What is A Good Credit Score (and How to Build it)

Given the high cost of living in the Islands, and our traditionally competitive housing and job markets, having a good credit score can be extremely important for Hawaii residents. A good credit rating can be the deciding factor when searching for a job, applying for rental housing, getting approved for a home or auto loan, or qualifying for credit cards with competitive interest rates or juicy perks.

If you want to make sure you have a solid credit score, so you're able to achieve your personal financial and life goals, it's important to understand how your credit score is created, what is considered a "good" score, and how you can take steps to improve your credit rating.

Credit Score 101

Credit scores are calculated with a complex algorithm, but fortunately understanding the basics is pretty easy.

At its most simple definition, a credit score gives lenders an idea of a person's ability to repay their debt. When you apply for a new credit card or plan a big purchase, like a car or house, lenders will check a person's credit report in the process of considering the credit card, bank loan or mortgage application. The higher your score, the more likely you'll be considered a "safe bet" and approved for the credit or loan.

Three key credit bureaus collect financial data on individuals to create a credit report: Equifax, Experian and TransUnion. FICO, or Fair Isaac Corporation, analyzes the financial information from the credit bureaus and produces a credit score.

Five key factors make up your credit score, and can either boost your rating, or harm it:

1. Payment history is the most important factor, and accounts for a majority of your score, at 35 percent. Paying accounts on time helps a credit score go up.
2. Credit utilization, or the amount of debt you have compared to your total credit limit,makes up another 30 percent. Consistently spending a large amount of your available credit can have a negative impact, so it's best to avoid maxing out your cards.
3. The age of your credit history accounts for 15 percent. Having cards for a long time is beneficial because it displays your ability to dependably maintain and pay off credit.
4. New credit inquiries make up 10 percent of your credit score. When applying for a new credit card or loan, creditors will inquire into your credit profile. A cluster of recent inquiries can have a negative impact, because opening several new accounts may suggest cash flow problems.
5. Finally, having a diverse mix of total accounts, such as store cards, credit cards and loans can have a positive bearing if paid off in a timely manner. This factor accounts for 10 percent of your score, as well.

What's a Good Score?

FICO scores range from 300 to 850. The higher the score, the more likely lenders are to give you a loan, and offer you a good interest rate. This could mean hundreds or thousands of dollars in savings in interest and finance charges over the long run. The lower the score, the more likely the borrower will be asked to pay a fee or deposit when renting an apartment, a higher interest rate on loans, or not receive approval at all.

• 800-plus is exceptional and signifies a desirable borrower.
• 740 to 799 is very good and demonstrates a dependable borrower.
• 670 to 739 is a good, average score.
• 580 to 669 is below average, but some lenders will still approve a loan.
• 579 or below is poor and lenders will likely not want to take the risk.

The specific score threshold for your needs may vary depending on the lender you reach out to, or the type of loan you apply for. For instance, car loan rates can vary from low single digits for a purchaser with a credit score of 781 to 850, and more than 14 percent for a low score of 300 to 500.

Building Your Credit Score

Ready to start improving your credit score? Downloading and reviewing your own credit report will help you figure out how well your mix of student loans, vehicle loans, mortgage, and credit card payments are helping or harming you. You'll be able to start coming up with a plan based on what you learn on your report.

The three credit bureaus each allow one free credit check a year at annualcreditreport.com. An updated policy due to COVID is allowing consumers free weekly online reports through April 2021.

If your score needs improvement, here are few good places to start:

• Pay attention to paying bills on time and, if you find yourself having trouble making payments, reach out to your creditors to discuss your options. Many lenders will allow you to extend the amount of time you have to pay, and keeping an open dialog may prevent them from reporting your lateness to the credit bureaus.
• If you completely pay off a credit card balance, consider keeping that account open rather than just closing. It can have a real positive effect on the total combined age of your accounts, boosting your score.
• If you spot incorrect information, contact the bureau to correct it.
• Know the difference between soft inquiries and hard inquiries. The first does not impact your credit report, the latter does. Checking your own report or inquiries by companies extending promotional offers for credit cards are soft inquiries. Hard inquiries occur when a lender investigates your credit history to consider your application for a loan or credit card. These inquiries remain on your report for two years and impact your score.
• Apps like wallethub.com, creditsesame.com and creditkarma.com can be useful for managing your credit. They help with budget monitoring and keeping track of debt and payments, while providing personalized insight and recommendations.

Credit is developed over time, so don't be discouraged if your score doesn't shoot up right away. Take it step by step, do the work, check your report on a regular basis, and you should start to see results.

And, if you are just beginning to establish credit, you may need to jumpstart your credit history by getting a cosigner on a credit account or loan, or you can work with a bank or credit union to give you a credit card with a small credit limit, secured by a cash deposit you put down in advance.