by Have a 600 credit score? Is that good or bad? Here’s what a 600 credit score means, and 5 tips to increase your 600 credit score.
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What is a credit score?
A credit score is an indication of credit worthiness.
Would you lend $20 to an acquaintance who never pays you back? – Maybe if you’re feeling generous.
How about $2000? – Probably not, unless you’re SUPER generous!
That’s kind of how credit scores work. It is just a number used as an objective measure to determine a person’s creditworthiness.
Someone with a high credit score usually has a proven history of paying back regularly and on time. Someone with a low credit score may have a spotty history of paying back, or is just getting started on building credit.
Your credit score will affect how much credit lenders will provide you on auto loans, home mortgages, and credit cards. It can also affect the interest rate on these loans.
What are the ranges of credit scores?
FICO:
FICO scores range from 250 to 900. The higher the FICO score, the more trustworthy you will be perceived by lending companies.
How is credit score calculated?
From the chart above, here’s a rough breakdown of deciding factors:
35% comes from payment history.
30% comes from the amount you owe.
15% comes from length of credit history.
10% comes from type of credit.
10% comes from new credit opened.
A FICO score of 600 would be considered FAIR according to this scale.
Transunion
Another type of credit score comes from the credit reporting agency Transunion.
Similar to the FICO score, the Transunion credit score takes into account:
- Your history of making payments on time
- The age of your credit accounts
- How much credit you are using
- Recent inquiries for credit
- Recently opened new credit or loan accounts
- How much credit you have available
A 600 TransUnion Score would considered Below Average.
Why are there different Credit Ratings Agencies?
Different agencies base their scores on different criteria. As you can see, the FICO score is focused on 5 criteria, while the Transunion credit score focuses on 6 different criteria.
There are also other credit ratings agencies such as Equifax and Experian. Different credit agencies may pull your credit data from different sources. Source: MyFico
How to increase your 600 credit score:
We’ve seen that a FICO score of 600 would be considered FAIR and a 600 TransUnion Credit Score would be labelled as Below Average. There is a lot of room for improvement with a 600 score.
The fastest way to increase your credit score would likely be to focus on the BIGGEST components of your credit score.
Let’s look back at the FICO score where the criteria was broken down by percentage, starting with the biggest:
35% comes from payment history
Are you late on your payments? Are you not even paying your minimums by the due dates? This will definitely negatively impact your credit score.
Tip #1: Pay your bills on time. Paying the minimum is a must, but paying in full every time is highly recommended and much better for your long term finances. By doing this, you will avoid having to pay interest on any money borrowed.
30% comes from the amount you owe
Tip #2: Your credit utilization rate is the ratio of the amount you owe vs. how much credit has been extended to you.
Example: If you owe $1,000, and have $10,000 worth of credit extended to you, then:
$1,000 divided by $10,000 = 10% credit utilization ratio
Keep a low credit utilization ratio to increase your credit score. Just think about it, if your utilization score is high like 95%, that means that you’re pretty close to maxing out your credit cards. That signals distress to lenders and credit agencies, and they may consider you higher risk to lend credit to. This can impact your credit score negatively.
15% comes from length of credit history
It takes time to build a credit history.
I got my first credit card / debit card I think my freshman or sophomore year of college. I’m sure my credit sucked at the time because I didn’t have any credit history.
By having an account open for a long period that you’ve been paying off regularly and on time, you’ll show the credit agencies that you’re reliable and trustworthy. Over time, this will boost your score.
Your credit history takes into account your oldest credit line. As you can see, I’ve had my oldest credit line open for 14 years and counting which Transunion deems GOOD.
Tip #3: Be patient when building your credit score from scratch.
Tip 3a: Don’t close your oldest credit card account if you can keep it open for free.
I wouldn’t dare close my oldest credit card account from college. Even though I rarely use it, I don’t have to pay any annual fees, so it doesn’t cost me anything to keep it open. But if I close it, the credit history from my oldest credit line will be erased which could lower my score.
10% comes from new credit opened
Credit agencies won’t look too kindly on you if you open a lot of different credit accounts in a short amount of time. For example, if you open up 5 credit card accounts in a one week period, the credit agency might think that you might be under distress if you need access to that much credit in such a short period. Since you’re considered riskier to lend to, such activity would likely decrease your credit score.
Tip #4: Avoid opening too many accounts in a short period of time, if possible. Generally credit agencies track how many accounts you’ve opened in the past 2 years. Just be sure to not open too many accounts over a 2 year period unless you have to, or if you’re like me and did it for credit card points.
10% comes from type of credit
Type of credit is also known as credit mix. Credit agencies will look at what types of credit has been extended to you including but not limited to credit cards, car loans, mortgage loans, etc.
Tip #5: This does NOT necessarily mean the greater the mix the better. It also does NOT mean that if you have more credit cards, more car loans, and more mortgage loans, that it was necessarily increase your score. Credit mix is not something I would focus too much on, especially because of the difficulty of trying to increase this part of your score, and the low percentage value.
The Bottom Line
Building good credit takes time, but you can do it with a little persistence. Just remember to:
- Pay your bills on time.
- Keep a low credit utilization ratio
- Keep old accounts that have a lot of credit history open, if it doesn’t cost you anything
- Avoid opening too many accounts in a short period of time, if possible
- Don’t be too concerned with credit mix
Good credit can open a lot of doors like better rates and conditions on auto loans, mortgages, and credit cards, just to name a few.
Anything that saves you money and builds wealth can bring you closer to financial freedom!
Let me hear your thoughts!
Why do you want to increase your credit score? Is anything holding you back?
