then there is no need to choose a credit card based on its APR.

Always Pay Off Your Credit Cards in Full

The most important rule when it comes to using credit cards correctly is this:

Only charge as much as you can pay off in full every single month. 

When you pay your bill in full each month, since you are not paying interest, it is essentially free to use credit cards. The exception to this is if your credit card has an annual fee, but for some consumers, the annual fee on some credit cards may be worth paying in order to reap the rewards offered by the card.

If you want to be a responsible user of credit cards, it is essential to pay off your balance in full every month rather than carrying a balance and paying interest.

If you want to be a responsible user of credit cards, it is essential to pay off your balance in full every month rather than carrying a balance and paying interest.

Maintain a Low Balance-to-Limit Ratio

If you want to have a good credit score, it’s important to keep a low balance-to-limit ratio (also commonly called the credit utilization ratio). The closer your balance is to your credit limit, the fewer points you can earn toward your credit score.

This goes for both FICO credit scores and VantageScore credit scoring models.

Don’t take this to mean that you cannot use your credit card often or make large purchases with it. Just be aware that since a higher balance-to-limit ratio means a lower credit score, you may want to avoid doing anything to substantially increase your balance before you apply for a loan, especially a large loan, like a mortgage loan or an auto loan. Otherwise, you could end up with a higher interest rate that could cost you thousands of dollars in additional interest over the course of the loan.

Do Not Skip a Payment

Credit card issuers sometimes offer “skip a payment” programs that allow you to “skip” a payment for one month, especially around the holidays, when consumers may rely more on their credit cards.

John recommends never signing up for these programs because by skipping a payment, you are obviously opting not to pay in full that month. Since you are carrying the balance to the next month, you will be charged interest on the debt and you will have even more debt to pay back the next month.

Instead of skipping a payment, the more responsible thing to do is to go ahead and pay the statement in balance in full just as you normally would.


While credit cards may be risky in the wrong hands, responsible consumers do not need to forgo using them altogether. It is possible to benefit from using credit cards as a financial tool without going into debt or paying interest.

To that end, make sure you always pay your balance in full and maintain a low balance-to-limit ratio, and never skip a payment.

To hear from John directly, check out the video below. Follow our YouTube channel to see more of our Credit Countdown videos!

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Things Everyone Should Know About Credit Cards

Things Everyone Should Know About Credit Cards - Pinterest graphicCredit cards are not only a useful payment method for making purchases but also an essential component of a solid credit-building strategy

After all, credit cards are the most common form of revolving credit, which is given more importance than installment credit (e.g. auto loans, student loans, mortgages, etc.) when it comes to calculating your credit score.

Unfortunately, credit cards often get a bad rap because it’s easy to rack up excessive amounts of debt and destroy your credit score if you do not know how to use credit cards properly.

However, when you have the knowledge and ability to use credit cards to your advantage rather than to your detriment, they can be an extremely powerful financial tool to have in your arsenal.

If you’re unsure if using credit cards is the right choice for you or confused about how they work, then keep reading to learn the basics of credit cards that everyone should know.

What Is a Credit Card?

A credit card is a card issued by a lender that allows a consumer to borrow money from the lender in order to pay for purchases.

The consumer must later pay back the funds in addition to any applicable interest charges or other fees.

They can choose to either pay back the full amount borrowed by the due date, in which case no interest will be charged, or they can pay off the debt over a longer period of time, in which case interest will generally accrue on the unpaid balance.

Each credit card has an account number, a security code, and an expiration date, as well as a magnetic stripe, a signature panel, and a hologram. Most credit cards also now have a chip to be inserted into a chip reader rather than swiping the card at the point of sale. In addition, some credit cards offer contactless payment capability.

Credit cards allow consumers to pay for goods and services with funds borrowed from the credit card issuer.

Credit cards allow consumers to pay for goods and services with funds borrowed from the credit card issuer.

How Do Credit Cards Work?

Although using credit cards may feel like using “fake money” or spending someone else’s money, it’s important to understand that the money you borrow when you pay with a credit card is very much real money that you now owe to the lender.

Credit Cards Are Unsecured Revolving Debt

With most credit cards, the funds you borrow are considered to be unsecured debt because you are borrowing the money without any collateral. That means the credit card issuer is taking on additional risk by giving you a credit card, since there is no collateral that they can take from you if you fail to pay back the debt, unlike with secured debt, such as a mortgage or a car loan.

Furthermore, the lender allows you to decide when and how much you want to pay back the funds instead of requiring you to pay the full balance on each due date. You can choose to only pay the minimum payment and “revolve” the remaining balance from month to month, which extends the amount of time during which you owe money to the credit card company.

Most credit cards now come with a chip in addition to a magnetic stripe.

Most credit cards now come with a chip in addition to a magnetic stripe.

For the above reasons, credit card interest rates are typically significantly higher than the interest rates for installment loans.

However, credit cards are also the only form of credit where paying interest is optional—there is a “grace period” of at least 21 days before the interest rate for new purchases takes effect, and you only get charged interest if you do not pay back your full statement balance by the due date.

(Keep in mind that the grace period usually only applies to new purchases, as stated by The Balance. This does not include balance transfers or cash advances, which typically begin accruing interest immediately.)

Understanding Credit Card Interest Rates

To reiterate, the interest rate of a credit card technically only applies when you carry a balance instead of paying off your full statement balance each month. However, most people will likely end up carrying a balance on one or more credit cards at some point, so it is still a good idea to be aware of what your interest rates are.


The interest rate of a credit card is usually expressed as an annual percentage rate (APR). This is the percentage that you would pay in interest over a year, which can be confusing because interest on credit card purchases is charged on a daily basis when you carry a balance from month to month.

You can find your average daily periodic rate (ADPR), which is the interest rate that you are being charged each day, by dividing the APR of your card by 365.

Average Credit Card Interest Rates
The interest rate of a credit card, expressed as the APR, is important to know if you ever carry a balance on the card.

The interest rate of a credit card, expressed as the APR, is important to know if you ever carry a balance on the card.

As of October 2020, the average credit card interest rate as reported by The Balance is 20.23%. However, credit card issuers are allowed to set their APRs as high as 29.99%. It is not uncommon to see APRs upwards of 20%, even for consumers who have good credit.

The highest interest rates are generally seen on credit cards for bad credit or penalty rates that credit card issuers can implement when you are 30 or more days late to make a payment. You may also get penalized with a higher interest rate if you go over your credit limit or default on a different account with the same bank, according to ValuePenguin.

Ask for a Lower Interest Rate

In our article on easy credit hacks that actually work, we suggest trying the simple tactic of calling your credit card issuer’s customer service department and asking for a lower APR. Surveys have shown that a majority of consumers who do this are successful in obtaining a lower interest rate.

Important Dates to Know

Many consumers assume that the payment due date of your credit card is the only important date you need to worry about. While it’s true that the due date is the most important date to be aware of, there are several other dates that are useful to pay attention to as well.

Billing cycle

The billing cycle of a credit card is the length of time that passes between one billing statement and the next. All of the purchases you make within one billing cycle are grouped together in the following billing statement.

This cycle is typically around 30 days long, or approximately monthly, although credit card companies can choose to use a different billing cycle system.

Statement closing date
Your credit card's statement closing date is not the same thing as your due date, so make sure you know both.

Your credit card’s statement closing date is not the same thing as your due date, so make sure you know both.

Sometimes referred to simply as the “closing date,” this is the final day of your billing cycle. Once a billing cycle closes and the statement for that cycle is generated, the balance of your account at that time is then reported to the credit bureaus.

You can look at your billing statement to find the closing date for your account. Because of the 21-day grace period, the statement closing date is usually around 21 days before your due date.

Due Date

This is the most important date to know in order to pay your bill on time every month, which is the most influential factor when it comes to building a good credit history. To make it easy for yourself to avoid accidental missed payments, you may want to set up automatic bill payments.

If your due date is inconvenient due to the timing of your income and other bills, you can try requesting a different due date with your credit card issuer.

Promotional offer dates

Many credit cards offer introductory promotions to attract new customers, such as 0% APR, bonus rewards, or no balance transfer fees. To use these offers strategically, you will need to know when the promotional period ends so you can plan accordingly.

Expiration date
All credit cards have an expiration date past which they cannot be used.

All credit cards have an expiration date past which they cannot be used.

Every credit card has an expiration date printed on it, after which you will no longer be able to use that card, although your account will still be open. You just have to get a new credit card sent to you to replace the one that is expiring.

Usually, credit card companies will automatically send you a new card before the original card expires. If this does not happen, simply call the issuer to ask for a replacement credit card.

A Common Credit Card Mistake

Some consumers think that the closing date and the due date are the same thing and therefore believe that if they pay off the full statement balance by the due date, the credit card will report as having a 0% utilization ratio. They may then be confused to find out that their credit card is still reporting a balance to the credit bureaus every month.

However, the statement closing date is usually not the same date as your due date. This is why your credit cards may report a balance every month even if you always pay your bill in full—the account balance is being recorded on your statement date before you have paid off the card.

If you do not want your credit card to report a balance to the credit bureaus, you will need to either pay off the balance early, prior to the statement closing date, or pay your statement balance on the due date as usual and then not make any more purchases with your card until the next closing date.

Credit Card Payments

With credit cards, you have several different options for payment amounts.

Minimum payment
If you make only the minimum payments on your credit cards, it will take you longer to pay off your credit card debt and you will be charged interest.

If you only pay the minimum payments on your credit cards, it will take longer to pay off your credit card debt and you will be charged interest.

This is the minimum amount that you are required to pay by your due date in order to be considered current on the account and avoid late fees. Although this may vary between different credit card issuers, typically the minimum payment is calculated as a percentage of your balance.

If you make only the minimum payment every month, it will take you a much longer time to pay off your balance and you will be paying a far greater amount in interest than if you were to pay off your statement balance in full. Check your billing statement to see how the math works out; the credit card company is required to disclose how long it will take to pay off the balance if you only make the minimum payments.

Statement balance

This is the sum of all of your charges from the preceding billing cycle in addition to whatever balance may have already been on the card before that cycle. This is the amount you need to pay if you do not want to pay interest for carrying a balance.

Current balance

This number is the total balance currently on your credit card, including charges made during the billing cycle that you are currently in, so it will be higher than your statement balance if you have made more purchases or transfers since your last closing date. You can pay this amount if you want to completely pay off your account so that it has no balance.

Other amount

You can also make a payment in the amount of your choosing, as long as it is greater than the minimum payment. This is a good option to use if you don’t have enough cash to pay the statement balance in full, but want to pay more than the minimum in order to mitigate the amount of interest you will be charged.

Credit Card Fees

Credit cards often charge various other fees in addition to interest. Here are some common fees to be aware of.

Although you may have access to a "cash advance" credit limit on your credit cards, it is generally not recommended to get a cash advance due to the high interest rates and fees you will have to pay.

Although you may have access to a “cash advance” credit limit on your credit cards, it is generally not recommended to get a cash advance due to the high interest rates and fees you will have to pay.

Late payment fees

If you do not make the required minimum payment before the due date, the credit card company will likely charge you a late fee somewhere in the range of $25 – $40 (in addition to potentially raising your APR to a penalty rate). If you usually pay on time but accidentally miss a payment for whatever reason, try calling your credit card issuer and asking if they would be willing to reverse the fee since you have been an upstanding customer overall.

Annual fees

Some credit cards charge an annual fee for keeping your account open. Many times this charge may be waived for your first year as a promotional offer to attract new customers. Cards with higher annual fees will often have additional perks and rewards, but there are also plenty of great options for rewards cards that do not charge annual fees.

Cash advance fees

Your credit cards may give you the option to borrow cash in the form of a cash advance. However, this is usually not advised because cash advance interest rates are often significantly higher than your regular interest rate for purchases. In addition, you will most likely be charged a cash advance fee when you first withdraw the money, whether a flat dollar amount of around $10 or a percentage of the amount you take out, such as 5%.

Foreign transaction fees

Some cards charge a fee to use your card to pay for things in other countries. These fees are typically around 3% of the purchase amount. However, there are many credit cards on the market that do not charge foreign transaction fees.

Be sure to check the terms of service of your credit cards for fees such as these so that you can avoid any unexpected charges.

How Credit Cards Affect Your Credit

Credit cards are one of the most impactful influences on your overall credit standing, and they play a role in multiple credit scoring factors.

Building Credit With Credit Cards

One of the major advantages of credit cards is that it allows you to start building a history of on-time payments, which is extremely important given that payment history is the biggest component of your FICO score, making up 35% of it.

All you have to do to get this benefit is use your credit card every so often and pay your bill on time every month.

Click on the infographic to see the full-sized version!

Click on the infographic to see the full-sized version!

Revolving Accounts Are More Important

We have previously discussed why revolving accounts are more powerful than installment accounts when it comes to your credit score.

Revolving accounts such as credit cards can have a much greater influence on your credit than auto loans, student loans, and even a mortgage—for better or for worse. They must be managed properly because negative credit card accounts will also have a very strong impact on your credit.

Mix of Credit

Although your mix of credit only makes up 10% of your FICO score, it is still worth considering, especially if you aim to achieve a high credit score or even a perfect 850 credit score.

A good credit mix generally includes various types of accounts, including both revolving and installment accounts. You can see the different types of accounts in our credit mix infographic.

Credit cards may help with your credit mix if you have a thin file or if you primarily have installment loans on your credit report.

They also add to the number of accounts you have, which is a good thing for the average consumer. In fact, as we talked about in How to Get an 850 Credit Score, FICO has stated that those who have high FICO scores have an average of seven credit card accounts in their credit files, whether open or closed.

The Importance of Credit Utilization Ratios

Your credit utilization is the second most important piece of your credit score, which is another reason why credit cards are such a strong influence on your credit.

The basic rule of thumb with credit utilization ratios is to try to keep them as low as possible (both overall and individual utilization ratios), meaning you only use a small portion of your available credit. Ideally, it’s best to aim to stay under 20% or even 10% utilization, because the higher your utilization rate is, the more it will hurt your credit instead of help.

Conclusions on Credit Card Basics

Credit cards can be intimidating, especially when you don’t know how to use them correctly.

It is also true that not everyone wants or needs to use credit cards.

It’s not impossible to build credit without a credit card, but it is more difficult since you would be limited to primarily installment loans, which are not weighed as heavily as revolving accounts, and possibly alternative credit data.

However, for those who are able to use credit cards responsibly and follow good credit practices, they can be an incredibly useful credit-building tool as well as a way to reap some benefits and perks that other payment methods do not provide.

We hope this introductory guide to credit cards provides the knowledge base you need in order to feel confident using credit cards and to take advantage of their benefits.

If you found this article useful, please comment to let us know or share it with others who want to learn more about credit cards!

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Snowball vs. Avalanche: What Is the Best Way to Pay Off Debt?

Snowball vs. Avalanche: What Is the Best Way to Pay Off Debt? - Pinterest graphicIf you’re like most Americans, you probably have more debt than you would like to have. Almost 60% of Americans say they feel “weighed down” by debt, according to a survey by LendingTree. It’s no surprise that a majority of consumers share this sentiment considering that the Federal Reserve Board (FRB) says that Americans collectively owe a total of over four trillion dollars in debt as of August 2020 (that’s $4,123,499,210,000, to be precise).

Between mortgage loans, auto loans, student loans, home equity lines of credit, credit cards, personal loans, and more, Business Insider reports that the average American has $51,900 in debt.

Naturally, many people want to pay off their debt as quickly as possible. Once you are done making those hefty monthly payments, you can use your money to work for you instead of sending it out the door to your lenders.

If paying off debt is one of your financial goals, then this article is for you. We’ll be breaking down two of the most popular and effective ways of paying off debt: the debt snowball and the debt avalanche.

The Debt Snowball Method

The “debt snowball” strategy was popularized by Dave Ramsey and it is perhaps the most well-known technique for paying down debt.

How the Debt Snowball Works

The process of the debt snowball method is relatively simple. Here’s how it works:

Keep making the minimum payments on all of your debts.
Take a look at your budget and see if you can free up some funds by cutting spending or increasing your income.
Send as much money as you can toward your smallest debt until you have completely finished paying off that debt.
Once you have paid off your smallest debt, direct the money that was previously assigned to paying off that account to the next smallest account.
Repeat this process for each of your accounts in order of lowest to highest balances until you have no more debt!

Pros of the Debt Snowball Method

The debt snowball plan is not necessarily the most economically efficient, as we will discuss below, but there is a reason why it is still one of the most popular ways to gradually pay off debt.

The “debt snowball” strategy is the most popular and statistically the most successful method for paying down debt.

The “debt snowball” strategy is the most popular and statistically the most successful method for paying off debt.

You get to enjoy the satisfaction of “small wins” as you pay off your lowest balances.

The effectiveness of the debt snowball approach lies in behavioral psychology rather than mathematical calculations.

When you use your resources to tackle your least intimidating debt first, it won’t be long before you can celebrate a small victory, and then another, and then another. This provides encouragement and motivation to keep going, which is a vital factor in the long-term sustainability of your plan.

You can quickly make progress on freeing up cash flow to direct toward other debts.

Every time you knock out a small debt, you can use the money that you were putting toward that bill to attack the next one, increasing your momentum with each debt that you finish paying off.

The debt snowball has the highest success rate.

Many financial experts recommend the debt snowball option because statistically, consumers are more likely to stay on track with their goals when they use the snowball approach, which is due to its powerful psychologically motivating effect.

Cons of the Debt Snowball Method

You will pay more in interest charges.

With the debt snowball option, since you are attacking your debts in order of their outstanding balances without considering their interest rates, it is likely that you will end up paying more in interest than if you were to work in order of the debt with the highest interest rate first to the debt with the lowest interest rate last.

It will likely take longer to pay off your debt.

Similarly, since you will be starting small and paying more money in interest overall, it could take longer to become debt-free than if you were to use a mathematically more efficient method.

The Debt Avalanche Method
The debt avalanche method is technically the faster and more economical approach to getting rid of your debt.

The debt avalanche method is technically the faster and more economical approach to getting rid of your debt.

The debt avalanche, on the other hand, is all about the numbers. This path aims to reduce the amount of interest you pay so that you can pay off your debt faster and pay less money overall.

How The Debt Avalanche Works

The debt avalanche is very similar to the snowball strategy. The only difference is the order in which you pay off each debt. The process follows these steps:

Keep making the minimum payments on all of your debts.
Send as much money as you can toward the account that has the highest interest rate.
Keep doing this until the account is paid off.
Take the money that was going toward that account and add it to your monthly payment toward the account with the second-highest interest rate until you eliminate the balance on that debt.
Repeat this process until your debt is gone!

Pros of the Debt Avalanche Method
Without the psychological motivation of “small wins” at the beginning, the debt avalanche plan tends to be less effective because it is harder to stick to than the snowball method.

Without the psychological motivation of “small wins” at the beginning, the debt avalanche plan tends to be less effective because it is harder to stick to than the snowball method.

You will pay less in interest.

Since you are tackling the debts with the highest interest rates first, you will be able to wipe out the most expensive debt more quickly than if you were to prioritize the size of the balance instead.

The debt avalanche helps you get rid of your debt sooner.

Again, starting with the highest interest rates means you won’t have to deal with those high interest charges continually piling on as you pay off other accounts. Less interest means a lower total amount owed, so you could reach your goal faster with this method.

Cons of the Debt Avalanche Method

It might take a while to feel like you are making progress.

With the debt avalanche, you may not be starting with a small debt, so you might not get the chance to celebrate some small wins early on that you could get with the snowball approach. This is especially true if your higher interest rate debts are also your accounts with high balances. It could take a long time to finish paying off just one account.

It doesn’t account for emotions about money and debt.

While the debt snowball is meant to keep you going by providing quick emotional boosts, the debt avalanche focuses purely on the numbers. Calculations of how much you could save on interest may not be as exciting or motivating as the prospect of knocking out smaller accounts.

The fact that people tend to have strong feelings about money is not necessarily accounted for in the debt avalanche plan.

The fact that people tend to have strong feelings about money is not necessarily accounted for in the debt avalanche plan.

The debt avalanche is harder to stick to long-term.

Due to the above factors, the debt avalanche method can feel discouraging to some consumers. If it’s hard to see the dent you are making in your debt, you are more likely to give up on your goals and land right back where you started. As we mentioned above, the debt snowball tends to have a higher success rate than the debt avalanche.

Snowball vs. Avalanche Debt Payoff Calculator

Perhaps by this point, it is still not clear which of these two methods would work best for you. One tool that may be useful in making your decision is a calculator that can show you how much you will pay back in total and how long it will take you to get out of debt with both methods so that you can compare the results side by side.

To use a snowball vs. avalanche calculator, such as this one from MagnifyMoney, you will need to have the following information on hand to put into the calculator:

A debt snowball vs. avalanche calculator can help you determine the best approach for you.

A debt snowball vs. avalanche calculator can help you determine the best approach for you.

The balance of each of your accounts
The APR of each account
The amount of the minimum monthly payment you make toward each account
The total dollar amount that you can afford to pay toward your debt every month

Once you input your information and get your results from the calculator, you will have a clearer comparison of the two methods in numerical terms.

A Hybrid Approach

A third option is to use a combination of the two strategies to get the benefits of each.

For example, you could first focus on accounts with significantly higher interest rates than your other accounts, such as credit cards, like you would with the avalanche method.

Then, once you are finished with those, you could proceed to pay off the rest of your accounts with lower interest rates in order of smallest to largest outstanding balances. Since these accounts will all have relatively low interest rates, this way, you can still hit some of those smaller goals without sacrificing too much money in terms of interest.

Another potential benefit to this approach is that focusing on paying off your credit cards first can help your credit score rebound sooner, since revolving debt balances are far more damaging to your credit score than installment debt balances.

Summary: What Is the Best Way to Pay Off Debt?

When it comes to paying off debt, there is no easy, one size fits all answer. The best path forward depends not just on the nuts and bolts of your finances, but also your personality, behaviors, and motivations.

The debt snowball is a popular option that works well for many because the quick feeling of success each time you pay off a small debt can help keep you inspired to stay on track. The downside of this method is that you could pay more in interest and spend a longer period of time chipping away at your debt.

If you would rather minimize interest charges and speed up the process, and you don’t need those psychological boosts, then the avalanche method may work for you. However, keep in mind that not everyone has the discipline to stick with the debt avalanche for as long as it takes to see results.

You can also get creative and modify or combine the two approaches in a way that makes sense for your financial situation and your personality.

In addition, your debt payoff plan—no matter which method you choose—will only help you if you commit to getting and staying out of debt. If you are still spending too much and accumulating more debt, then you won’t get anywhere, even with the most powerful debt payoff strategies.

Ultimately, the best way to pay off debt is to choose a plan that you can stick to. The most important thing is to be able to reach your destination of becoming debt-free, regardless of which path you choose.

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What Is Bad Credit and How Can It Affect You?

Bad Credit - Pinterest

Bad credit is something we all fear, but what is actually considered poor credit and how could it affect you? In addition to explaining what bad credit is and why you need to avoid it, we’ll also provide some strategies in this article to help you fix bad credit.

What Is a Bad Credit Score?

The definition of “bad credit” varies depending on which credit scoring system you are talking about. Since FICO 8 is the scoring model most widely used by lenders, we will focus on FICO when discussing the question of what is considered bad credit.

The FICO 8 credit scoring system assigns consumers a number to represent their creditworthiness, with the lowest credit score possible being 300 and the high end of the scale being 850.

A high credit score shows lenders that they can be fairly confident that a consumer will repay debts because they have demonstrated responsible behavior when it comes to credit in the past.

A low credit score, on the other hand, means that someone represents a higher risk to lenders because they are thought to have a higher probability of defaulting on a loan.

According to Credit Karma, a FICO score between 300 to 579 is considered a poor credit score, while a fair credit score is between 580 and 669. In contrast, an excellent credit score is between 800 and 850.

Credit scores between 300 and 579 are considered poor credit.

Credit scores between 300 and 579 are considered poor credit.

What Gives You Bad Credit?

As we mentioned, a bad credit score means lenders perceive you as a high-risk borrower. Therefore, what causes bad credit is poor management of credit and risky behaviors that indicate you may have a higher probability of default.

For example, being late on payments or missing payments altogether can really hurt your credit because payment history is the most important factor of a credit score.

High credit card utilization can lead to bad credit.

High credit card utilization can lead to bad credit. Photo by Natloans

What causes bad credit specifically? Here are some more examples:

Late or missed payments
Defaulting on a loan
Collection accounts
Foreclosures or repossessions
Maxed out or high-utilization credit cards
Too many inquiries at one time
Too much new credit

Sometimes people have bad credit because of things they can’t control, like having a medical emergency that leads to huge hospital bills that they can’t afford to pay. In fact, the majority of consumer debt in collections is medical debt, according to Magnify Money.

Bad Credit Loans

If you have bad credit, you’re likely going to have a hard time getting loans with favorable terms or possibly even getting approved for a loan in the first place. Since a bad credit score represents a high risk for the lender, loans for people with poor credit typically have higher interest rates and may require collateral or a down payment—if the lender is willing to approve the loan at all.

Personal Loans for Bad Credit
Those with bad credit might turn to payday loans, which can come with interest rates of up to 400%.

Payday loans can come with interest rates of up to 400%. Photo by Aliman Senai.

Personal loans for bad credit are few and far between. Usually, at least fair credit is needed to be considered for a loan. Bad credit loan lenders may charge very high interest rates since they are taking on a lot of risk by lending money to someone with poor credit. These higher interest rates may translate into thousands of dollars of additional interest payments over the term of a loan.

Very bad credit loans such as payday loans often have astronomical interest rates of up to 400%, which makes it nearly impossible for many consumers to get out of debt.

Bad Credit Car Loans

Bad credit auto loans, also known as subprime auto loans, are often considered “second-chance” loans because they are typically the next option for those who have been rejected for traditional auto loans. Although there is not necessarily an official dividing line between which credit scores are considered prime and subprime when it comes to auto loans, credit scores below 620 tend to be considered subprime.

Car loans for bad credit, similar to personal loans for bad credit, are associated with much higher costs than prime auto loans. Since lenders of second-chance auto loans are taking on additional risk, these loans often have significantly higher interest rates and more fees than auto loans for consumers with good credit. Additionally, car loans for bad credit may come with penalties for paying off the loan early.

Bad credit car loans can have triple or more the interest rate as prime auto loans.

Bad credit car loans can have triple or more the interest rate as prime auto loans. Photo by

According to Investopedia, “While there is no official subprime auto loan rate, it is generally at least triple the prime loan rate, and can even be five times higher.”

Credit Cards for Bad Credit

If you have bad credit, your options for getting a credit card will be limited, and you will most likely not be able to get the perks associated with premium credit cards, such as low interest rates, high credit limits, and rewards. Credit cards for poor credit may also come with annual or even monthly fees.

Subprime credit cards often require you to make a deposit with the lender as collateral. These cards are known as secured credit cards since they are secured by your deposit, which the lender can keep if you fail to make payments on the card. Sometimes, the lender may be willing to switch you to an unsecured card after you have shown a history of consistent on-time payments.

As we’ve seen with loans for bad credit, credit cards for bad credit, both secured and unsecured, will likely have high interest rates, sometimes as high as 30% or more.

How to Fix Bad Credit

Having a bad credit score is expensive. It makes getting any kind of credit more difficult and more costly because bad credit lenders tack on high interest rates and fees to compensate for the higher financial risk of poor credit loans.

Bad credit doesn’t just dramatically increase the cost of credit. It can also affect other aspects of your life, such as your insurance premiums, your ability to find housing, and even your job, since many employers now check prospective employees’ credit reports. Therefore, most people with bad credit want to fix it as soon as possible.

Here are some strategies that you can try if you need to fix bad credit.

Credit Repair

If you have bad credit as a result of identity theft or extensive errors on your credit report, you’ll likely need to undergo credit repair in order to clean up your credit file.

Some people opt to try their hand at DIY credit repair, while others may prefer to hire a trusted credit repair company to get help with the dispute process and potentially faster results. [Disclosure: This article contains affiliate links.]

Either way, it’s important to be aware of best practices when disputing credit report errors. It’s best to submit your dispute by sending a letter along with documentation to verify your identity and support your claim. Trying to dispute errors online or over the phone may not yield the best results.

In addition to disputing inaccurate information with the credit bureaus, it’s also important to contact the company that is furnishing the data so that the error doesn’t get reported again in the future.

Rebuilding Credit

Improving bad credit takes time and patience. While credit repair companies may claim to have tactics that can boost your credit fast, the reality is that these tactics are usually limited to removing inaccurate information from your credit report. If you remove everything from your credit report, what are you left with?

The best way to fix bad credit, beyond correcting inaccuracies, is to rebuild it with more positive credit history over time. In other words, you need to add more positive accounts to your credit profile and keep them in good standing while they age. At certain age levels, these accounts should begin to boost your credit profile with that positive payment history.

Rebuilding credit with positive credit history helps to fix bad credit.

Rebuilding credit with positive credit history helps to fix bad credit.

One option that can help people re-establish credit is opening a credit-builder loan, which works in the reverse order of a traditional loan. Instead of receiving the loan amount up front and then making payments to the bank to pay off your debt, with a credit-builder loan, you make all the payments first and then receive the funds after you have finished paying off the loan. Since these loans are much less risky for lenders, they can be offered to those struggling with bad credit or lack of credit history.

Generally, though, building credit by opening new accounts can take at least two years to see much of a positive effect. The best way we have seen to bypass this two-year waiting period is by piggybacking on the good credit of others.

Have you been affected by bad credit? What did you do about it? Tell us your story in the comments.

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