If you’ve been wondering what constitutes a good credit score and why then you’ve come to the right place. We’ll discuss everything you need to know about having a good credit score rating and what you can do to improve it.
What are the Credit Score Ranges?
FICO is the most popular scoring model used for credit today and comes with five distinct categories in which your credit may fall. The ranges are as follows.
- Very Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800-850
Good credit falls right in the middle and is consequently the credit rating most people have. Currently, the average score in the United States is 704. If you’re close to this score, you certainly have some room for improvement, but you’ll also have an easier time getting approved for financing compared to those who have lower credit scores.
Who is Responsible for Credit Scores?
This is actually a more complicated answer than you might think. There are three credit bureaus that financial institutions send reports to. They are:
These bureaus compile reports known as credit reports, which are not the same as credit scores. A credit report is a detailed account of your financial history. It keeps track of on-time payments, delinquent payments, amount of credit lines, and credit inquiries. Each bureau has its own report of your financial history. The lenders and creditors you work with report this information directly to one or more credit bureaus.
When a lender then goes to pull your credit score, your credit report is sent to FICO (Fair Isaac Corporation) and is turned into a score. You have a separate credit score for each bureau: one each from Experian, TransUnion, and Equifax.
How Credit Scores are Created
FICO has a unique algorithm that they’re unwilling to share with the public. We only know the gist of it, and the gist is that there are five categories that affect your credit score. The five categories are:
- New Credit: 10%
- Credit Mix: 10%
- Length of Credit History: 15%
- Amount Owed: 30%
- Payment History: 35%
To get your credit score into a good rating, the most important things you need to focus on are payment history (making payments on-time) and amount owed (meaning you need to pay down your debt).
Most people with low credit scores have an unfortunate history of missing payment deadlines and maxing out their credit cards.
FICO vs. VantageScore
While many lenders and creditors throughout the U.S. use FICO score to analyze your credit score, a newer model called VantageScore is also gaining popularity. This version was created by the three major credit bureaus as an alternative. Previously, VantageScore used a different numerical range for their credit scores but have now switched to the same 300-850 range used by FICO. This is meant to make it easier for creditors to compare score.
While most of the reporting categories between FICO and VantageScore are the same, there are a few key differences to be aware of.
Length of Credit History
The first is that VantageScore requires a shorter credit history than FICO. To start building a credit score in the FICO model, you must have an account reported within the last six months, plus a total of six months of credit history.
VantageScore, on the other hand, only requires an account have been reported in the last 24 months and you only need a single month of reported history.
Late mortgage payments are penalized more heavily with VantageScore, while FICO treats all late payments equally. You should always prioritize mortgage payments but if you know a potential lender uses VantageScore to analyze applications, you’ll want to pay careful attention to making that payment on time each month.
Both FICO and VantageScore allow for duplicate inquiries without penalizing your credit score. That means you can shop around for certain types of loans ( like auto loans and mortgages) without each lender inquiry counting as a separate score drop. However, these duplicates are treated differently with each scoring model.
You only get a 14-day window with VantageScore, compared to 45 days with FICO. Essentially, FICO offers a longer rate comparison window than VantageScore before your credit score starts to suffer.
The final difference between FICO and VantageScore is the treatment of collections accounts. FICO doesn’t include any collection account that’s under $100. VantageScore, on the other hand, doesn’t look at the dollar amount but weighs whether or not the collection has been paid. This doesn’t mean these items aren’t listed out on your credit report, it just means they won’t hurt your score as much.
If you have a good credit score with one scoring model, but not the other, some of these key differences might be the reason why you see a variation.
How Your Credit Score Impacts You
Depending on what credit score you have, your credit score will affect you in different ways. Let’s briefly talk about how each category will affect your ability to finance.
If you have exceptional credit, you’ll likely have no difficulty in opening a new credit card, receiving a personal loan, buying a car, or taking out a mortgage. The amount you are able to borrow is only limited by your income and debt-to-income (DTI) ratio. Regardless of how great your credit is, lenders won’t loan you any amount of money that pushes your DTI past 43%.
Very Good Credit
If you have very good credit, you’ll receive better rates than most people (except, of course, those with exceptional credit). Because of this, you’ll pay less in interest, so more of your monthly payments on credit cards and loans will go towards the principal. Though the perks aren’t as great as those that come with exceptional credit, having very good credit is still an awesome place to be.
Having a good credit score means lenders are likely to loan you money. According to Experian, only 8% of people with a good credit rating will ever become seriously delinquent on their debts. As a lender, those are pretty good odds, so they’ll probably work with you. True, your interest rates won’t be as low as you would probably like them, but at least you’ll be able to get financing when you need it. There’s a lot to be said for that.
If you have fair credit, you can apply to finance a house with an FHA loan, and you’ll probably be able to open a few credit cards. However, don’t be surprised if some of your applications get declined; you may have a history of delinquency on your report. Consider signing up for auto-pay on your existing debts so you don’t forget to make your monthly payments. When you do find a lender who approves you, expect to pay higher rates.
If you have a very poor credit rating, few lenders will work with you. Therefore, you need to take steps to improve your credit score if you want to have more financing options.
People with a very poor credit rating often have to pay higher monthly fees and make larger deposits to lending institutions that are willing to work with them.
How to Increase a Good Credit Score
There are many ways to increase your score to good and well beyond. Here are a few:
#1: Pay Down Your Debt and Make Your Payments on Time
The best and most effective ways to increase your credit score are to pay off your debts and make your monthly payments on time. Debt and payment history are the highest contributors to your credit score. Make sure these areas are pristine and your score will greatly improve.
#2: Ask for a Credit Line Increase
Once you’ve paid down your debts, lenders will be more willing to increase your credit limit. The more credit you have available, the better your credit score will be.
#3: Become an Authorized User
If you have a family member or loved one who has great credit and a credit card with a low balance and no missed payments, ask if you can become an authorized user. If you do this, your report will reflect a credit utilization increase, as well as a payment history boost. Plus, you don’t have to use the credit card to have it affect your credit score.
#4: Open up a New Credit Card
A new credit card with a large line of credit can do wonders to your credit utilization. However, only do this if you are confident you’ll get approved. You don’t want a hard inquiry on your credit report for nothing!
The Bottom Line
A good credit score is a strong asset to have when preparing for your financial future. Whether you have a good score now and want to improve it or are hoping to enter this range from a lower category, create a game plan that makes sense for you. With a bit of time and consistency, you’ll be able to better your score in no time.