What Is a Good Credit Score?
Modern life abounds with reasons to worry about your credit score. Not just because a high score means you can borrow more, easier, and at lower interest rates — although for generations that was reason enough.
Credit scores originally were designed to provide lenders quick insight into a borrower’s payment track record. Nowadays, everybody wants to know your score, from your next employer to the utility company to your cellphone carrier to your landlord to — we are not making this up — your potential spouse!
So, what is a good credit score? And how do you (a) get it and (b) hang onto it?
Tracked primarily by two companies — FICO and VantageScore — credit scores range from 300 on the low end to 850 at the top.
Just under 1% of U.S. consumers – less than three million – have graded out at a perfect 850. About 19% (40 million consumers) have exceptional category status with scores of 800 or higher.
Then there are the rest of us. About 25% are in the very good category (740-799), which lenders regard as worthy of the best terms and interest rates. Another 21% are good (670-739); 18% are fair (580-669) and 16% are under 580 and hurting in this financial game.
760 Is Not Perfect, But Still Good Enough
There is no need to fret (unless you are a seriously competitive, overachieving, score-tracking millennial) if your credit is not perfect or near-perfect. Most lenders regard anyone with a 760 score or higher as worthy of their very best interest rates and terms so if you’re shooting for the top, shoot at 760.
And anyone who is remotely interested in your credit score will nod approvingly if the Big Two report a score above 670.
Slide below 620, however, and you may find it difficult to borrow at favorable rates, get the best deal on a new smartphone, or land that killer apartment in the perfect location you’ve been eyeing. Even if you do, if your credit is suspect, you might have to hand over a far larger deposit to get the utilities switched on.
“A good credit score,” says Los Angeles-based CPA and personal finance blogger (MoneyDoneRight.com) Logan Allec, “gives you leverage to negotiate a lower interest rate on a credit card or a new loan.”
Good credit gives you bargaining power, Allec says. Lenders solicit the credit-worthy with attractive offers. By contrast, creditors won’t bend for those with lower scores, and it’s unlikely those borrowers will find lenders lining up to court their business.
FICO, for Fair Isaac Corporation, is the big kahuna in the credit-scoring industry. FICO’s history of reliable analytics and evolving measurements make it the go-to official scorer for 90% of the lending decisions made in the U.S.
VantageScore, a collaboration of the three dominant credit bureaus — Equifax, TransUnion, and Experian — applies different weights to similar factors. As a result, the same consumer can have different scores and fall into different credit-worthiness categories.
One macro-economic result: FICO rates 67% of Americans as good risks or better. VantageScore ranks only 61% of Americans as good or better.
What Factors Affect Credit Scores?
FICO sorts your credit performance into several categories, each individually weighted. Knowing what’s what will help those with bruised credit know where to make their earliest efforts at improvement.
One tip worth noting before you go further: Putting your bills on automatic payment is almost a guaranteed way to help your credit score, assuming, of course, you have enough money in your account to pay automatically.
How consumers repay what they owe accounts for 35% of their scores. FICO Principal Scientist Can Arkali lays out the particulars that affect your score in this category:
- How many accounts are paid on time
- The recency, severity, and frequency of missed payments
- Presence of bankruptcies or collections.
- FICO strongly believes past performance definitely indicates future results. This is why using automatic payments helps so much. You get a steady flow of on-time payments.
- Unsteady payers grade out as bad risks to repay loans.
Utilization of Credit
Borrowers can be absolutely perfect in the category of on-time payments but still get dinged if they’re maxed out all over the place: Amounts owed comes in second at 30%.
Key factors, says Arkali, include utilization ratios (how much of your available credit is being used), as well as the total dollar amount of debt owed. In both instances, higher values equal elevated risk of default, in turn lowering FICO scores.
Length of Credit History
Lenders prefer borrowers who’ve established a meaningful pattern of repaying debt over a long period of time. Length of credit history, the No. 3 concern, comes in at 15%.
What’s your oldest account? Your newest? What’s the average age of your accounts combined? How long has it been since you used certain accounts?
Because lenders like to see a variety of successfully managed credit experiences, account mix accounts for 10% of a FICO score. Are you loaded up in only one area, like credit cards? Or do you have experience managing installment loans, retail accounts, and a mortgage?
Research, Allec says, shows that opening several credit accounts in a short period of time represents a greater risk — especially for consumers with modest credit histories. New credit comes in at 10% of your score. Avoid opening too many accounts too rapidly.
For that matter, avoid making too many applications for new credit. Each time a lender pulls someone’s credit history, it fractionally lowers his/her score.
Benefits of a Good Credit Score
We’re not going to suggest a FICO score in the high 700s is the key to paradise. Far from it. As told by the Wall Street Journal, the angst suffered by overwrought FICO-addicted millennials competing for the best credit score make you wonder if you shouldn’t pay your American Express bill late a couple of times just to break the spell.
We will say, however, a good-to-superb credit score beats the alternative.
“There’s this burdensome shame that relates to having a low credit score,” says Ali Zane, a former mortgage-bank operator-turned-credit-repair blogger from Los Angeles. “Some of my clients have expressed to me how they were severely depressed and felt disempowered when they had bad credit.”
A top-line credit score tells lenders you’re an A-plus credit risk. They will put you in line for the best terms (the highest unsecured credit at the lowest available rates) and the widest set of options (more lenders compete for your business).
Better still — as noted above — high FICO scores help you get that next job or next promotion. Employers want to know you can be trusted to manage a budget. High scores also mean you will pay the lowest utility deposit or insurance premiums, score the best mortgage or rental agreement, and may even help set the date with the love of your life.
It turns out the Beatles were not entirely correct. Love definitely is not all you need. And there are anecdotes and studies to prove it.
“You should absolutely consider your partner’s credit score before entering into a marriage,” says Riley Adams, a Mountain View, Calif.-based financial analyst for Google. “A bad credit history may come to haunt you both, when the time comes to make purchases on credit.”
There are short- and long-term concerns when one or the other spouse brings a dodgy history of financial management to the marriage that “lead to strife, eat into your ability to become financially stable,” Adams says, “or even retire.”
Guys, one in five women knows this: A 2017 survey revealed 20% of women consider credit-worthiness a significant influence in choosing a partner. Overall, 42% of adults report knowing a person’s credit score influences their datability. Not without good reason: Money troubles are among the key reasons marriages end up in cinders.
It’s almost not surprising, then, that a 2015 analysis by the Federal Reserve Board that the more alike a couple’s credit scores are, the more likely they are to stay together. Birds of a feather, and all that.
Break-ups, the review also found, are less prevalent among couples who enter their relationships with high FICO scores, possibly because they demonstrated common values regarding the most practical of life’s choices: how to handle money.
How to Improve Your Credit Score
Bottom line: So, success, advancement, security, lifestyle, even love can hinge on your credit score. The good news is, a low score now does not mean doom in the future. There are ways to turn it around, to seize the happily-ever-after destiny you deserve.
All it takes is a plan, commitment, discipline, and a bit of time. (Don’t believe anyone who claims they can repair your credit overnight.)
Begin, FICO’s Arkali says, by pulling your credit reports. The law entitles you to one free report from each reporting agency every year; get them all and carefully comb through for errors or outdated information. Mistakes don’t happen often, but they do happen. Begin at the beginning by harvesting whatever low-hanging fruit might be available.
Pay on Time
Next, get caught up. Leave nothing in arrears. Maybe this will mean juggling your budget or taking on an additional stream of income for a while. Gig economy opportunities are everywhere.
Next, commit to paying your bills in a timely fashion. If you have the money but lack the organization or the discipline, set up automatic payments. Set it and forget it. Otherwise, stick with your budget-trimming, income-enhancing scheme a while longer.
Remember, your payment history is the single most critical factor in your credit score. Get this part right, and by this time next year, you’ll be well down the road to a score you can be proud of.
Minimize Credit Use
As mentioned above, you can be spot-on with your payments to creditors, but if you’re bumping up against your limits across the board, your score will suffer. You must get your ratio down.
One way to create a favorable ratio is to increase your available credit. That can be done by opening new lines of credit. But be careful. This makes sense, says DollarSprout’s Megan Robinson, only if you don’t have a history of credit card misuse.
Arkali agrees: Open new credit accounts only as needed, not because you’re offered 10% off that day’s purchases.
Otherwise, attack your debt. Review the proven strategies for paying off balances that make the best sense to you: the snowball (eliminate the smallest balance first, and work your way up) or the avalanche (go after, in turn, the highest-interest balance).
What you don’t want to do, if you can avoid it, is close old credit card accounts. What you consider a prudent decision to limit your temptation, FICO registers as a loss of available credit; your ratio goes up, and your score goes down.
Connect with a Credit Counselor
These first two are do-it-yourself options, and they are, unquestionably, admirable. But their success relies on your discipline, commitment, resolve, and resistance to splurging. In short, like someone taking on a new nutrition regime, you will have to take more pleasure in slimming down than chowing down.
One alternative is to get yourself a coach. That is, a professional who is an expert in helping consumers skinny up their debt load while preparing them for a lasting lifestyle commitment.
In other words, partner up with a credit counselor from a nonprofit debt relief agency. You’ll learn about strategies from someone who knows every last rope. Better still, you’ll have someone who has your back when you’re tempted to slide.
If you need it, a credit counselor can negotiate better terms with your creditors and get you into a program that reduces and ultimately eliminates your credit card debt almost as though it were on autopilot. You make a single payment (often lower than your combined existing minimum payments) to the debt-relief agency, and it makes certain your creditors are paid on time and, by the end of the program — three to five years — in full.
In the end — actually, long before the end — you’ll have a FICO score anyone could fall in love with.
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