A good or bad credit score can affect every facet of an individual’s or family’s financial life, from mortgage rates and auto loans to employer background checks and life insurance rates. Lenders, landlords and even employers consider a credit score a reflection of an individual’s reliability and honesty – correlating an individual’s management of their personal finances to their level of responsibility, integrity, and business or financial skills.
Generally speaking, a good credit score is anything above 720; however, different credit bureaus use different formulas and statistics to calculate scores so it is common for an individual to have a different score with each credit reporting agency. Lenders usually get the 3 reports and average them to determine eligibility for a loan.
Unless you are extremely wealthy and can act as your own bank, you will need to maintain a good credit history, or learn how to improve your score, in order to borrow money for major purchases, such as a home, car, or even your child’s education.
What Is A Good Credit Score?
Credit scores above 800 are excellent and people in this range pay the lowest interest rates and are likely to qualify for additional credit. These Americans have a long credit history with consistent payments and no run-ins with collection agencies, bankruptcies, liens, or judgments. Scores between 750 and 800 are very good and 650 to 750 are good. 600 to 650 is an average score and individuals in this range pay higher interest rates and have more difficulty getting unsecured debt like credit cards or small bank loans. Scores below 600 are considered poor, which means individuals pay the highest interest rates and usually do not qualify for low-APR cards or unsecured loans.
As mentioned earlier, different reporting agencies and bureaus, as well as lenders and banks rank each credit rating differently. For instance, Credit Sesame suggests that a figure ranging from 680 to 739 is a GOOD credit score, while anything above 740 is excellent.
Then Credit Karma recommends that a GOOD credit rating should be anything above 720.
A more simplistic way to view credit score ranges may be the following:
- Excellent Credit, Grade A: 750-850
- Good Credit, Grade B: 700-749
- Average Credit, Grade C: 630-699
- Poor Credit, Grade D: 580-629
- Bad Credit, Grade F: 300-529
Different Types of Credit
Credit bureaus base scores on three major types of credit: secured debt, unsecured debt and revolving credit, as well as many additional factors. The highest scores are achieved by people who use all types of credit appropriately. An example of secured debt is a mortgage, car or business loan because the loan is secured by collateral or an asset, such as the home, car or business itself, respectively. The lender holds the deed or title until the loan is paid off, at which point, the institution sends the deed/title to the owner.
A bank signature loan is a good example of unsecured debt. Unsecured personal loans can be used to buy expensive toys or gifts, consolidate debt, or start a small home business. Typically, large business loans will need to be secured, collateralized, or the borrower will be required to take out a life insurance policy to pay off the lender in case of tragedy. Personal credit cards like Visa, MasterCard, American Express and Discover are examples of revolving credit, where the lender can continue to borrow, up to card’s limit, while making regular payments against the incurred debt.
Since the bureaus base scores on payment history and length of credit history, it is necessary to actually carry non-credit card debt and make regular payments for at least one year. For example, if you buy a home with cash, you will not improve your credit score because you never made payments and no reporting agency actually received note of the transaction. Consumers who are trying to build the best credit score must carry some debt over time to build a history. Late payments have an immediate negative effect, so making payments on time regularly are vital.
How Is Your Credit Score Calculated
The algorithm or formula used to calculate your credit score is constantly changing. As more data is pulled by agencies, new relationships are discovered between varying factors; however, the basic factors you need to focus on to maintain a high score are payment history, balances or amounts owed each month, length of history, new applications for credit, and types used.
Payment History: approximately 35% of your score is attributed to your payment history. Consistently making payments on-time will have a positive effect in the long-term, while a 30, 60, or 90 day late payment will have an immediate negative effect on your score. Though 30 or 60 day late payments may damage your credit now, if it is isolated event, your scores will only decline temporarily. 90 day late payments are another story – one 90 day late payment may affect your credit for up to 7 years because, to the computer models, it indicates you are likely to repeat the transgression. In terms of damage, it ranks up there with a bankruptcy filing, tax lien, repossession, or collection against you.
Balances/How Much You Owe: approximately 30% is based on how much of your credit limit you use and the balances you have that carry over. If you over leverage your income or consistently use 100% of your limit, you may be penalized. This is called credit utilization and the best recommendation is to consistently use less than 50% of your card’s limit and then switch to another card. Do not max out any one credit card. If you must carry over a balance from one month to another, try to keep it as low as possible if your credit score is very important to you. This concept also applies to your mortgage and car loans – do not live beyond your means, especially if you want to avoid being house poor.
Length of Credit History: about 15% relies on your overall credit record or history. The longer you’ve maintained accounts, consistently used credit, and maintained them in good standing, the more reliable you are. New college graduates may be frustrated that, despite no mistakes or late payments, they don’t have a perfect score. This is because a long track record of reliability and financial responsibility is essential to your creditworthiness.
Applications For Credit/New Accounts: accounting for 10% of your calculated scores, new accounts and applications take into consideration the number of recent inquiries into your history, the number of recently opened accounts, and the times between each opening and inquiry. Multiple inquiries in a short time period can temporarily lower your rating.
Types of Credit Used: the last 10% is contributed by the variety and mix of loans and liabilities you have, such as credit cards, home, car, student, business, and/or personal loans, as well as revolving, installment, retail, unsecured, secured, etc.
If you are a teenager, high school or college student, start with a credit card tied to your parent’s account. Many student cards do not actually build credit, but a normal card tied to your parent’s credit card account can start building you a positive history while you are in school.
For those with no credit history, the easiest type to obtain is secured credit. Secured cards are easy to get and the credit card companies make regular reports to bureaus and agencies, helping account holders raise scores quickly. Bank loans against savings accounts or car loans are also relatively easy to apply for and, provided the payments are made on time, will build a good score over a one to two year period. This type of credit can also help consumers rebuild after a bankruptcy or foreclosure.
Lastly, if you have no credit history, but are a recent graduate with a job offer or are currently employed, most any credit card company will be happy to have you. Just make sure to use your card responsibly and start paying off your student loans on a monthly basis, and your record will build.
Why Is A Good Credit Score Important?
People with the best credit scores pay the lowest interest rates on loans for cars or homes, are eligible for special considerations like full financing on new cars or high credit limits on cards. Employers often pull reports on potential employees and a low score can make a difference in the hiring process. A high score is seen as a sign that an individual is responsible and honors their obligations. A bad score can even make it difficult to rent housing since many landlords check the credit scores of potential tenants. I even have a friend who works in the banking industry, and her employment contract stipulates that she maintain a certain minimum credit score at all times.
Other Factors To Consider
Your rating will never be the only factor taken into consideration when applying for a loan. Even if your credit score is over 800, you may be turned down for a loan if you are self-employed, your income is unpredictable (maybe you work on commission?), have been at your current job less than 6 months or if your debt to income ratio is greater than 33 to 38%. The debt to income ratio is the percentage of monthly income that goes toward paying existing debts, including housing costs.
It may be possible to overcome the 6-month job requirement if the change in employer resulted in a substantial increase in income. Those who are self-employed or own a small business can choose to incorporate their business and become employees of the business receiving a salary, which can make it easier to qualify for credit.
When it comes to credit scores, lenders use general guidelines that are not entirely based on whether you have good credit or not. A mortgage lender that requires a 720 may qualify a borrower with a lower score if the person has a substantial down payment. Federally guaranteed mortgage loans, also known as conventional loans, require a minimum credit score of 620, but private lenders have some flexibility in their guidelines.
Young borrowers have a shorter history and consequently lower scores, so lenders may consider an applicant’s age, current income, education, place of employment, and payment history on rent, utilities, student loans and cable or cell phone service.
Why Is It Important?
While some people prefer to pay in cash, there are some things that may cost more than most people can pay in a lump sum, like a house or a car. Smart consumers use credit wisely and borrow amounts they can easily repay to establish a good history and score. When these people are ready to buy high ticket items, they can qualify for loans with the most favorable terms and lowest rates. Good credit scores also make it possible to borrow money quickly to cover emergencies like auto and home repairs.
Getting A Credit Report
There are a number of online services that provide free credit scores from the 3 bureaus. If there is a difference of more than 30 to 50 points between the scores, a consumer should request a copy of the report from the credit agency. The lower score could be due to reporting errors that can be disputed and corrected. Correcting errors in credit reports is one way to quickly raise your score.
Reporting agencies are required by law to supply an individual with a copy of their report on request. If you find a discrepancy, call the company that reported it, explain the situation, and have them send a written request explaining the inaccuracy. Follow-up with the credit bureau to ensure it gets inputted into your account and the issue is resolved.
Keep A Good Credit Score
Credit scores are more than just numbers; they reflect how lenders, banks, credit card companies, landlords and employers see individuals who are potential business associates. Establishing and maintaining an excellent credit score is the first step in building wealth and a financially secure future. So if you are looking for what is considered a good credit score, it’s the number that gets you the lowest interest rates and fees!