Last updated on May 5th, 2022.
More than 20% of Americans had loans and other credit applications denied because of a low credit score.
A good credit score can make your life much easier. You won’t have a problem getting a loan, credit card, home, or better insurance rate.
Many people don’t understand how credit really works or know what a good credit score is.
What is a good credit score? Read on to find how the answer and how you can boost your credit score.
There are two companies that lenders and credit card companies use to learn your credit score.
The most common credit scoring company is the Fair Isaac Corporation, better known as FICO. The other scoring company is VantageScore.
These companies use the information on your credit report to create your credit score. Both companies use a scale between 300 and 850 for your credit score.
They weigh your information a little differently and there are slight variations as to what is a good credit score. FICO considers anything above 670 to be a good credit score.
Here’s the full breakdown of FICO scores:
- Under 580: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
VantageScore considers a credit score between 661-780 to be a good credit score. Here’s the breakdown for VantageScore 4.0, the latest version of the credit score:
- Below 500: Very Poor
- 500-600: Poor
- 601-660: Fair
- 661-780: Good
- 781-850: Excellent
Another factor that determines a good credit score is your lender or credit provider. They’ll use these metrics as guidelines, but they have their own rules that determine good credit.
A home lender might require a credit score above 725 to approve a loan. A credit card company might want to see a credit score of 650. You have to keep all of these things in mind before you apply for credit.
How do the credit scoring companies come up with your credit score? They take the information on your credit report from the three credit reporting agencies: Equifax, TransUnion, and Experian.
The information that appears on your report is weighted. One indicator has more influence on your credit score than another. For example, late payments are weighted more heavily than the length of your credit history.
These are the most influential factors on your credit report.
Do you pay your loans and credit cards on time? Missed payments or late payments take a toll on your credit score, especially if you have a string of late payments in a row.
The worst part is that these payments stay on your credit report for years. The impact does diminish over a few years, so you don’t want to be in a position to miss payments.
Credit Utilization Rate
Credit scoring companies weigh people who use credit responsibly more favorably than those who don’t. What makes someone responsible with credit? They don’t max out all of their credit cards.
Your credit utilization rate is the percentage of credit available to use against the amount you actually use. Both VantageScore and FICO consider a credit utilization rate under 30% to be good.
Recent Credit Inquiries
Did you apply for a few loans or credit cards at the same time? Each credit application is examined using a hard pull of your credit report.
A hard pull shows up on your credit report and can cause your score to fall a few points. A soft pull is used for pre-qualifications and doesn’t cause your score to drop.
Credit scoring agencies tend to allow 1-2 hard inquiries a year. Anything more than that is a sign you’re relying on credit to make ends meet.
Do you want to buy a home in the future? You better take the steps to improve your credit score now. It is a long process to raise your credit score, but it is possible.
Look at your budget and how much credit you use each month. Do you pay down the balance each month or do you always carry a balance?
If you do carry a balance, make sure that you pay more than the minimum payment. That’s because interest is high, and it can take 10 years or more to completely pay off your card.
Credit Repair Agencies
If you have a long and complicated credit history, a credit repair agency can work for you. These services help you clear out disputes and misinformation on your credit reports.
They can even remove late payments, which can provide an immediate lift to your credit score. You can check out these best credit repair companies to learn more about the top companies in the industy.
Tackle Your Credit Utilization Rate
The reason why you want to pay more than the minimum payment is that it lowers your credit utilization rate faster.
There is another way that you can raise your credit utilization rate. Apply for another credit card and don’t use it.
You’ll have much more credit available, so your credit utilization rate will increase. Your credit score will take a small hit from the credit inquiry, but it will bounce back once the credit increase appears on your report.
Pay Bills on Time
This can seem so simple, but it’s where so many get tripped up. Some lenders don’t offer a grace period. A payment that’s late by a day can be detrimental and appear on your credit report.
The best thing to do is automate your payments. Most lenders give discounts for automatic payments and they make it easy to set up.
Get Over a Bad Credit Score
What is a good credit score? It depends on the credit scoring agency and the lender or credit card company. For the most part, a score of 660 or above is considered to be a good score.
Now that you know what goes into a good credit score, you have to do your part to build your credit. Hopefully, you’ll be able to put these tips to use.
For more financial tips, take a look at the other articles on the blog today!