What is a Good Credit Score? Credit Score Range Explained
Credit scores impact our lives every day. Although many of us do not apply for mortgages, credit cards or other loans daily hoping to be approved based on our credit, credit scores do impact our monthly loan payments, weekly budgets, and even our employment and housing.
When trying to understand what is a good credit score, it may prove useful to understand your credit score through two lenses. The first involves how the three major credit reporting bureaus calculate their numbers. Looking at a credit score from that perspective helps everyday people build, repair, and maintain a reasonably good three-digit number.
Another way to view a credit score is from the lender’s perspective. A loan professional uses your credit score as a predictive tool. When decision-makers process loan applications, they use your credit score to predict future behavior. Based on your financial past, it paints a picture about how you will most likely manage a new loan.
Knowing what is a good credit score before applying for a credit card or loan is essential. Taking it one step further, understanding how to improve your credit score can seriously impact and improve your financial future.
What is a Credit Score?
Credit scores are essentially numbers between 300-850 that correspond to your creditworthiness. They are calculated using impartial FICO metrics by Equifax, Experian, and TransUnion. Although each major bureau applies the same standards, it’s not uncommon for local lenders to find different ratings. Although measured the same way, each bureau may have access to different information or calculate the number at a different time. A credit score ebbs and flows as you make financial moves, and the information makes its way to the bureaus.
A working knowledge of how a credit score is determined provides consumers with information about financial best practices. By managing your portfolio strategically, you can improve your credit score relatively quickly and gain access to favorable borrowing opportunities.
What Impacts Your Credit Score?
to determine everyone’s score in an even-handed fashion. It’s very different from a college application or a potential employer reviewing your resume. There are five fundamental credit score factors used. These include the following.
- Repayment History: Ranked as the most important of the five, payment history accounts for 35 percent of a consumer’s score. The reason this area garners so much attention is that it may be the most predictive metric from a lender’s point of view. It indicates whether you habitually pay bills on time and in full. Missing even a single loan installment or credit card bill can in fact lower a credit score.
- Outstanding Debt: Industry insiders typically refer to this as “credit utilization.” The term doesn’t necessarily relate to the dollar amount of outstanding debt someone holds. Rather, this metric considers your maximum debt capacity against how much of it you are currently using. In other words, if you have a debt capacity of $100,000 and you currently carry $40,000 in outstanding credit cards and loans, your credit utilization is 40 percent. Lenders generally like to see credit utilization at 30 percent or lower when processing loan applications. This metric also counts for 30 percent of your total credit score.
- Age of Accounts: The FICO system considers longevity at 15 percent of your credit score. The metric looks at a consumer’s oldest and newest credit accounts, as well as the average age of all your accounts. Because the age of accounts influences credit scores, it’s important to establish credit as early as possible.
- Mix of Accounts: Financial diversity helps buoy a good credit score. Comprising 10 percent of the equation, a blend of auto loans, mortgages, credit cards, and even student loans, helps improve a credit score as long as they remain in good standing.
- Credit Inquiries: When someone applies for a loan or credit card, the lender makes what is known as a “hard pull” on their report. These inquiries result in a slight decline in your rating and this metric accounts for 10 percent of your credit score. It’s essential to minimize hard pulls because they hurt scores for up to six months and serve as a red flag.
When processing a loan, a local lender considers your credit score in conjunction with other factors. Professionals at a credit union are typically more inclined to work with a responsible community member with an imperfect credit score, over less personable, non-community-oriented institutions. But no matter where you apply for your loan, that three-digit credit score number will have a significant effect on the types of loan products available to you and the accompanying interest rate and monthly payment.
To discover how to build or improve your credit score, download our free guide:
What is a Good Credit Score?
Asking what is a good credit score can be something of a loaded question. The simple truth about this predictive lending tool is that lenders consider numbers between 300 and 850 in ranges. The ranges are typically assigned values to simplify the process. The following example includes professional values and layman’s terms.
- Superprime (Excellent): 781-850
- Prime (Very Good): 661-780
- Nonprime (Average): 601-660
- Subprime (Fair): 501-600
- Deep Subprime (Poor): 300-500
Given that higher credit scores help borrowers earn low interest rates and favorable repayment terms, a good credit score involves the highest possible number you can achieve. By that same token, people who have not taken corrective measures to improve their credit score are more likely to suffer ill financial effects.
How Bad Credit Impacts You & Your Family
A credit score may be a number driven by an anonymous organization’s data and calculations, but the application of a credit score often proves deeply personal. A good credit score gives working families access to preferred loan programs, lower interest rates, and the ability to borrow in an emergency. Now, consider these real-life examples of how a bad credit score can negatively impact the quality of life for you and your loved ones.
- Homeownership: A credit score below 500 can make it extremely difficult to secure a mortgage. Subprime credit scores typically lead to higher rates and unenviable terms even with a sizeable down payment and other positives. Low-range scores ultimately cost working families tens of thousands of dollars over the life of a home loan.
- Apartment Denials: Rental property owners generally run background checks and credit checks before agreeing to a lease. A bad credit score puts people at a disadvantage and makes affordable housing difficult. Even when a multi-family property owner agrees to rent to someone with a credit score under 600, they typically require first, last, and a hefty security deposit upfront.
- Employment: It may seem counterintuitive, but more employers are considering credit scores in the hiring process. Allowing your credit score to decline could cost you a good-paying job.
- Credit Cards: Getting approved for a low-interest credit card usually requires a credit score of 700 or higher. Scores in the 600s or lower usually mean you will incur a higher interest rate.
The implications of a bad credit score are far-reaching. Insurance companies look at credit reports, and even familiar cell phone companies consider that three-digit number. Those are reasons why paying bills on time, minimizing credit utilization, and building good credit is essential to quality of life.
We Are Here To Help
The three major bureaus provide a free copy of your report every 12 months. You can request a copy at Annual Credit Report.com by filling out the online forms. Reviewing your credit report and reporting any errors to each credit bureau serves as the first step to improving your credit score.
If your credit score has been damaged by past errors or mistakes and you are unsure where to turn, contact Allegiance today. Our free financial coaching, Credit Building Credit Card, and Credit Builder Loan can help you build or repair your credit, no matter where you are starting from.