What’s A Good Credit Score?
Credit scores have become so crucial in today’s world. Almost all businesses out there want to get a summary of your credit score before they render their services to you. Initially, only lenders were interested in credit scores. In recent years, we have seen property managers and even employers request for credit scores before renting you an apartment or offering you an employment contract. Some car rentals, cellular services, insurance providers and utility companies also tend to pull credit scores before making their services available to you.
Therefore, a good credit score will make your life so much easier. Not only does such a score qualify you for more loan offers but it also improves the terms that come with the said loans.
But, what score is considered a good credit score? Who determines your credit score? What aspects influence the type of score that you have?
Credit scores range from 300 to 850 with 300 being the poorest score possible while 850 is the highest score attainable. This credit score range is then broken down into various segments that help in differentiating the different levels of creditworthiness. From this range, a good credit score is always considered to be anything from around 700 to 720 going all the way to 799. Scores just below the 700 mark are categorized as fair credit scores and this is where most people fall. From 800 upwards is the excellent credit score category.
Take note that different lenders will have different credit score categorizations. Some lenders may consider anything from 680 going up to be a good credit score while others have a higher good credit score cap of 720. Whatever the case, anything above 700 should be considered as a good credit score and it should get you more loans with good terms.
Types of Credit Scores
- Fico Scores
Of all the types of credit scores in the market, Fair Isaac Corporation (FICO) scores are the most common. Most lenders use these scores to determine one’s creditworthiness.
According to FICO, credit scores start from 300 going all the way to 850. Good FICO credit scores start from 670 to 799. They also provide another category of “Very Good” credit score which ranges from 740 to 799.
- Vantage Score
VantageScore 3.0 is the latest credit score model from Vantage. From this model, credit scores also range from 300 to 850 with the good credit score starting from 700 to 749. Anything above 749 here is considered as an Excellent credit score.
A good credit score will go a long way towards ensuring that you get a mortgage with the best terms and low APR. With a good credit score, most lenders will also give you mortgages without requesting huge down payments.
You will also have an easier time getting a decent auto loan if you have a good credit score. You’ll receive offers from different lenders with great terms and other perks.
What Factors Influence Credit Scores?
In this particular segment, we will use FICO scores as an example to see the details contained in your credit score.
First, you should know that FICO uses data from all the three major reporting agencies i.e. TransUnion, Experian, and Equifax to calculate your scores. Remember that these reporting agencies are the ones who collect information on all the financial transactions you do with the businesses you interact with on daily basis.
The following are the details that will be used to calculate the scores:
Payment history accounts for 35% of your credit score. It is under this category that collection accounts, late or missed payments, and bankruptcy are captured. It’s for this reason that people are always encouraged to make sure that they make all the necessary payments on time. This doesn’t just save you penalties but it also helps to keep your credit score high.
You should also know that your recent payment history has a bigger impact than financials misbehaviors from the 5+ years ago. Most lenders will use your recent history to give you better loan repayment terms. It also means that if you have a good credit score but your recent history isn’t decent, then some lenders may consider it as a red flag.
Debt to Available Credit Ratio (Credit Utilization)
A simpler way to describe this category is by referring to it as the amount you owe. The amount of money you owe to different businesses accounts for up to 30% of your credit score.
Various other factors will be used here to determine one’s credit utilization. For instance, FICO may take into account various other factors to accurately determine your debt to available credit ratio. It’s through such data that they can differentiate the impact a debt of say $20,000 has on a person in an entry-level job earning $15,000 over a similar amount on someone else earning $60,000.
Length of Credit History
15% of your credit score is calculated using data on the length of your credit history. The longer your credit history goes the better the score will be. People who are still operating accounts from a long time ago are always considered to be low-risk individuals and that’s why their scores will always be more positive.
Types of Credit Operated
This category makes up 10% of your credit score. A person with credit cards alone is considered to be a high risk compared to someone else with credit cards, a personal loan, mortgage, and an auto loan. Don’t get yourself in trouble by opening new credit lines that you cannot afford though.
How to improve your credit score?
Now that you know the factors that influence your credit scores learning how to improve the scores should be much easier. This will help to bring you into the good credit score bracket (if you are not there yet) or it can take you even higher to the excellent credit score category which will improve your financial life substantially.
First, it is important that you open a credit account and maintain it for as long as possible. For instance, you can apply for a credit card that’s favorable for people in your current credit score range. It’s usually advisable that you get a card with decent terms as they are much easier to maintain. For example, if you can get a card that doesn’t charge any annual fees, it becomes so much easier to keep the credit account open since you won’t be paying any fees. All you have to do is make sure that all payments are done on time.
That brings us to the next point. As you have seen above, timely payments and overall credit history account for 35% of the credit score. That percentage is huge. You should do everything possible to make sure that all payments are done on time. This will save your credit score while also protecting you from late or missed payment penalties.
Owning a credit card with a high limit doesn’t mean that you have to exhaust it. Such behaviors will be interpreted as dependence on credit and this won’t look good on your credit report. Try as much as possible to keep your credit utilization low. It’s advisable that you make sure your credit utilization never goes beyond 30%. This shows that you don’t rely on credit for your daily expenses meaning that you are financially stable and this will definitely boost your credit score over time.
Good credit Scores by Age
A fresh graduate with a credit score of 680 is not the same as an adult of over 30 years with a similar score. Students, of course, don’t have much credit history and this means that their credit scores cannot be as high as someone who’s been in the credit market for a longer period. Therefore, a student with a credit score of 680 may be considered to have a good credit score but older adults won’t.
College students can apply for student credit cards to build their credit history. These cards come with favorable terms but they usually have very low lines of credit. It’s important that students use their credit cards carefully because they won’t enjoy the same terms a few years after graduating.
Where Can I get my Credit Score?
Every American is entitled to a free credit report from the three major credit reporting agencies every year. You will have to pay a certain fee for any other requests placed for a credit report in that year.
It’s paramount that you learn to apply for these reports and scrutinize them even if you are paying all your balances on time. Cases of individuals finding errors on their credit reports are not rare. Therefore, if you read through your credit reports every time you get one, it becomes much easier to identify errors and initiate disputes before it is too late. Going through your credit report will also help you to identify factors that may be dragging your scores down. You can then use this information to correct your financial behaviors.
David is a financial expert who graduated from the University of Fordham (Master in Finance) in 2001. He has 10+ years of experience in private equity and wealth management. With strong expertise in senior-level financial planning, personal financial analysis, and mortgages, David knows his way around personal finance. Before working at CCR he used to be a financial analyst at McKinsey.
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