Have you ever wondered, “What’s a good credit score?”
It’s a normal question, especially if you’re thinking about buying a house, car or getting approved for a credit card.
Before we get started, let’s go over what a “credit score” is. Your credit score is a three-digit number that shows, among other things, how you pay back debt. Credit scores help lenders determine how likely you are to repay money lent to you. Lenders use your credit score to help determine whether you will qualify for a loan, the amount of credit and the annual percentage rate (APR).
Higher credit scores help demonstrate that you are more likely to pay your future debts. However, there are often other factors that lenders will look at to determine whether you’ll qualify for loans or credit cards.
What are the credit score ranges?
The information in your credit report comes from your payment history, the amount of debt you have and the length of your credit history. But what is the best credit score? Credit score ranges go from 300 to 850. An 850 credit score is more than a good credit score — it’s the best credit score you can achieve. A 300 is the lowest credit score you can have. These scores are developed by scoring models like FICO and VantageScore.
What is a good FICO score?
What is a good credit FICO score? The Fair Isaac Corporation (FICO) developed FICO scoring models to provide an industry standard for creditworthiness that would work for both lenders and consumers. FICO utilizes software that analyzes a credit report to generate your credit score. Credit reports come from companies that work with you, such as your mortgage provider, your utility company, even landlords.
Your FICO score is a three-digit number based on the information in your credit reports. Lenders commonly use FICO credit scores to determine how likely you are to repay a loan. FICO measures:
- The length of time you’ve had credit
- The amount of credit you’re currently using
- How much of your available credit you use (aka your credit utilization)
- Whether or not you’ve paid your bills on time, such as monthly credit card payments
A credit score between 740 to 799 is generally considered good, according to FICO, and a score of 800 or above is considered excellent. The average FICO score in the U.S. rose to 714 in 2021, growing four points, making it the fourth consecutive year scores went up, according to Experian.
FICO’s score ranges are as follows:
- Excellent credit: 800-850
- Very good/good: 740-799
- Good/fair: 670-739
- Fair/poor: 580-669
What is a good VantageScore?
VantageScore is another scoring model which has been more widely used since 2006, when the three major credit reporting agencies created it in 2006. Like FICO, VantageScore analyzes credit reports to generate credit scores that lenders and creditors use to evaluate customers’ creditworthiness.
VantageScore’s ranges are as follows:
- Excellent credit: 781-850
- Very good/good: 661-780
- Good/fair: 601-660
- Fair/poor credit: 500-600
According to VantageScore, a score of 661 to 780 is considered good credit. A score of 781 or above is considered excellent.
What affects your credit score?
You can help increase your credit score by paying bills on time, not carrying too much debt and lowering your credit utilization. Let’s go over a few factors more in depth that affect your credit score.
- Payment history: Your payment history refers to how you make your loan and credit payments. Lenders want to see how dependably you pay back your debt. Payment history is the most significant factor that affects your credit score.
- Credit utilization ratio: Your credit utilization ratio refers to the sum of your balances (the money you owe) divided by your total available credit. You can calculate it yourself by dividing the revolving credit you currently use by your revolving credit limits. Creditors often want to see applicants remain below 30% of their available credit.
- Credit history length: Lenders want to know how long you’ve had credit. Consistency paying debts for a longer period of time are likely to be more favorable than consistency over a short period of time.
- Mix of credit: A higher mix of credit sources (from car loans, mortgages, student loans, credit cards, etc.) will give you more potential to build a higher score. Credit scoring models look at how you tackle a wide range of credit products.
- New credit: How often do you apply for credit? Too many inquiries or account applications can lower your credit score. Why? Lenders may deduce that you’re a “bigger risk” as a borrower.
Why is a credit score important?
There are many benefits to having a good credit score. Access to lower APRs, the ability to get approved for important loans (such as a mortgage) and passing tenant screenings are all examples of ways good credit can help you reach your financial goals.
Note: Credit scores are rarely the only factor considered by lenders. Among others, debt-to-income ratio, collateral, work history and background checks may come into play for various applications or loans.
How to improve your credit score
You want to have an excellent or good credit score, but what is the best way to improve it? Let’s take a look at a few tips that can help you learn how to build credit.
- Paying your bills on time. Since paying your bills on time is one of the most important factors in improving your credit score, make sure your bills are paid on time. (Automation can help.) Payment history is worth about 35% of your credit score. (Even late payments can have an impact on your credit score.)
- Keeping your credit utilization low. It’s typically recommended to keep your credit utilization below 30% of your available credit. For example, if you have a credit limit of $3,500, using less than $1,000 of credit at any given time would keep you under 30% credit utilization.
- Waiting for your credit length to increase. You may need to wait for your account to “age” so you can improve your credit. If you apply for your first credit card right out of college and make timely payments, it may take time to build up good credit.
- Note: not all credit is “bad credit” or “good credit.” There is such a thing as “no credit” which is typically what you will start with if you have never had a credit account. Building good credit from no credit can be easier than improving a bad credit score.
- Taking advantage of self-reporting. You may be able to self-report your banking data and rent payments. This can help you build a deeper payment history and can also help you begin building your credit score before opening a credit account (such as a credit card or loan).
- Waiting to apply for credit. If you’re applying for a larger loan, like a mortgage, consider waiting to apply for other types of credit (such as a personal loan or credit card) until your loan is approved.
Focus on your financial health
Whatever your financial goals may be, building your credit is an important part of your overall financial health. Even if a mortgage, car loan, business loan or personal loan is not part of your plan today, building your credit will help you get access to credit when you need it.