Is 656 a Good Credit Score? How to Improve Your Score

A credit score is a numerical representation, typically a three-digit number, that reflects an individual’s creditworthiness. It serves as an assessment of how likely a person is to repay borrowed money and manage financial obligations responsibly. Lenders, including banks and other financial institutions, rely on these scores to make decisions about extending credit, determining interest rates, and setting loan terms for various financial products. Understanding your credit score is therefore important for navigating personal finance, as it influences access to loans, credit cards, housing, and even insurance premiums.

Understanding Credit Score Ranges

Credit scores generally fall within a range of 300 to 850, though the exact categories and their boundaries can vary slightly between scoring models like FICO and VantageScore. The FICO score, which is widely used by lenders, categorizes scores into distinct tiers. A score below 580 is typically considered Poor, indicating a high credit risk.

Scores between 580 and 669 are categorized as Fair, while a Good score ranges from 670 to 739. Very Good scores are found between 740 and 799, and an Exceptional score is 800 or higher. Each category signifies a different level of credit risk, with higher scores indicating a greater likelihood of responsible repayment and thus more favorable lending terms.

What a 656 Score Indicates

A credit score of 656 typically places an individual in the “Fair” credit category under the FICO scoring model. This score suggests a moderate credit risk to lenders, which can impact the availability and terms of financial products. While not considered a “bad” score, it is below the average credit score in the United States.

Individuals with a 656 score may qualify for some loans and credit cards, but often with less favorable terms. For instance, on an auto loan, a fair credit score might result in APRs ranging from 9% to 10%, while excellent credit could secure rates around 5%. This difference can translate to higher interest payments over the loan’s life.

For mortgage applications, a 656 score generally meets minimum requirements for certain loan types, such as FHA loans (minimum 580) or conventional loans (minimum 620). However, borrowers with this score will likely face higher interest rates and increased Private Mortgage Insurance (PMI) premiums, leading to higher monthly payments. When seeking credit cards, a 656 score may lead to approvals for unsecured cards, but these often come with higher variable APRs (16% to 20% or more) and could include annual fees. Carrying a balance becomes more costly, emphasizing careful financial management.

Factors Influencing Your Credit Score

Several key components contribute to a credit score, each weighted differently by models like FICO. Payment history is the most significant factor, accounting for 35% of a FICO score. This reflects whether bills and loan payments have been made on time; late or missed payments have a substantial negative impact.

The amount owed, also known as credit utilization, makes up 30% of the score. This factor assesses the proportion of available credit used; lower utilization ratios generally indicate better credit management. A ratio below 30% is recommended, though single-digit utilization is often associated with higher scores. The length of credit history, which considers the age of accounts, is 15% of the score, as longer histories of responsible credit use are viewed favorably.

Credit mix, accounting for 10%, evaluates the diversity of credit accounts, such as revolving credit (credit cards) and installment loans (mortgages or auto loans). New credit, also 10%, reflects recent applications and newly opened accounts. Multiple hard inquiries in a short period can temporarily lower a score, suggesting increased risk.

Strategies for Improvement

Improving a credit score, particularly one in the fair range like 656, involves consistent financial habits. The most impactful action is ensuring all payments are made on time. Setting up automatic payments or reminders can help avoid missed due dates, which are detrimental to payment history.

Reducing credit utilization is another effective strategy. This means paying down credit card balances to keep the amount of credit used below 30% of the total available credit limit, or ideally lower. Minimizing outstanding debt demonstrates responsible credit management and can lead to a positive shift in scores.

Maintaining older credit accounts, even if not frequently used, can be beneficial as they contribute to the length of your credit history. Opening too many new credit accounts in a short timeframe should be approached cautiously, as each application can result in a hard inquiry that temporarily lowers the score. Regularly reviewing credit reports from Experian, Equifax, and TransUnion for accuracy is important, as errors can negatively affect a score and should be disputed.