What is a “Good” Credit Score?
Every time you open a credit card, apply for a loan, or seek an apartment rental, a financial institution looks into your past. The reason they do this is that your habits are their best predictors of a successful lending experience. The summation of your behavior comes in the form of a 3 digit credit score. If that number is high on the scale, you will benefit. If it is low, you will have to deal with various complications surrounding large purchases. Given how crucial this metric is, it is natural to ask: What is a good credit score? Below, we tell you everything you need to know about that question.
Different Scoring Models
Scoring models are the first thing you need to understand before answering our critical question: What is a good credit score? Though your specific rating is often referred to as a singular number, you actually have many metrics that reflect your financial history. Though there are numerous scales, the two most prevalent are FICO and VantageScore. Each of them uses a scale of 300-850, and they both compile similar data when calculating your exact score. For this reason, they are practically indiscernible. Still, knowing the difference between them is useful when navigating the financial landscape.
A Good FICO Score
The answer to the question, “what is a good credit score,” is slightly different for FICO and VantageScore ratings. For FICO, a “good” rating is generally anything above 670 points. If you find yourself in this category or above, that means that lenders have a great deal of trust in you, you are unlikely to default on loans, and you will most likely pay every bill on time and in full.
A Good VantageScore
VantageScore has the same 300-850 range, but their standards for “good” are a bit higher. Using this scoring model, you must come in at 700 or above to receive a favorable designation. The consequence of having this status is the same as a good FICO score: Trust from lenders.
General Factors That Contribute to Score
A simple 3 digit number is the first answer to our critical question: What is a good credit score? Still, you won’t fully understand the answer until you know the mechanics behind credit. To do so, we need to address what behaviors affect your score. Both FICO and VantageScore look at the following factors.
- Payment History: This describes how often you pay your bills on time. If you miss payments regularly, lenders will not trust you.
- Total Amount Owed: Unless it is in the form of a house or car, having debt is an indication of financial irresponsibility. If you have too much of it, companies will penalize you.
- Credit History: If you are consistent in paying your bills and managing debt, you will have a high score. If you do it for an extended period, your reward is even greater.
- Credit Diversity: Companies trust borrowers more when they show that they can handle multiple kinds of debt. The result is that if you effectively manage a credit card, car loan, and mortgage, you will get a score boost.
- New Credit: Lenders like to see a borrower that has a moderate amount of credit and stays that way. What they do not like is somebody consistently opening lines of credit, as it signals a lack of accountability. As a result, applying for non-essential credit cards will drop your score.
How Your FICO Score is Calculated
The following are the various aspects your FICO score. Each has a percentage that reflects how much of an effect they have on your score.
- Payment History: 35%
- Total Amount Owed: 30%
- Credit History: 15%
- Credit Diversity: 10%
- New Credit: 10%
How Your VantageScore is Calculated
The following are the factors that go into your VantageScore. Each has a percentage designation that indicates how important they are.
- Payment History: 40%
- Credit Age and Mix: 21%
- Credit Utilization: 20%
- Balances: 11%
- Recent Credit Applications: 5%
- Available Credit: 3%
As you can see, the VantageScore model is nearly the same as FICO in that it has similar inputs and proportions. The one critical difference is that VantageScore weighs your payment history more and your current credit card balance less. The logic behind this is that a large sum of debt should not lower your score too much. The line of thinking goes that as long as you consistently pay your bills, you can be trusted. While carrying debt will still lower your score, it will be less damaging using this model, rather than FICO.
What Doesn’t Go Into Your Score
The following are a few factors that some people wrongly believe go into your credit score calculation.
- Age – What is correct about age is that credit scores usually rise as you get older. This effect comes from older people having more fiscal responsibility and longer credit histories. The misconception is that age is a direct factor, which it is not.
- Marital Status – Many people think that you will receive a bump in credit once you get married. Unfortunately, this is not true.
- Salary – The truth behind this myth is that your salary does show up on your credit report. While a financial institution may use it as a factor in its lending decision, it does not go into your score.
- Location – Whether you’re in a big city or a small town, where you live does not affect your score.
Why Your Score Matters
To understand why your score matters, picture the following situation. You, a person with an excellent credit score, are interested in buying your dream home. Next door, a couple is trying to do the same, but they have bad ratings. Here’s how that would likely go
- You – Previously, you asked the question “what is a good credit score.” The result of your research was improving your rating substantially before trying to purchase a home. Once you make an offer on the house, the sellers choose you right away. When you talk to the bank, they do a credit check on you. Given that the results are fantastic, they quickly accept your loan application. Additionally, they offer you a low interest rate as a reward for being such a reliable borrower. The result is a stress-free home buying experience and massive savings on your loan.
- Your Potential Neighbor – They make an offer on the home and get a routine check from the lender. Upon looking at their credit scores, the credit company realizes that his couple is a considerable risk. As a result, they decline their loan application or accept it with a high interest rate. The couple either experiences the disappointment of a denied loan or the frustration of paying extra interest.
This situation is an extreme example of why credit matters, but it is not uncommon. Additionally, similar dynamics play out when seeking a car loan, credit card, apartment rental, or job. In each of these situations, lousy credit leads to denial or unfavorable terms.
What to Do if You Have No Credi
Some of you out there likely have no credit at all because you’ve never taken out any form of debt. To build your score, try applying for a credit card. Once you find one that will accept you, you can use it responsibly and raise your rating over time.
Now you know the answer to your initial question: What is a good credit score? Additionally, we hope you learned more critical information about the mechanics behind credit, some common misconceptions, and what to do if you have no credit history. With this newly found information, you can go forward with confidence.