Not sure what a good credit score is because you don’t know what the credit score scale or range is supposed to be? Credit scores are some of the most confusing, yet essential components of personal finance. Your credit score rating affects you every time you want to buy or invest and need to borrow money. Reminiscent of our school days, consumers are basically “graded” by companies like Experian, TransUnion, and Equifax on how well we manage our finances, ranging from Excellent to Poor. If you’ve never applied for a mortgage or auto loan, you’ve probably wondered what is a good credit score.
Below, we’ll walk you through everything you need to know about the credit rating scale. From the specific FICO score range to how your number is calculated to what a good score is, check out our complete guide to fully understand credit in America.
What Is The Credit Score Range?
The simple answer is that your credit score ranges from 300 to 850, with 850 being the highest and best score. Additionally, a good credit score is anything above 720. There are a few legitimate ways to view your credit score online, but it helps to first know what to look for and what it all means.
Why Does Your Credit Score Matter?
Your historical relationship with credit is summed up in your credit score. This is a statistics-driven evaluation of your credit accounts, debts, liens or other judgments on your record, history of payments (on time, late, nonpayment, etc.), and other credit-related information that the three credit bureaus take into consideration when it comes to calculating your credit score.
Each of these bureaus have their own proprietary formulas, but home mortgage lenders, car loan officers, personal or business loan managers, and even insurance companies typically use your FICO score or the average score from all 3 credit report agencies.
There are plenty of reasons why this information is crucial: not only does a better credit score get you low interest rates on loans and credit cards, saving you thousands of dollars in interest payments, but you are also in a better position when it comes time to apply for a job. Many employers are interested in the credit worthiness and financial responsibility of their potential employees, so many businesses run background checks to determine the stability of your credit.
Overall, the broad appeal of a good or excellent credit score is that you save money by qualifying for loans with favorable interest rates. Since lenders are adverse to taking on excessive risk without significant benefits in return, such as lending to someone with a poor history of paying back loans, the more comfortable they feel about lending money to you, the less interest they’ll charge.
Here is a brief overview of the credit score scale and a percentage breakdown of the American population.
Where To Find Your Credit Score
There are three major credit reporting agencies: Equifax, TransUnion, and Experian. Thanks to the Fair and Accurate Credit Transactions Act (FACT Act), consumers are entitled to one free credit report from each of these bureaus once per year. AnnualCreditReport.com is a centralized location for obtaining one of these free reports.
There are also other online resources to help you track your credit score, such as Credit Karma and Credit Sesame.
- Credit Karma offers access to 3 different scores – your TransUnion score, your Vantage Score, and the score auto insurance companies use.
- Credit Sesame offers access to your Experian Plus score.
How Is My Credit Score Calculated?
No one knows the exact algorithm or formula used by the bureaus to calculate credit scores, but the following factors are taken into account.
- 35% of your score is determined by your payment history on credit cards, loans, and lines of credit.
- 30% is affected by how much of your credit limit is used. Maxing out your credit cards has an adverse effect on your score, so always try to use less than 50% of your available credit.
- 15% is based on the length of your credit history, usually taking into account the average time period all your accounts are open.
- 10% is derived from the number of recent credit inquiries.
- 10% is decided by the types of debt and credit you have.
Credit Score Scale
As we mentioned previously, the credit score range is between 300 and 850, and generally speaking, most lenders will consider 720 a good credit score. However, here is a more in depth look at each part of the credit scale.
- 750 – 850: Excellent Credit – you should qualify for the best and lowest interest rates and most flexible terms and conditions.
- 700 – 750: Good Credit – you will qualify for one of the lower rates available and really shouldn’t have a problem getting any type of loan you want.
- 640 – 700: Average Credit – you may qualify for a loan or credit card, but not at the best interest rates. You will likely pay an excessive amount of interest.
- 580 – 640: Poor Credit – you will not qualify for loans or credit cards from all lenders, and may have a tough time getting approved. Companies that will work with you will charge very high interest rates or require significant collateral.
- 300 – 580: Bad Credit – good luck qualifying for a loan or credit card.
If your score is higher than 750, then congratulations! You have excellent credit. You probably pay your bills on time and have been doing so for a very long time, giving you an excellent and unmarred credit history. You won’t have any late payments, collection issues, bankruptcies, judgments, and/or liens against you, and will likely have a strong mix of different types of credit, such as installment loans and revolving lines of credit. Keep it up and soon enough, you’ll be in the 800 club.
In return for your financial diligence and responsibility, you enjoy the lowest interest rates and the best repayment terms on everything from home loans to credit cards to auto loans. The absolute best rates are given to those with scores over 770, but as long as you have 750 or higher, all lenders and banks will want to loan money to you. If you are interested in purchasing investment properties or buying a small business, excellent credit is what you need.
When it comes to employability, you will be seen as a dependable candidate for the job and insurance companies will favor you because you pose zero risk of insurance fraud or late payments.
If your score is between 700 and 750, then you have a good credit history with possible minor issues that may not be your fault at all. You may have an excellent history of making payments on-time, but maybe your credit history isn’t as long, your credit mix is a bit skewed, or your debt-to-income ratio is high, causing you to use a large portion of your available credit. The other possible cause could be that you’ve had a late payment or two in your past and it is slowly being faded out, but still has some affect, hence the lower credit score.
Although you have displayed personal financial responsibility using multiple lines of credit, you’ll likely have to pay a little more when it comes to interest payments (in comparison to those with excellent credit). However, qualifying for one of the lower mortgage rates or a cheap auto loan should be no issue, and almost all credit card companies will approve you. Finally, employers and insurance companies still love people with good credit, so you’re in a good place overall.
The 640 to 700 range is where you start running into some problems. Maybe your debt to income ratio is higher than average, or you have some late payments, collections accounts, bankruptcy, or liens on your record. The point is: there have been a few bumps in the road where your credit history is concerned and while you probably still qualify for most mortgages, credit cards, and lines of credit, your interest rates will be significantly higher than if you had a good credit score.
Lenders are more wary of those with fair credit because they pose a risk of late or slow payments (or default), and even if you do qualify, you may be asked to offer collateral, which is a tangible piece of property that can be seized if you default on your loan. This makes the lending and borrowing process equally risky for both parties, rather than shifting all the risk onto the lender. Obtaining unsecured revolving credit may prove difficult.
With fair credit, jobs in the finance sector may be difficult to come by, and insurance carriers may charge higher premiums to cover the potential risk of nonpayment or insurance fraud. To alleviate the cycle of ever-increasing interest payments, be sure to pay your bills on time every month and never miss a payment. Slowly pay off any credit card debt, resolve issues with open collections, and do not take on additional debt for the foreseeable future to avoid increasing the use of your available credit. After some time, you’ll be able to nudge your credit score into the “good” range.
If your score is between 300 and 639, this is known as poor or bad credit. Qualifying for loans, credit cards, or lines of credit is remarkably difficult and if you manage to secure one, then the interest rates are going to be crippling. Those in between the 570 to 639 range will probably still qualify for home loans, but if you’re below this mark (less than 570), you need to focus on improving your credit score before a lender will even consider extending you some funds.
If you have a score of less than 500, consider starting with a secured credit card, which uses funds that you deposit upfront, like a debit card, except it can repair your credit score over time. If you don’t want a secured credit card, live off of cash – don’t spend anything you don’t have in your wallet at the moment.
Furthermore, don’t take on any more debt until you’ve paid off your existing accounts. You could also make an appointment with a credit counselor to determine what steps you need to take to improve your credit score and get into a position where lenders and credit card companies would consider taking a risk on you.
Lastly, considering the recent housing crisis, most mortgage lenders won’t lend unless you have fair credit. At the bare minimum, many banks won’t even lend unless you have a sizable down payment and good or excellent credit. So, if buying a home is an investment you’d like to make in the future, do everything you can to get that credit score out of the “poor” range.
My Credit Score
Credit scores don’t need to be complicated. If you’re unhappy with your score, there are multiple ways to improve your credit, such as managing payments more effectively, offering collateral as down payment on loans, or using secured credit cards to rebuild your credit score. Once you work your way up to excellent or good credit, you’ll receive better interest rates, banks will feel much more comfortable lending to you, and investment opportunities may open up.