What Is A Good Credit Score?

When you apply for a loan, one of the questions on the application may ask for your credit score. You should be able to give a fairly accurate guess. You most likely won’t be exact since credit scores can change monthly as accounts are updated. The question may cause you to wonder just what is a good credit score? There are many factors and differing opinions for the answer to this question. Before looking at these factors, you need to have an understanding of your credit score and its importance.

What Is a Credit Score?

Your credit score is a number representing your creditworthiness. Financial institutions, credit card companies, and other lenders use it as an aid in determining approval for loans. You will be asked for your credit score many times in your life. Creditors, insurance companies, and some employers include this question on applications.

There are two scoring companies in the United States, FICO, and VantageScore. FICO, being the oldest, is the most commonly used by lenders and creditors while  VantageScore is most commonly used by consumers when they request their credit scores. However, your FICO credit score can vary among the three credit bureaus, Equifax, TransUnion, and Experian, giving you three different FICO scores. On the other hand, VantageScore is based on cumulative information from the three bureaus. We think it’s important to know your FICO scores at each credit bureau and your VantageScore.

Your credit score is a number that falls between 300 and 850. FICO has various models that are computed based on the industry requesting the score. For example, home and auto loans tend to use FICO scores that are modeled specifically for their industry. Standard FICO and VantageScore are used by many lenders that do not request specific computing models.

Getting to Good: By the Numbers

Both FICO and VantageScore differ on the definition of “good” as illustrated in the table below:

FICO Rating VantageScore Rating
800-850 Exceptional 781-850 Excellent
740-799 Very Good 661-780 Good
670-739 Good 601-660 Fair
580-669 Fair 500-600 Poor
300-579 Poor 300-499 Very Poor


Image source: credit.com. Data source: Experian.

FICO has created different types of consumer credit scores. There are “base” FICO scores that the company creates for lenders in several different industries to use, as well as industry-specific credit scores for auto lenders and credit card issuers.

The base FICO scores range from 300 to 850, and FICO defines the “good” range as 670 to 739. FICO’s industry-specific credit scores have a different range—250 to 900. However, the middle categories have the same groupings and a “good” industry-specific FICO score is still 670 to 739.

VantageScore’s first two credit scoring models had ranges of 501 to 990. The two newest VantageScore credit scores (VantageScore 3.0 and 4.0) use a 300 to 850 range—the same as the base FICO scores. For the latest models, VantageScore defines 661 to 780 as its good range.

FAST FACT: According to Experian, Americans have an average FICO score of 711. This is a 24-point increase compared to the average FICO score of 687 recorded in 2010.

Your Credit Score Makes a Difference

For many people, good credit simply means being able to get a loan or credit card. Most may not be concerned with the interest rate reduction, higher credit limits, and other perks that accompany higher credit scores. Maybe you have a credit score of 660, just on the cusp of good. You think you don’t need to work on your credit or that it matters. Then you apply for a home loan. Your lender goes over your score and credit report. The good news is that you are approved. The bad news is that your interest rate is going to be higher than you anticipated… which means your monthly mortgage payment is also going to be higher. Why? Because “good” is not always good enough.

Lenders use the credit score scale to gauge fiscal responsibility. As your credit score declines, so does the amount of credit extended to you. Furthermore, interest rates go up, often way up. So, while being good can get you approved for a loan, the resulting loan is not always an appealing one. This is why you need to understand how your score is determined and how you can improve it.


How Credit Scores Are Calculated

Your credit report is a compilation of your financial health throughout your life. It is broken into sections, with these being the critical sections used in computing your credit score:

  • Credit/Lender Accounts. In addition to the name of the company that granted you credit, the date each account was opened is also listed. This is used by credit models to determine the length of credit. The report also shows how often you paid on time as well as how many times you were 30, 60, 90, or 120+ days late. This section will also note if the account was closed and written off due to non-payment, placed in collections, or paid in full and closed according to the arrangements.
  • Inquiries. This section shows the names of agencies that have requested your credit score or full credit report. It is broken down into full inquiries, reviews, and assessments. Only full inquiries, often called hard pulls, are used in computing credit scores.

FICO and VantageScore credit score models each use these sections in slightly different ways for computing credit scores.

FICO credit scoring calculates your credit score using data in the following order, listed from most important to least important:

  • Payment history
  • Total debt owed
  • Credit history length
  • The mix of credit accounts (revolving and installment) plus new credit accounts

VantageScore calculates your credit score in a slightly different order:

  • Payment history
  • Credit history length plus the amount of credit limit in use and credit type
  • The total amount owed and balance on accounts
  • Inquiries and credit available for use

Your payment history is the most influential part of your credit score regardless of the model used in computing it. Your financial health depends on your responsibility to pay your bills on time, every time.

Some factors cannot be used in computing credit scores, even though some of this data is on your credit report.

  • Age
  • Sex, color, religion, marital status, race, or national origin
  • Employment history, salary, or other data related to employment – note that while this information cannot be used in computing your score, your lender can use it to make a final determination
  • Residence

Understanding the factors that are used in computing your credit score is beneficial for improving and maintaining a good credit score.

3 Steps To Improve Your Credit Score

When you need to improve your credit, consider taking these 4 steps:

1. Reduce your credit card balances.

This may be the easiest way to improve your credit score quickly. Your debt-to-income ratio is an important factor in your credit score. If you have high credit card balances and don’t have the cash to pay them down, consider a debt plan to reduce your balance. You should aim for a 10% debt-to-credit ratio. Lenders will see this as being fiscally responsible and your credit score will improve as well.

2. Make all payments on time.

We highly recommend you put yourself in a position to set up autopay with as many creditors as possible. This almost assures on-time payments and on-time payments are the first thing creditors look at when determining your creditworthiness. They want to know they will get their monthly payments without having to hound you.

4. Be careful about closing older, unused accounts.

Closing older accounts can seem like a good idea to simplify your finances, but it may decrease the average age of accounts on your credit report. This can impact the credit history length mentioned above. The longer your relationship with creditors and lenders, the better it is for your credit score… even if the account isn’t currently active.

Conclusion

Understanding how to get your credit score to 670 or even in the 700 range may be one of the most important things you can do for your financial health. If you are on the low end of good, work to reach the high end. Keep paying on time, use less credit, and check your report at least annually.