Our credit scores are tied to financial institutions that decide whether to offer credit cards, an auto loan, student loans, or a personal loan. Our credit report will reflect how we handle these products as a FICO Credit Score. A FICO score is a three-digit number ranging from 300 to 850. It summarizes a person’s creditworthiness.
This worthiness is based on how you make a monthly payment, usage of available credit, how long you have had credit, the amount of new credit, and the different types of credit. A good credit score affects the amount of credit you will be granted and the interest rate you pay. The three major credit bureaus maintain your credit information and FICO score. Let’s explore all the factors involved to answer the question: Is a 671 Credit Score Good or Bad? How to improve it?
Credit Score Range
Credit scores range from 300 to 850. The average credit score in the US is about 717. Here is how the range is broken down from poor to excellent.
300-669: Generally considered poor to fair credit.
670-739: Considered good credit.
740-799: Considered very good credit.
800-850: Considered excellent credit.
Therefore, a 671 is considered good. With a score of 671, you should qualify for most loans and other financial products. This should include credit cards, a personal loan, a car loan, and a mortgage. However, it could be a no if you do not receive the best interest rates or terms until your score has improved. Here is how scores affect credit accounts:
Credit Cards
You will be able to obtain a standard credit, but will not qualify for the more favorable rewards or premium cards.
Personal Loans
You can apply for and obtain a personal loan, but at higher interest rates. The amount you can borrow will be limited compared with someone with excellent credit.
Auto Loans
You will be able to qualify for an auto loan, but at a much higher rate than someone with a better credit score.
Mortgages
You can qualify for a conventional loan, but you need a larger down payment or purchase private mortgage insurance (PMI). Once you pay off 20% of the mortgage, you will no longer have to pay for this insurance. You have the option to apply for an FHA loan, which has lower credit score requirements and down payments.
Improving Credit Scores
How can you improve the score to obtain lower interest rates and better financial products? Let’s start by addressing the five factors that make up the credit scores:
Payment History – 35% of your credit score
Credit Utilization – 30% of your credit score
Length of Credit History – 15% of your credit score
New Credit Accounts – 10% of your credit score
Credit Mix – 10% of your credit score
Payment History
How you pay your bills is the most important factor. It represents 35% of your credit score. Late payments are the very thing that will tank your credit score. The good news is that it can be turned around relatively quickly. Most credit card issuers and your mortgage lender report credit activity monthly. Thereby allowing your credit scores to be updated at least once a month. It is also possible to have multiple updates during the month if multiple credit lines are updated at various times. Hence, it is possible to improve your credit score within 30 to 45 days to obtain better interest rates.
Credit Utilization
This is the second most important factor in improving a credit score. Credit Utilization represents 30% of your credit score. It is based on a ratio of the amount of credit spent vs. the amount of credit available. The credit utilization ratio should be 10% to improve your credit score. For example, if your credit limit is $5,000, to maintain a credit utilization ratio of 10%, you can only charge up to $500.00. Consequently, if you have an available credit limit of $50,000, you can charge up to $5,000.
To increase your credit utilization, you must increase your credit limit. The best way to increase your credit limit is to ask your financial institution for more credit. This will be easy to obtain with an excellent payment history. You can also apply for more credit from other financial institutions.
Length Of Credit
The length of credit factor is 15% of your credit score; it speaks to the time you have had lines of credit. A good length of credit history is about fifteen years. However, seven to ten years is considered reasonable for establishing good credit. Since negative information, like a bankruptcy, can stay on your credit report for seven years, it is a good benchmark for the length of credit to be at least seven years. Consequently, it is better to hold on to as many of your credit products to establish a broader history of being a responsible borrower.
New Credit Accounts
Obtaining new credit is a double-edged sword because it decreases your credit utilization percentage but increases hard inquiries. This is a good idea for helping with your utilization, but it will harm your credit score if you open up too many new accounts. The good news is that this variable is only 10% of your credit score.
Also, if you open too many accounts in a short time, it can be seen as a red flag to lenders. They could view this as a scam to obtain more credit and then default. Therefore, you do not want to apply for a bunch of new credit cards too quickly. Also, too many hard inquiries on your credit report will affect your credit score for about two years, but its impact begins to diminish after one year. On the other hand, you do want to diversify your credit mix.
Credit Mix
People with a much higher credit score will have a variety of credit products to draw from. They will have a variety of credit cards, i.e., American Express, Visa, Mastercard, Discover, or retail credit cards. These people will have a used or new car loan and a mortgage. They could also have a personal loan. Hence, this is an excellent mix for an excellent credit score. A good to very good score will probably not have all of these types of credit products, but will have a good payment history and credit utilization rate.
Credit Reports
Credit reports are tracked and created by the three major credit reporting agencies in the US: Equifax, Experian, and TransUnion. These three agencies collect and store information about your credit history, which is used to create your credit report. Lenders, employers, and other businesses typically use this information to make decisions. Insurance companies are one of the industries that use the data from the credit bureaus when determining the cost of premiums and eligibility. Especially for auto and homeowner insurance, to predict the probability of future insurance losses. This process is legal in most states. Experian explains which states restrict the use of credit scores in determining insurance rates.
Repairing And Extending Your Credit
It is in your best interest to review the information on your report for discrepancies and errors. You can obtain a free credit report from the three credit bureaus annually. This is a great way to make sure that all is okay, or if there are some issues you need to address. You may find something preventing your score from increasing and extending your available credit. You can dispute or request a correction based on documentation as proof of the error. There is no annual fee to obtain, dispute, and correct your credit report.
Repairing Credit
To repair your credit report, you will need a copy of it to review. Carefully go line by line and identify any inaccuracies or missing information. You should be looking for incorrect account balances, late payments, or incorrect personal information. Hence, each line of credit should be yours and not a relative with the same or similar name. Next, gather supporting documents that support your claim, i.e., account statements, payment records, or correspondence with your lender.
You can formally dispute with the credit bureaus online or by mail. Provide the credit bureaus with your name, address, the specific error you are disputing, and an explanation why it is wrong. Finally, upload or mail supporting documentation. Continue to review your report until each discrepancy has been corrected. Ensure you get a written statement from the bureau once the issue has been resolved.
Extending Credit
The easiest way to extend your credit is to begin making on-time payments. Set up automatic deductions to pay most of your bills electronically. Then you can reduce your total debt to get your credit utilization under 10%. Once these two items are under control, you can request additional credit from your current lenders. It can be small incremental increases between $100 and $500 until you have a substantial credit line. You can then request credit from other lenders to add credit tradelines to your credit portfolio. Just be mindful of the hard inquiry that could sit on your report for two years.
Spending Habits
Finally, you must be mindful of your financial situation and spending habits. Taking on too much credit at once can potentially lead to a negative financial situation. A new credit card does not have to mean more debt. It is a way to increase the amount available for your utilization while maintaining the 10% limit. Make sure you have a budget in place to track your credit card spending each month. Make it a habit of paying off your balances each month.
Other Financial Resources
In addition, you can watch your credit rating for free using apps provided by your financial institution. You can get a quick overview of where you are on any given day at your fingertips. There are Apps you can download to help you review your credit. They also offer financial products to meet your personal finance goals. CreditKarma.com and CreditSesame.com are websites that have Apps you can download to help you monitor and improve your credit scores. They offer a wide variety of financial products catered to your unique circumstances. They will send you emails to alert you of any changes to your credit score and credit accounts.
Recap of Is a 671 Credit Score Good or Bad? How to Improve it?
Even though a 671 is considered a good credit score, what makes it bad is the limitations on credit line, interest rates, and financial premium products. Hence, it is in your best interest to strive for excellent credit scores on each of the three credit bureaus. Higher scores will allow you to acquire the best financial products to meet your goals. It all starts with understanding the factors that make up your credit score. Then you have to be able to follow the guidelines for each of the five components that make up your credit score to reach a credit score of 740 or more. Review your credit reports annually for any discrepancies and take immediate action to correct them.
Steps To Improve Credit Scores
Over 49.3% of the US population has a credit score of 740 or better. Therefore, it is possible to achieve very good or exceptional credit. I have had Exceptional credit for over 40 years, following the guidelines of the credit bureaus. Here are some first steps for improving your credit score:
- Create a budget
- Pay yourself by fully funding your emergency fund or sinking funds
- Pay all bills on time by setting up automatic payments
- Set up a payment plan to pay off each credit or loan balance
- Pay off each balance each month if you are able
- Send for a copy of all three credit bureau reports for a full review
- Remove any inaccurate information by disputing it with the credit bureaus
- Request and/or apply for additional credit
- Do not exceed 10% utilization of your available credit balance
- Have a good mix of credit products
- Consult a financial advisor or credit counselling if your debt-to-income ratio is high
This content is for educational purposes only. It does not constitute financial advice. If you need personal advice, please consult a financial advisor. I do not endorse any of the companies mentioned. Please research and do your due diligence. I do not get paid if you click any of the links.
Additional Reading…
How To Budget When Living Paycheck to Paycheck
Budgeting for Dummies: How To Budget Your Money
Credit Inquiry Letter Of Explanation And Removal