What is a Good Credit Score?
Wednesday, Dec 21 2022
You’ve likely heard the importance of a good credit score. But did you know there are different credit scoring models? Building a good to excellent credit score can make qualifying for loans and credit cards more effortless. And lenders may use various scores for different purposes. Knowing how much credit score is good and what factors go into calculating the number can provide a roadmap to improving.
How Much Credit Score is Good?
A simple way to think about your credit score is as a measurement of how risky you are as a borrower. It provides a snapshot of your credit risk at a given time and tells lenders how likely you are to pay the debt you take on.
Credit scores are three-digit numbers ranging from 300 to 850. The higher the number, the more likely you’ll get approved for loans with lower interest rates and fees. Most lenders use credit scores calculated by FICO and VantageScore®. Even though they serve a similar purpose, they aren’t identical.
VantageScore uses data from credit history, including types of credit, usage, and recent inquiries, to calculate a score. It tracks trend data and behavior patterns to categorize you as excellent for 750-850, 700-749 good, 650-699 fair, 550-649 poor, and 300-549 very poor.
To determine a credit score, VantageScore weighs these financial indicators:
- Payment History. This highly-influential metric is weighed at 40% and measures the ability to keep up and make consistent payments.
- Age and Type of Credit. Accounting for 21% of the VantageScore, this metric looks at how long accounts are in good standing; the longer, the better.
- Credit Utilization. A measurement of the amount of credit you have access to versus how much you use. Optimize this metric by keeping balances on credit card accounts below 30% of the total limits.
- Balances. Weighing the total amount of current and delinquent credit accounts. Lenders like to see low balances on other credit accounts, as it suggests on-time payments. But the best method is to pay off your balances monthly.
- Recent Credit Behavior. A credit application results in a hard inquiry into your credit. Spacing applications out by about six months helps avoid this query ding to your credit score.
- Available Credit. Not a significant factor, accounting for only 3%, lenders typically like to see you’re only taking out the credit you need.
Like VantageScore, FICO scores range from 300 to 850. A score under 580 is below average and classified as poor, making getting approved for a loan or an unsecured credit card difficult. Fair is from 580-669. A score in this range limits the borrower’s options for a new loan or credit card, and if approved by the lender, they won’t receive favorable terms.
Now that you know the range which makes getting a loan challenging, you may wonder how much a good credit score is for lenders. FICO defines good as 670-739, 740-799 as very good, and exceptional as 800-850. People with top credit scores are most likely to be approved with low-interest rates and beneficial repayment terms.
FICO groups financial information into 5 categories:
- Payment History. FICO and VantageScore both consider the number and frequency of missed and late payments. The difference is FICO treats all late payments equally for scoring, while VantageScore penalizes late mortgage payments more harshly than other types of credit.
- Length of Credit History. FICO requires a minimum of six months of credit history, while VantageScore looks for one month of history and one account reported in the past two years. Translation, if you’re new to credit, you may have a VantageScore but not a FICO score.
- New Credit. Similar to VantageScore, FICO will penalize you for hard inquiries. FICO only includes mortgages, vehicle loans, and student loan inquiries. VantageScore also temporarily penalizes other inquiries, including credit cards.
- Credit Utilization. While VantageScore looks back and considers your trend utilization, FICO doesn’t.
- Amounts Owed. Past-due accounts sent to a collection agency may impact credit scores from either company. FICO generally ignores collection amounts when the original balance is below $100. VantageScore doesn’t factor in paid collections but includes all unpaid collections, regardless of the amount.
How to Improve Your Credit Score
There’s no set timeline or solution for rebuilding credit. Improvement depends on what’s pulling your score down and your rebuilding steps. Long-term focusing on good credit-building habits, rather than quick fixes, can help boost your credit score.
Use these strategies to raise your score:
- Pay Your Bills on Time. Credit scoring formulas hold a grudge. If you’re having trouble paying your bills, contact the lender to discuss possible hardship options. And if due dates slip your mind, add a layer of security by setting an alert on your phone or establish automatic payments for the minimum amount due.
- Pay Off Debts. Your credit utilization rate changes as your account balances fluctuate. The lower the balance compared to your credit limits, the better your credit score. Paying down large balances with cash or via a consolidation loan will raise your score as soon as your lenders report the lower balance.
- Apply for Credit Sparingly. You may need to open a new account to build your credit, but you want to try to limit hard inquiries. Inquiries can have a compounding negative effect on your score.
- Check For Errors. One quick way to increase your score is to review your credit report for errors. Thirty-four percent of people have a mistake on their credit report. Common errors include unrecognized accounts, mistakes on reported collections, and payments wrongly noted as late or missed. Be on the lookout for an address where you’ve never lived. It could signal identity theft. You’re entitled to a free report copy every year from each credit bureau. Checking your credit report or credit score won’t affect your credit score.
Focus on Your Credit Score
Despite the differences among scoring models, the basic components of maintaining a good credit score remain the same:
- Pay your bills on time
- Limit your credit usage
- Don’t open a bunch of credit at once
Knowing how much credit score is good is an essential component to financial security. Let Focus Federal Credit Union help you raise your credit score. Our Fresh Start Loans can help build back your credit.