What is Considered a Good Credit Score Range?
Definition of Credit Score
Your credit score is a solitary number that symbolizes your trustworthiness as a debtor when you apply for a loan. It’s also a gauge of how someone would view you if he intends lending you money.
So a low credit score represents untrustworthiness while a high score will definitely show that you pay your bills on time and can be trusted with lent money and which you will most certainly repay.
Who determines your credit score?
Credit scores are usually determined by a select few companies, known as credit reporting agencies, which collect information about your financial habits and behavior. This is done by approaching and collecting information from companies offering financial products like credit cards and loans.
Credit reporting agencies base their calculations and assumptions on the amount of money borrowed, the amount owed and whether payments are being regularly made. These agencies will collect such information from anyone who’s your creditor and create a picture of your credit trustworthiness. In the US, the three leading credit rating agencies are Equifax, TransUnion and Experian.
Why is credit scoring done?
Let’s take an example. Say, you are approached by 3 people with a request to borrow $5. You’ve known the first two people for a number of years: One is fully trustworthy while the other one is a perfect wastrel and scoundrel and you don’t know the third person at all.
Who then would you most likely lend those precious $5 to? The choice obviously would be loaning the funds to the person who’s trustworthy followed by the person you don’t know. The scoundrel would be last on your list.
Now, think of yourself as a bank which has been approached by 3 for a loan. You will surely look for a way to determine who is most trustworthy and can be lent to; the unknown individual about whom you would have to be cautious when lending; and the wastrel to whom you wouldn’t risk lending at all.
This is exactly where the credit scores of these three individuals will help you make a decision. It’s going to tell you at one glance how trustworthy or untrustworthy these three people are moneywise.
Why Does Your Credit Score Matter
For lenders, a credit score is a decision-making tool that helps them anticipate how likely you will repay your loan within the stipulated time period. A credit score therefore, is also often called a risk score because it helps lenders assess the risk of your not being able to repay your debt as agreed upon.
Thus, having an acceptable credit is important because it also determines if at all you are eligible for the loan. Moreover, depending on the loan’s interest rate, you could stand to save hundreds or even thousands of dollars. Your good credit score would also imply that you are financially strong enough to rent an apartment of your choice, or afford the latest cell phone.
A credit score is somewhat similar to a report card that is reviewed at the school term’s end. However, instead of a letter grade, your financial activity is confined to a particular scoring range. Unlike an academic grade, a credit score isn’t stored as part of your personal credit history. Rather, the score is generated every time any prospective lender asks for it. And this would be on a credit scoring model of his choice.
So every time you attempt to achieve a major financial goal, such as owning a home or buying a new car, your credit will inevitably become a part of that picture. Your credit score will aid lenders in determining whether you qualify for the loan or not and what the loan terms will be.
However, your credit score is not the sole deciding factor for lenders to depend on while deciding to release your loan or in extending your credit.
This is because your credit report will also contain other details which are as follows:
- The total debt amount you have
- Credit types in the report
- Time lengths of all credit accounts
- Any negative marks you may have got
Apart from these, lenders also consider your debt-to-income ratio or total monthly expenses against the monthly income. This again depends on the type of loan you want.
The Effect of a Credit Score On Your Life
Even if a credit score is poor or low by acceptable standards, you may still qualify for credit. However, it will be available with fairly high interest rates or certain specific conditions like having to make a money deposit to obtain a secured credit card.
You may even have to make deposits for utilities or shell out more for your car insurance. As your credit score improves, you’ll get access to more credit products while also paying less to make beneficial use of them.
For example, data published by Informa Research Services reveals that someone with a FICO score in the range of 620 would have to pay $65,000 more on a 30-year mortgage of $200,000, than someone with a score over 760. On the other hand, prospective borrowers scoring above 750 have multiple options, including qualifying for 0% interest credit cards and/or 0% car financing.
Types of Credit Scores
A handful of models for credit scoring are used. These are:
- FICO score: The most widely applied credit score by far. The FICO score ranges between 300 to 850. FICO gets its information from Experian, TransUnion and Equifax, the three largest credit reporting agencies. Several FICO scores exist and vary depending on the industry and credit bureau that’s using them. However, since FICO is the market leader in this business, it’s what most people refer to when using the term “credit score” generically. Despite the number of credit scores available, lenders prefer the FICO credit score more.
- VantageScore: This model was generated by the three major credit bureaus as a competitor to the FICO score. VantageScore 3.0, the latest version has a range between 300 and 850 with older versions having slightly different ranges.
- PLUS score: This has been developed by Experian and bases itself solely on the data given by the Experian credit report. Used mostly for educational purposes and not lenders. Its range is between 330 and 830.
- TransRisk score: TransUnion has developed this score and based it on its own credit reports. It doesn’t take your full account history into account. Instead, risk predictions are made for new accounts only. Ranges between 100 and 900.
- Equifax score: Ranging between 280 and 850, this is the Equifax version of your credit score and functions as an educational tool only
Ranges for Credit Scores
FICO or Fair Isaac Corp and VantageScore are the two most widely used credit scores. Both use a range of 300 to 850. So here’s a quick look at what’s considered a poor, fair, good or excellent credit score, according to leading expert on consumer credit, John Ulzheimer.
Those with a score between 300 and 650 fall in this category. A 650 score is the dividing line between subprime and prime. Here, a lender would consider a prospective borrower to be a greater risk. Any score that’s below 650 would make it harder to qualify for credit cards or loans, and will most likely carry much higher rates of interest when it does.
A score between 651 and 700 is considered fair. A 700 score pushes you to the US national 50th percentile.
When your scores are somewhere between 701 and 759, your chances of getting approval for any loan or financial product is almost hundred per cent. However, there are no guarantees that you will get the lender’s best deal on offer.
Those with a credit score of 760 and above are considered to have excellent credit. Research shows that those with a 720 credit score even stand to get the lowest interest rates on their auto loans, but those with scores of 760 and above inevitably garner the most lucrative mortgage rates. An excellent category credit score ensures some of the finest deals in most lending environments.
All lenders use different criteria for determining whether you’re creditworthy or not. For example, even though you might find it difficult to get a low-interest mortgage when your score is less than excellent, you may still get an auto loan at decent rates of interest even with mediocre credit.
That said, some general guidelines still exist as VantageScore ad FICO – the two largest credit rating agencies – use a common point range of 300 to 850.
The FICO credit score range is as follows:
- Poor Credit: Under 580
- Fair Credit: 580-669
- Good Credit: 670-739
- Very Good Credit: 740-799
- Exceptional Credit: 800+
However, in the most practical terms, the true determinant of a good credit score is whether a prospective borrower qualifies for the lowest interest rates. Or in other words, if he gets approved for the lowest rate, then his score is thought to be good. If he doesn’t, then they’re not really acceptable.
Published statistics show that average Americans are no credit slouches because their average FICO score currently is around 695, with close to 20% of consumers having a credit score of 800 or more. 54.2%Americans have good or excellent credit scores of 700 or more while nearly 32.2% have a score below 650, typically considered subprime.
Factors Affecting a Credit Score
There are certain variables that go into the making of a credit score. Since FICO is an officially acknowledged ad accepted leader in this field, the following variables make up a FICO credit score.
- Credit types: This directs 10% of the credit score calculation process. Prospective creditors prefer seeing multiple credit accounts instead of just a single type. They particularly prefer both revolving credit lines as also installment debt. The former allows you to borrow repeatedly after regular repayment as in credit cards. The latter is a loan disbursed as a lump sum (a student or car loan) where the repayment happens in fixed installments over a pre-determined time period.
- New credit: If you open too many credit accounts simultaneously, your score could get hurt. This also happens when you make multiple inquiries about your credit when you shop for a credit account. New credit is 10% of the credit score calculation.
- Owed amounts: This garners a 30% share in score calculations. If you use up a lion’s share of the credit limit available to you, it signals that you are spreading yourself too widely and thinly. The total amount owed by you on all your accounts against the total credit limit as also what is owed on certain account types like installment loans versus credit cards are also factors likely to affect your score.
- Credit history length: 15% of a credit score depends on the length of your credit history. Long credit histories make you less of a risk to prospective creditors as compared to those with credit accounts opened recently. The credit score reflects your accounts age and how long they’ve been operational since you used them.
- Payment history: 35% of your credit score depends on your payment history. It tells prospective creditors whether you have paid your bills on time. Collections, foreclosures and bankruptcies will negatively affect your credit. Your score also reflects if you were late in making payments, the number of times you’ve missed the payment deadline, how much was actually owed by you and if there have been any defaults in the recent past.
Implications of a Good Credit Score
Having a good or excellent credit score makes life much easier. You may even consider yourself as one of the privileged few who have been chosen to enjoy some of life’s more lucrative blessings. Here’s why.
- You get loans easily: Having bad credit inevitably makes it harder to get a credit card, a mortgage or even an installment loan. Even if you do, you’ll have to pay much higher interest rates. It could also entail additional hoops like getting a guarantor or putting up collateral. This doesn’t happen when your credit score is good.
- Makes it easier to get employment or keeping your job: certain prospective employers even check your credit before employing you. This is done to check if there are any major issues like missed payments or even legal issues that are pulling it down. These black marks may be interpreted by your prospective employer as your lack of responsibility and could even result in your getting rejected for a good job even if you are otherwise qualified. Regulatory agencies are also known not to license professionals who have poor or bad credit.
- You get lower insurance rates: A good or excellent credit score gives you the additional advantage of having to pay much less for property and/or car insurance as compared to someone having bad credit. This is because insurers feel that those with bad credit tend to file claims more, which makes them risky customers.
- Good credit helps in launching a small business: To start a small business, your personal credit may be your only asset when you need to borrow money. Bad credit, on the other hand, makes this very difficult and/or costly.
- It makes apartment renting easier: Good credit surely gets you a good mortgage rate, but it also helps you rent a good apartment at a reasonable rate. A prospective landlord may either refuse to rent an apartment or charge higher rent from a person with bad credit because he feels the tenant may not pay his rent timely.
- It gets you your utility services faster: Having good credit draws all utility service vendors like the electric company or cable operator to your house faster. Having bad credit on the other hand, could force you to keep a deposit or guarantor before the gas, electricity, phone, water, or Internet service provider.
Effects of a Credit Score on Credit Cards & Loans
Your credit score affects the three most common credit accounts — credit cards, car loans and mortgages. Let’s take a closer look.
You’ll probably get a credit card with any credit score. What will vary dramatically is the type of credit card you will qualify for. Those with excellent credit stand to get the lowest interest rates on a majority of credit cards, which may be as low as less than 10% also. More notably, you will qualify for some of the best rewards credit cards with extra incentives like cash back, hotel stays and airline miles.
If your credit is good, you still qualify for a variety of credit cards. While the rewards cards may not be accessible, you could get 0% introductory APRs, ideally usable for balance transfers. The interest rate however, could be slightly higher, spiraling to the mid-teens.
Average credit qualifies you for some of the cards with higher interest rates of 20% or above but with certain privileges given by cards to those with good credit.
Bad credit will get you a secured credit card that needs a security deposit which is equal to or greater than the chargeable amount. The credit card issuer can also take away the deposit in case of payment defaults. Even if you get an unsecured card, the credit limit will in all probability be extremely low.
A good credit score makes a significant difference when you wish to buy a house. While loans to bad credit holders have recently been rising in other sectors, it hasn’t worked in the mortgages segment. Since most lenders got burnt by the subprime mortgage crisis of 2008, they have clamped down severely on loans to bad credit or subprime borrowers.
Interestingly, mortgage lending has become so stringent that it’s even difficult to obtain a mortgage at the 639 mark. One exception however, is the loan program of the Federal Housing Administration, which continues to disburse loans to those with scores as low as 580.
The good news is that you can still land a car loan with a bad credit than a mortgage. In fact, more than 65% of the entire subprime lending volume in the US last year comprised auto loans against bad credit. However, you’ll be paying much higher interest than someone with an excellent or good credit score.
How to Build Excellent or Good Credit?
Certain steps can be taken to make your credit shine within the shortest possible time. These are: first learning to manage real money and to determine a budget. This means opening a checking account to pay off regular expenses without having to incur overdraft fees. Also open a savings account to build up an emergency fund.
Start small: Use a credit card with a lower spending limit that’s designed for first timers. It will help you contain your spending without risking too much debt.
Use credit cards for students: These teach you financial responsibility and come with more lenient terms and reduced fees.
Make use of secured credit cards: These require you to deposit a certain amount of cash to open an account enabling the card issuer to use the deposit as collateral in case there are defaults in payment. It of course, won’t come with too many perks and your card activities will get reported to the credit bureaus, helping you to build up your credit history. Retail credit cards may be used also as these have lower limits but higher interest rates.
Develop and maintain good credit habits by paying your bills on time, understanding your credit utilization by using less than 30% of your credit limit.
On top of this, you could also fix your bad credit by putting in the required work as stated above. The process however, is however, not a quick one. But should you seriously consider how a good or bad credit score can affect your life, it’s certainly going to be worth the effort and time.
Sean brings a decade worth of experience in credit repair to our company. Sean started his career working in an accounting department for a major credit card company. This was a natural fit, given his bachelor’s and master’s degrees in accounting.