If you’ve been in the credit world for some time, chances are you understand the many benefits you’ll derive from having a good credit score. For starters, good credit means you will qualify for the most competitive offers on financing. It could also equate to lower insurance premiums and competitive employment opportunities, just to name a few.
So, whether you’re a credit newbie or someone who’s looking to boost their score, here’s how to know if your credit score is up to par or needs more work.
What is a credit score?
Simply put, a credit score is a three-digit number used to gauge the riskiness of a borrower. The most prevalent model is FICO, which is used by 90 percent of lenders. It ranges from 300 to 850 with higher scores being perceived as more favorable.
There are also alternative credit scores that are referred to as FAKO scores, like Vantage 3.0. You may have noticed them when checking your credit score through free credit monitoring services. And while they’re worth a look as they can provide insight into how things are going, the FICO is what matters most since it’s the most widely used credit score.
Your FICO score is generated using the information in your credit report from each of the three credit bureaus: Equifax, Experian, and TransUnion. For this reason, the numbers may not be the same as not all reports contain identical information and each credit reporting agency uses unique algorithms.
What’s in my credit score?
Wondering what framework credit reporting companies use to calculate your FICO score? There are five distinct components:
- Payment history (35% of your FICO score): Do you pay your bills on time? This is a very big deal to lenders and creditors as it demonstrates your ability to handle credit responsibly. And just one late payment of 30 days or more could have serious implications for your credit score.
- Amounts Owed (30% of your FICO score): What is your debt usage in proportion to how much credit you have available (with regards to revolving credit, or credit cards). The lower, the better for your credit score. Creditors like to see this percentage at 30 percent or lower.
- Length of Credit History (15% of your FICO score): How long have you had credit? The FICO scoring model also takes credit history into consideration.
- Credit Mix (10% of your FICO score): Do you have both revolving (i.e. credit cards) and installment credit (i.e. auto, mortgage, personal and student loans)? Lenders and creditors like to see a healthy mix of both.
- New Credit (10% of your FICO score): How often do you apply for credit? Too many credit applications in a short window of time could be a turn off for creditors.
What’s considered a good credit score?
There are varying opinions on what’s considered a good credit score. Some may say anything over 740, but you could very well qualify for the best financing terms with a score of 680 or higher. It really depends on the lender and how much risk they’re willing to take on from consumers.
As a general rule of thumb, here’s how Experian classifies credit scores:
- 800 to 850: Exceptional
- 740 to 799: Very Good
- 670 to 739: Good
- 580 to 669: Fair
- 300 to 579: Very Poor
So if your score is 670 or higher, it’s safe to say you have a good credit score. And anything above 740 is stellar credit.
Why Having Good Credit Matters
Historically, those who are proponents of a debt-free lifestyle may argue that credit scores don’t matter. And while there’s nothing wrong with keeping outstanding debt at a minimum, it takes credit to build credit. Furthermore, you may find that shying away from any credit will result in poor credit scores, making it much harder to qualify for credit with favorable terms, if any at all.
A better solution: use credit responsibly to boost your scores so you’ll give yourself the best chance at competitive financing offers should the need arise. It’s all a matter of risk and the better your manage your score, the less risky you’ll be perceived by creditors and lenders. In other words, lenders will be less reluctant to lend you money if you’ve demonstrated responsible credit management in the past.
You should also know that there are several other benefits to having good credit that span beyond paying less in interest on debt and credit products. Credit scores can also have implications for:
- Employment opportunities. Some employers review credit profiles of prospective employees during the hiring process. While they can’t view your credit score, negative information in your credit report could disqualify you from landing your dream job.
- Insurance premiums. Select insurance providers consider credit history when calculating premiums. Those with good credit could qualify for substantially lower rates than those who’ve experienced credit challenges in the past.
- Housing. If you’re planning to purchase a home, your credit score plays a huge role in the interest rate you’ll receive if approved. It can also determine how much you have to put down or what your mortgage insurance rates will be. Landlords also consider credit history when determining how much of a deposit is needed.
- Security deposits. Whether you’re connecting utilities in your home or apartment for the first time or securing cell phone service, the provider may conduct a soft credit pull to assess the likelihood of default and assess a security deposit (if any at all) accordingly.
If your credit score isn’t where you want it to be, don’t get discouraged. It’s possible to make a complete turnaround in a brief period of time. More on that shortly.
What can I qualify for with a good credit score?
The higher your credit score, the greater your approval odds as long as you have the income to back it up. To illustrate:
- Credit Cards: While a credit score of 670 may not be enough to qualify you for the best credit cards on the market, you shouldn’t have a hard time finding a product that suits your needs. But a score of 720 is the sweet spot.
- Personal Loans: The odds of qualifying for an unsecured loan with a good credit score are definitely in your favor.
- Auto Loans: Those with good credit scores shouldn’t have any issues securing an affordable auto loan.
- Mortgages: Consumers with credit scores of 680 or higher generally qualify for the best rates. Just a single percentage point can result in cost-savings of thousands of dollars.
- Apartments: With a credit score of 670 or higher, you shouldn’t have a hard time qualifying for an apartment. (Most landlords are willing to go as low as 620 as long as recent serious issues, like bankruptcy and repossession, are not present on your credit report.
What can I qualify for with a bad credit score?
Having less than perfect credit doesn’t mean you won’t qualify for any debt or credit products. It just means you’ll be classified as a subprime borrower and more than likely pay more in interest, and the other terms may not be that appealing. But if you’re in a crunch and have no other choice but to move forward with that credit card, loan, or housing application, here are some credit score minimums for you to keep in mind:
- Credit Cards: When you fall below the threshold of having “good” credit, you run the risk of only qualifying for secured cards or those that cater to risky customers. The latter is usually accompanied by exorbitant interest rates and maintenance fees.
- Personal Loans: Similar to credit cards, you may only be offered secured personal loan products or no credit check loans with no cap on interest rates.
- Auto Loans: Lenders, like Capital One, will take a risk on consumers with less than perfect credit. But don’t expect the interest rates to be pretty.
- Mortgages: To qualify for conventional financing, you’ll need a credit score of at least 620. But that won’t get you the best rates, and you may be hit with hefty mortgage insurance (assuming you don’t put 20 percent down) or asked to make a higher down payment.
- Apartments: As mentioned earlier, a 620 should be enough to get you in the door if there’s not much competition. But if there is, you may be ousted for a prospective renter with a better credit profile.
In the meantime, work towards improving your credit rating so you can qualify for better terms going forward and possibly refinance loans to get lower rates.
Where can I get my credit score?
Although you can get your free credit report from AnnualCreditReport.com, it doesn’t quite work that way with credit scores. Instead, you’ll have to pay a small fee to see your FICO score. You also have the option to visit each of the credit reporting agency’s sites and order your scores from there.
The good news is some financial institutions and credit card companies offer free credit score updates on their statements and online portal. (Discover also gives free access to FICO scores through their CreditScorecard to non-customers.
But don’t get too wrapped up in your credit score. What matters most is what’s in your report, so your mental energy should be focused on rectifying errors, untimely information, and avoiding financial missteps that could do further damage to your credit score.
How can I improve my credit score?
There are many actions you can take to improve your credit score from not so good to great. But the easiest way to approach this is by retrieving a free copy of your credit report and reviewing the contents to find problem areas.
From there, you’ll know what’s dragging down your score, and those are the issues you should tackle first.
Some helpful suggestions:
- Get current and stay current on all your outstanding debt balances
- Keep credit utilization low on credit cards (preferably 30 percent or lower)
- Don’t close idle credit cards
- Refrain from applying for new credit you don’t need
- Dispute any errors or untimely information on your credit report
- Become an authorized user
- Enroll in autopay to avoid missing payments
- Obtain a credit builder loan
- Apply for a secured credit card
- Stay on top of your credit profile
What if I don’t have a credit score?
If you don’t have any credit history, you’ll receive an error message when attempting to retrieve your credit report or score. This is referred to as a blank or thin file and can be frustrating if you’re seeking a loan or credit card product and are having a hard time getting approved.
Some of the tactics mentioned above won’t work for you since you don’t have any credit to manage. However, you could open a credit builder loan or apply for a credit card to get the ball rolling.
For the latter, you may have to go with a secured card if you don’t have luck with an unsecured one. Either way, be sure to make timely payments and keep the credit utilization ratio below 30 percent. Doing so gives you the best chance of boosting your credit score in the shortest period of time possible.