Wondering about getting a mortgage, auto loan, or even a credit card? Wait! Before applying, you must know what a good credit score is and how you can improve yours to get a better loan.
A credit score is a numerical representation of how “risky” you are as a borrower based on the evidence in your credit reports. In other words, it shows lenders how likely you are to repay the amount of debt you incur.
Credit scores are one element of the puzzle that lenders consider when deciding whether to lend to you. A good credit score might provide you access to a broader range of lending options. A good or exceptional credit score might also help you qualify for reduced interest rates and better conditions if a lender approves your credit application.
In general, the higher your scores, the more likely you are to get authorized for loans with more advantageous terms, such as lower interest rates and fees. This can result in significant savings over the course of the loan.
However, having a strong credit score does not guarantee that you will be approved for credit or receive the best interest rates, as lenders also consider other variables. On the other hand, it may assist you in selecting which offers to apply for – or how to improve your credit before applying.
A good credit score can help you be accepted for favorable interest rates and terms when you apply for a loan. However, determining if a given credit score is excellent or bad is difficult. That’s because the standard for what’s acceptable varies depending on the sort of loan you’re looking for and which lender is analyzing your information. When you combine several lenders employing different credit scoring models, you’re likely to get ratings that differ depending on which technique was utilized.
Table of Contents
- 1 What’s a good credit score?
- 2 What factors impact your credit score?
- 3 How to get a good credit score?
- 4 What are the credit score ranges?
- 5 Common credit score ranges
- 6 Why is having a good credit score important?
- 7 What’s a good credit score for a mortgage?
- 8 What’s a good credit score for an auto loan?
- 9 What’s a good credit score for a credit card?
- 10 Bottom line
What’s a good credit score?
may have a creditor who only reports to one, two, or none at all. Furthermore, there are It’s an age-old question, and answering it needs us to start with the basics: What exactly is a credit score?
A credit score is often a three-digit value ranging from 300 to 850. Credit scores are determined using information from your credit reports, such as your payment history, the debt amount, and credit history length.
There are numerous credit scoring methods, and some incorporate additional data to calculate credit ratings. Potential lenders and creditors, such as banks, credit card companies, or car dealerships, use credit scores as one criterion when deciding whether to grant you credit, such as a loan or credit card. It’s one of many factors that help them estimate how likely you are to repay the money they lend you.
It is critical to note that everyone’s financial and credit condition is unique, and there is no “magic number” that guarantees better loan rates and terms.
Although credit score ranges vary depending on the credit scoring methodology. Credit scores ranging from 580 to 669 are generally considered fair; 670 to 739 are considered good; 740 to 799 are considered very good, and 800 and more are considered exceptional. Higher credit scores indicate that you have previously proven responsible credit conduct, which may give potential lenders and creditors more confidence when reviewing a credit request.
Lenders generally consider customers with credit scores of 670 and higher to be acceptable or lower-risk borrowers. Those with credit scores ranging from 580 to 669 are considered “subprime borrowers,” which means they may have a more difficult time qualifying for better loan arrangements. Those with lower scores – less than 580 – are considered to have “bad” credit and may have difficulties obtaining credit or qualifying for improved loan terms.
When it comes to credit, different lenders have different criteria, including information such as your income or other characteristics. As a result, the credit ratings they accept may differ based on that criterion.
Credit scores may differ because not all creditors and lenders report to all three main credit agencies (Equifax, Experian, and TransUnion). Many creditors report to all three, but you numerous scoring models accessible, and those scoring models may differ depending on the type of loan and lenders’ preferences for specific criteria.
What factors impact your credit score?
Two things have the greatest influence on your credit score, according to the list of what affects your credit score: Payment history refers to whether you pay on time, and credit utilization refers to how much of your credit limit is being used.
Other considerations include how long you’ve had credit if you have a variety of credit types and, how frequently and recently you’ve applied for credit.
Here are some tried-and-true behaviors to keep in mind as you begin – or continue – to create – responsible credit behaviors:
- Always pay your payments on time. This is not limited to credit cards; late or missed payments on other accounts, such as cell phones, may be reported to credit agencies, affecting your credit scores. If you are experiencing difficulty paying a bill, call the lender right away. Even if you’re disputing a charge, don’t miss payments.
- Pay off your debts as soon as possible.
- Maintain a credit card balance that is well below the credit limit. A balance that exceeds your credit limit may have an effect on your credit score.
- Apply for credit only when necessary. Applying for many credit accounts in a short period of time may have an impact on your credit score.
- Check your credit reports on a frequent basis. Request a free copy of your credit report and review it to ensure that your personal information is right and that no account information is incorrect or incomplete. Every 12 months, you are entitled to a free copy of your credit reports from each of the three nationwide credit bureaus. You may keep track of your reports all year long by requesting a copy from one every four months. Remember that reviewing your personal credit report or credit score has no effect on your credit ratings.
- Your use of credit matters. The number of balances on your accounts, the amount you owe, and the percentage of your credit limit that you’re using on revolving accounts all play a role here.
- Your credit history length is also an important factor. This category contains the average age of all of your credit accounts, as well as the ages of your oldest and newest accounts.
- The account types that you are using have an impact on your credit score. This, also known as “credit mix,” analyses whether you manage installment accounts (such as a vehicle loan, personal loan, or mortgage) as well as revolving accounts (such as credit cards and other types of credit lines). Demonstrating that you can safely manage both types of accounts often improves your ratings.
- Your recent activities, which takes into account whether you’ve lately applied for or opened new accounts.
What information credit scores do not consider
When computing credit ratings, FICO® and VantageScore do not take the following factors into account:
- Your ethnicity, race, religion, national origin, gender, or marital status. (Under US law, credit scoring systems are not permitted to take into account these facts, as well as any receipt of public assistance or exercise of any consumer right under the Consumer Credit Protection Act.)
- Your age.
- Your salary, occupation, title, employer, date of employment, or work history. (However, keep in mind that lenders may take this information into account when making overall approval choices.)
- Where you reside.
- Soft inquiries are typically initiated by third parties, such as businesses making promotional credit offers or your lender performing periodic inspections of your current credit accounts. Additionally, soft queries occur when you examine your own credit report or use credit monitoring services from organizations such as Experian. These inquiries are not reported to credit bureaus and have no effect on your credit scores.
How to get a good credit score?
Consistently practicing good credit habits will help you improve your score. What you need to do is as follows:
- Make timely payments on your invoices. This is critical since payment history has the greatest impact on your credit score of any element. A missed or late payment can have a significant negative impact on your credit score and can remain on your credit report for up to seven years.
- Maintain credit card balances well below your credit limitations; strive for a credit usage rate of less than 30%, and lower is preferable. While high utilization lowers your credit score, the impact will diminish as you pay down your bills and the reduced utilization appears on your credit reports. Additionally, you may be able to reduce use by increasing your credit limit or adding yourself as an authorized user on a seldom-used card with a large limit.
- Maintain credit accounts unless there is a compelling cause to close them, such as exorbitant costs or substandard service. Maintaining older accounts helps your average age of accounts, which has a minor impact on your credit score. Additionally, canceling an account reduces your total credit limit, increasing your credit utilization.
- Avoid submitting many credit applications in a short period of time. Credit checks conducted for credit decision-making purposes can result in a modest, temporary drop in your score, and several in a short period of time can add up. That is why it is critical to conduct research on credit cards prior to applying.
- Keep an eye on your credit reports and dispute any material that appears to be erroneous or too old to be included (most negative information falls off after seven years).
What are the credit score ranges?
When you apply for a loan, a good credit score might help you qualify for favorable interest rates and terms. However, determining whether a credit score is excellent or not is hard. That’s because the definition of what constitutes a good credit score varies according to the sort of loan you’re asking for and the lender assessing your information. When you combine multiple lenders who use varying credit scoring models, you’re likely to wind up with ratings that vary according to the approach utilized.
When you apply for new credit, you are not informed of the lender’s specific cutoff point between a good and a terrible credit score. This is because lenders often do not disclose their credit score cutoff points to the general public.
FICO and VantageScore are two popular credit score brands in the United States that compete in the loan sector. With a few notable exceptions, a good credit score is quite similar between the FICO and VantageScore scoring models:
What is the FICO® Score?
FICO is the industry’s oldest and most extensively used credit score brand, with a range of 300 to 850 points. Additionally, there are industry-specific FICO scoring models that employ a unique scale. For example, auto FICO ratings range from 250 to 850 divided into the following categories:
FICO Scores, regardless of their range, serve the same objective. They assist lenders in determining the likelihood of a borrower defaulting on a loan. The higher your credit score, the less risk you represent to lenders.
What is the VantageScore?
VantageScore was founded in 2003 as a joint venture between Equifax, TransUnion, and Experian. Although FICO Scores are the most frequently used by lenders, VantageScore credit scores are also worth considering. VantageScores employ a credit score range of 300 to 850, divided into the following categories:
As with FICO Scores, the higher your VantageScore, the less risk you pose to lenders.
Common credit score ranges
There are numerous credit-scoring models, and each one utilizes a different algorithm to construct credit scores based on information contained in your credit reports. Even the most well-known credit-scoring organizations, FICO and VantageScore, use numerous scoring models to generate unique credit ratings. While there are other credit scores available, the most widely used models all employ a scale ranging from 300 to 850. There are several common credit score ranges within this scale that can assist you in interpreting what your scores signify.
The credit score ranges to be aware of and what they represent for you are listed below.
Poor credit scores: 300 to low-600s
With a low credit score, it can be difficult to obtain a loan or an unsecured credit card.
However, a low credit score does not spell financial doom. Certain financial products, such as secured credit cards, can assist those who are seeking to establish credit. These products can be a useful stepping stone to obtaining loans on more favorable conditions – if used prudently.
Bear in mind the possibility of fees and increased interest rates associated with credit-building goods. Additionally, ensure that the issuer or lender reports to the three major consumer credit bureaus — Equifax, Experian, and TransUnion — so that critical activities, such as on-time payments, can help improve your ratings.
Fair to good credit scores: Low-600s to mid-700s
While you’re weighing your alternatives, keep in mind that applying for a new loan or credit card may trigger a hard inquiry, which can have a negative effect on your credit ratings.
Preapproval or prequalification loans can provide you with an estimate of the terms you may qualify for in advance.
Your Credit Karma Approval Odds may also be able to assist you in determining whether or not to apply for a loan or credit card.
Very good and excellent credit scores: Above mid-700s
Individuals with excellent credit ratings are more likely to get approved for low-interest loans and credit cards with favorable payback terms. However, having a very good or excellent credit score does not guarantee you’ll qualify for every loan or credit card available. A lender may reject any application for another reason, such as an abnormally high debt-to-income ratio.
Regardless of your credit score, it’s a good practice to monitor your credit reports in order to understand what lenders will see when you apply. Credit Karma provides free access to your Equifax and TransUnion credit scores and reports, as well as weekly updates to help you keep on top of your credit.
What is the highest credit score you can get?
There are numerous credit scores available with varying ranges. However, for the major consumer credit scores, the maximum credit score available is often 850.
Bear in mind that flawless credit scores are not always required to qualify for favorable loan and mortgage rates. Once you reach the “very good to exceptional” range, the difference in the interest rate offered between, for instance, a 790 and an 840 is likely to be minimal.
Moving from a 650 to a 700 will almost certainly have a greater effect, which is why the overall credit score ranges are critical to consider.
Why is having a good credit score important?
In general, having high credit makes it easier to accomplish financial and personal goals. It could mean the difference between being approved for or being denied for a significant loan, such as a home mortgage or a car loan. Additionally, it can have a direct impact on the amount of interest or fees you’ll have to pay if authorized.
For instance, the difference between obtaining a 30-year, fixed-rate mortgage for $250,000 with a 670 FICO® Score and obtaining one with a 720 FICO® Score might be $72 per month. That’s money you could be saving or spending toward other financial goals. An excellent credit score might save you $26,071 in interest payments over the life of the loan.
Additionally, credit ratings can have an effect on non-lending decisions, such as whether a landlord will rent you an apartment.
Furthermore, your credit reports (but not your consumer credit scores) may have an effect on you in other ways. Certain employers may do a credit check prior to making a hiring or promotion decision. Also, insurance firms may use credit-based insurance ratings to assist in calculating your auto, home, and life insurance premiums in the majority of states.
What’s a good credit score for a mortgage?
When applying for a mortgage, your credit score counts more than it does for any other kind of personal loan. If you have a decent credit score, a mortgage might save you hundreds of dollars a year in interest.
What if your FICO credit score is 640, and you apply for $350,000 in mortgage financing, and you have a down payment of 20%? In June 2020, FICO’s Loan Savings Calculator predicted that your APR on a 30-year, a fixed-rate loan would be roughly 3.957 percent. Your monthly payment would be $1,662, and you’d pay $248,424 in interest over the life of the loan.
Assume for a moment that you attempt to increase your FICO score to 680. You may be eligible for an APR of 3.313 percent if you have a higher credit score. In this case, you would spend $1,535 per month for the same house at the lower interest rate. Over the course of 30 years, you will pay $202,726 in interest. As a result of a rise in your credit score, you will save:
The monthly cost is $127.
An annual cost of $1,524
Over the course of the loan, $45,698 was paid.
A FICO score of 760 or better is often required to get the best mortgage rates from a lender.
Of course, a high credit score isn’t enough to secure a fantastic mortgage rate.
The three-digit numbers that appear next to your credit reports are an important aspect in determining whether or not you can get a mortgage.
What’s a good credit score for an auto loan?
In the United States, automobiles are frequently the second most expensive purchase an adult can make after a mortgage. For a light-vehicle purchase in the United States, Kelley Blue Book estimates that the average price was $38,940 in May of 2020. You could save thousands of dollars if you have good credit when you’re financing a large purchase like a car. According to a car dealer, someone who has a FICO credit score of 620 and is looking to purchase a new vehicle is eligible for a 60-month loan of $39,500.
FICO Loan Savings Calculator estimates that you will spend $939 per month on your loan in June 2020 at an APR of 16.714 percent. You’d end up shelling out an additional $18,315 in interest over the course of the loan.
A $942 monthly vehicle loan payment, even if you’re accepted, is a considerable sum.
Let’s imagine you’ve decided to put off taking out a loan until you’ve improved your credit.
A credit score of 670 is regarded as an “excellent” credit score by most credit scoring algorithms when you apply again in the future.
The FICO Loan Calculator currently suggests that you may be eligible for an APR of 7.89 percent if you have a credit score of 670. On a $38,000 car loan, your monthly payment would be $768 at this rate. Over the course of the loan, you will pay $8,106 in interest.
Because your credit rating went from bad to good, you’ll save money:
$171 a month.
The life of the loan will cost $10,208.
You may be able to save even more money if you have a higher credit score.
Credit scores of at least 720 are likely to qualify you for the finest offers from an auto lender; a score of 800 is even more reliable.
What’s a good credit score for a credit card?
As with other lenders, credit card issuers look at your credit score before granting you a new credit card to assess the risk of doing business with you. Many premium credit cards require that you have decent or even excellent credit in order to open one. In order to get a 0% introductory APR credit card, even if you have an excellent credit score, you’ll need to apply for the card.
Besides determining whether or not you qualify for a credit card, your score has a considerable impact on the APR and other parameters of the account. To decide whether or not an application will be accepted, credit card issuers utilize credit scores to calculate the interest rate on the accounts they accept.
As an illustration, consider the cards on this comparison chart. You’ll note that the annual percentage rate (APR) on every credit card offer is not a fixed number. An APR advertised by a card issuer could range from 13.49 percent to 24.49 percent. The issuer will base the final rate it offers you on the condition of your credit, which is why the range is so wide.
Because of these two factors, it’s difficult to pin down a single number that may be considered a “good” credit score. Card issuers set their own credit score requirements. To get the best possible terms from one bank, you may need to have a credit score that is higher than the minimum required by another bank.
Different credit rating methodologies are employed by different credit card issuers. Credit card issuers may employ a FICO scoring model with a range of 250 to 900 points to determine whether or not to grant new accounts. However, some people prefer to rely on basic FICO or VantageScore credit ratings (300-850). Finally, some issuing banks employ bespoke, proprietary credit assessment methods when evaluating new accounts.
Remember that your credit score is derived from the same data that appears on your credit report, regardless of how a lender calculates it for you. Your credit scores should be in good shape no matter who reviews them and what scoring algorithm they employ if you focus on maintaining accurate and favorable credit reports.
If you’re wondering how critical it is to build and keep a positive credit score, the simple answer is extremely. When you work diligently to achieve a decent — or better — credit score, the savings might be significant. A strong credit score might have a lifetime value of tens of thousands of dollars.
While checking your credit score immediately before applying for a new loan or credit card might help you understand your prospects of qualifying for favorable terms, doing so further in advance allows you to raise your score and potentially save hundreds or thousands of dollars in interest. Maintaining a close eye on your credit score can assist you in taking steps to enhance it, increasing your chances of qualifying for a loan, credit card, apartment, or insurance policy—all while improving your financial health.