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What is a Good Credit Score?

Your credit score is a three-digit number that’s used to predict how likely you are to pay your loans and credit card bills on time. That’s simple enough. But trying to explain what a good score is can be more difficult.

There isn’t just one answer. Different lenders will use different scores when deciding whether or not to lend money, and what interest rate they should charge.

That means there isn’t an official cutoff for what constitutes a “good” score. Instead, the general rule of thumb is that you want a score above 700 — as long as it’s from one of the major credit reporting agencies: Equifax, Experian or TransUnion

But here are some guidelines to help you understand where your own credit stands:

  • A good credit score is a score that’s higher than average.

  • Credit scores are used to predict how likely a person is to pay their loans and credit card bills on time. That’s simple enough. But trying to explain what a good score is can be more difficult.

  • The average credit score in the United States is around 700, according to FICO, which developed the most commonly used credit scoring system (the FICO Score). A score of 760 or above is considered excellent, while scores between 700 and 759 are considered good.

  • The average American has a FICO score of 695, according to Fair Isaac Corp., the company behind the most widely used scoring model (FICO Score 8).

Credit scores are used to predict how likely a person is to pay their loans and credit card bills on time. That’s simple enough. But trying to explain what a good score is can be more difficult.


There are FICO scores, VantageScores and Experian Pluses, which all have different ranges and formulas. And while they all measure the same thing — your likelihood of repaying debt — they don’t necessarily agree on where you fall in those ranges.


So what is a good credit score?


The answer depends on who you ask.


The average VantageScore 3.0 from Experian was 686 in Q1 2018, according to Experian data cited by TransUnion CEO James Peck during an earnings call last week. But that number doesn’t mean much without context: Experian simply means that there are about 1 million people with this score or higher.


A FICO 8 Score of 760 or higher is considered very good by most lenders, but it’s not an official scoring system recognized by the credit bureaus or creditors themselves. A FICO 8 score range of 800-850 would be excellent, while anything below 650 would be considered poor by most lenders.


Here are the basics you need to know about credit scores:


A credit score is a number between 300 and 850 that predicts how likely you are to pay your loans and credit card bills on time. The higher the number, the better.


Credit scores are calculated by looking at your credit report and assessing how much debt you have, how long you've had it and if you've paid late or made any big mistakes.


Credit bureaus like TransUnion, Equifax and Experian use these calculations to assign a number to each person in the United States who has a credit file with one of them (which is almost everyone). This score is called a FICO score — short for Fair Isaac Corporation — because it was created by that company. FICO scores are used by most lenders when deciding whether or not to lend money to someone.


Your FICO score can range from 300 to 850, but most people fall between 600 and 750.


People with poor payment history will have lower scores than those who pay their bills on time every month.



Your credit score is affected by a variety of factors, including your payment history and the amount of debt you carry. But how do lenders know how much debt you have? The two main sources of information that lenders use to determine your ability to repay your debts are your credit report and your credit score.


So you can see credit-scoring models and credit reports are two big factors that determine your credit score. But if you don’t know what information from your credit report is being used, it’s not much help.


What information from my credit report affects my credit score?


In general terms, the factors that affect your credit scores include:


Payment history: This includes whether or not you pay each bill on time and in full every month. Some lenders also look at how often you make payments late and whether or not there have been any delinquencies in the past 30 days prior to the date the score was pulled.


Credit utilization ratio: This is the percentage of available credit that you currently use — for example, if you have a $10,000 balance on one card with a $20,000 limit and another card with a $5,000 limit, then your total available credit would be

What information do credit scores not consider?


Credit scores also don't consider any personal information that isn't contained in your credit report, such as your criminal history or medical records. Additionally, credit scores don't take into account any positive financial behaviors that aren't reported to the credit bureaus, such as paying rent or utility bills on time.


What information do credit scores not consider?


While your age doesn't directly influence your credit score, the age of your credit accounts is a factor that affects how scores are calculated [1]. Typically, people's credit scores tend to increase as they get older because their accounts have been open longer. However, credit scores can rise or fall no matter how old you are, and having a good credit score comes down to more than just the age of your accounts. According to NerdWallet, a good credit score on the commonly used 300-850 credit score range is generally between 690 and 719, while scores 720 and above are considered excellent, and scores 630 to 689 are considered fair credit. Scores of 629 or below are considered poor credit [1][2]. It's important to note that credit score ranges can vary depending on the credit scoring model used [3].

Sources:

  1. https://www.nerdwallet.com/article/finance/credit-score-ranges-and-how-to-improve

  2. https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/

  3. https://www.americanexpress.com/en-us/credit-cards/credit-intel/credit-score-ranges/

Why is a good credit score valuable?

A good credit score is valuable because it can help you qualify for more financial products with better rates, terms, and credit limits. Lenders, credit card companies, and other financial institutions use credit scores to evaluate the risk of lending money to a borrower. A higher credit score indicates that you are more likely to repay your debts on time and in full, which makes you a more attractive borrower. This can result in lower interest rates on loans, credit cards, and mortgages, which can save you money over time. Good credit scores can also lead to lower insurance rates, fewer and lower security deposits on things like telecom and utility accounts, and make it easier to rent a home. Additionally, certain employers may check your credit report as part of the hiring process, so having a good credit history could potentially impact job prospects as well.

Pre-approval, pre-qualification and comparing offers


If you have good credit scores, you may be pre-approved or pre-qualified for more credit offers, allowing you to compare offers and find the best fit for your situation. Pre-qualification typically involves a soft credit inquiry, which does not affect your credit scores, while pre-approval typically involves a hard credit inquiry, which may have a temporary negative impact on your credit scores.


When shopping around for credit offers, it's important to understand how credit inquiries can affect your credit scores. Multiple hard inquiries within a short period of time can have a negative impact on your credit scores, as it may indicate to lenders that you are taking on too much debt or are a higher credit risk. However, multiple inquiries for the same type of credit (such as mortgage or auto loans) within a short period of time are usually counted as a single inquiry and will have less of an impact on your credit scores.


To avoid negatively impacting your credit scores, it's important to limit the number of inquiries you make and to do your research beforehand to ensure that you are only applying for credit offers that you are likely to be approved for. By doing so, you can find the best credit offers for your needs while also maintaining good credit scores.

Interest rates and credit limits


A good credit score can have a positive impact on the interest rates and credit limits you are offered when approved for a loan or credit card. With a higher credit score, you are considered a lower risk borrower and may be offered higher credit limits and lower interest rates. This can result in smaller payments and the ability to pay off debt faster, ultimately decreasing the cost of borrowing money.


On the other hand, if you have a lower credit score, you may be offered lower credit limits and higher interest rates, which can make it more difficult to make payments and pay off debt. It's important to maintain good credit habits, such as paying bills on time and keeping credit card balances low, to improve and maintain good credit scores. By doing so, you can increase your chances of being approved for credit offers with better terms and ultimately save money over time.

Beyond credit cards and loans


Having a good credit score can have a positive impact on other parts of your life beyond just borrowing money. For example, landlords may check your credit score as part of a rental application process to assess your financial responsibility and ability to pay rent on time.


Additionally, some employers may check credit reports before hiring job applicants, particularly for positions that involve handling money or sensitive information. This is because good credit scores can be seen as a sign of responsibility and trustworthiness.


Insurers may also consider credit when determining premiums for auto, home, or renters insurance policies. This is because studies have shown a correlation between good credit scores and a lower likelihood of filing claims.


Finally, cellphone and utility providers may waive security deposits or offer better rates and plans to customers with good credit scores. This is because good credit scores can be an indicator of financial stability and the ability to pay bills on time.


Overall, maintaining good credit habits can have a positive impact on many aspects of your life beyond just borrowing money, and can lead to lower costs and better opportunities.


How to build a good credit score


Building and maintaining a good credit score is essential for achieving financial stability and flexibility. Here are five tips to help you build and maintain a good credit score:

  1. Always pay your bills on time. Late payments can have a negative impact on your credit score, so it's important to pay all bills on time. Consider setting up automatic payments or electronic reminders to help you remember payment due dates.

  2. Stay below your credit limit. Experts recommend keeping your credit usage below 30% of your available credit, across all your credit card accounts. This shows lenders that you are a responsible borrower and can handle credit responsibly.

  3. Keep an eye on your credit history. Showing responsible credit habits over a long period can help your credit scores. This means paying bills on time, keeping credit usage low, and maintaining a good credit history.

  4. Apply only for credit you need. If you apply for multiple credit cards and loans over a short period of time, lenders may think your financial situation has changed for the worse. This can have a negative impact on your credit score.

  5. Check your credit reports. Your credit scores are based on the information in your credit reports, so it's important to check your reports regularly for errors. If you find an error, dispute it with the credit reporting agency to have it corrected.

In a nutshell


In a nutshell, good credit scores are achieved by using credit responsibly, paying bills on time, and maintaining low credit card balances. This can help establish a positive credit history and lead to good, very good, or excellent credit scores.


Maintaining good credit also involves avoiding late payments and regularly checking credit reports for errors. Using a credit monitoring service, such as CreditWise, can help keep track of credit reports and scores.

Having good credit scores can offer many benefits, including easier access to loans, lower interest rates, and better credit card rewards. By following good credit habits and monitoring credit regularly, you can maintain and improve your credit scores over time.


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