Monthly Archives: June 2017

A Good Credit Score Range

Ever wonder what is a good credit score, and why this little three-digit number is so crucial to your financial well-being? Can it really affect your everyday life? And what kind of control do you have over it? In this guide to credit score ranges, we’ll tackle all of these questions. We’ll take a look at what your credit score means, what’s considered a good score (and what’s a bad one), how your credit score can help or hurt you, how to improve your credit score, and much more.

Credit Score Ranges at a Glance

The two most commonly used credit scores are those issued by Fair Isaac Corp. (FICO) and VantageScore, and each uses a range of 300-850. If you recently got a peek at one of your credit scores, and you’re simply wondering whether it’s a good one or not, here’s a quick look at what’s considered an excellent, good, fair, and poor credit score, according to consumer credit expert John Ulzheimer:

Bad Credit: 300-650

“A score of 650 is generally used as the dividing line between prime and subprime,” Ulzheimer says, referring to the point at which lenders consider you a much greater risk. A score below 650 means you’ll have a harder time qualifying for loans or credit cards, and may have to pay much higher interest rates when you do.

Fair Credit: 651-700

The average American’s FICO score was 695 in 2015, an all-time high. “A score of 700 gets you to about the 50th percentile nationally,” Ulzheimer says.

Good Credit: 701-759

If your credit falls within this range, Ulzheimer says, you’re likely to get approved for whatever you’re applying for. But, he adds, “There’s no guarantee you’re going to get the best deal the lender has to offer.”

Excellent Credit: 760 and above

Ulzheimer says a score of 720 is enough to get the best published interest rates on an auto loan, but the best mortgage rates are only available to people with credit scores above 760. “So, I’d define an ‘excellent’ credit score as one that ensures the best possible deals across all lending environments, which is 760 or above,” Ulzheimer says.

Below, we’ll dig in a little deeper to understand what your credit score means, why you have several of them, how they’re calculated (and by whom), and how to improve a bad credit score.

What Is a Credit Score?

A credit score is a single number that represents how trustworthy you are from the perspective of someone who would lend you money. If you haven’t proven yourself trustworthy, your credit score will be low; on the other hand, if you repeatedly show yourself trustworthy (by paying bills on time, every time), your credit score will be high.

Who determines a credit score?

In the United States, a small number of companies, called “credit reporting agencies,” are in the business of collecting information about your financial behavior. They do this by exchanging information with companies that offer financial items, such as loans, credit cards, and so forth. The agencies generally care about three things:

  1. the money you’ve borrowed
  2. the amount you owe
  3. whether you’ve been making your payments

The agencies collect this information from everyone you’re indebted to and create a picture of how trustworthy you are in terms of credit. In the United States, the three main companies engaged in this business are Experian, Equifax, and TransUnion.

Why?

Think of it this way. Let’s say three people walked up to you and asked to borrow $5. You’ve known two of them for years: one is as trustworthy as can be, and the other one is the biggest backstabber and scoundrel you’ve ever known. The third, you’ve never met before. Who would you be more likely to lend money to? Obviously, I’d loan money to the person I trusted, then the person I didn’t know, then the scoundrel.

Now, let’s say you’re a bank and three people come in and ask for a loan. You’re going to want to have some way to determine who is the trustworthy person (whom you would want to lend money to), the unknown person (whom you would cautiously loan money to), and the rogue (whom you wouldn’t want to loan money to at all). This is the exact purpose of a credit score: It’s a number that says how trustworthy – or how much of a scoundrel – you are in terms of money.

Why Does It Matter If I Have a Good Credit Score?

A good credit score can make your life much, much easier than if you have a bad credit score. You’re probably well aware of some of the reasons, but others may surprise you. When you have a good credit score:

  • It’s easier to get a loan: Most people know that bad credit can make it hard to get a mortgage, a credit card, or an installment loan. And even if you can get a creditor to give you a chance, you’ll probably be paying a much higher interest rate than you would if you had a good credit score. Bad credit also means you may have to jump through some additional hoops, such as getting a cosigner or putting up collateral.
  • It can be easier to get (or keep) a job: Though a handful of states have outlawed or limited the practice, in most cases, prospective employers are allowed to check your credit. Though they won’t see your score, they’ll still see any major problems dragging it down, such as frequently missed payments or legal issues. Those black marks can indicate a lack of responsibility and potentially cost you a job offer. Regulatory agencies can also refuse to license professionals with poor credit.
  • Your insurance rates may be lower: If you have a good credit score, you could pay less — sometimes much less — for car and property insurance than someone with bad credit. That’s because insurers’ research shows that you’re more likely to file a claim if you have bad credit, which makes you a riskier customer. A few states (California, Maryland, and Hawaii) do prohibit this practice.
  • It can help you launch a small business: Your personal credit may be all you have to go on when you need to borrow money for a fledgling business. A bad credit score can make this extremely difficult, costly, or both.
  • It can help you get an apartment: Sure, good credit is essential for getting a mortgage, but it can also help you get a good apartment. On the flip side, prospective landlords may refuse to rent to you — or charge you higher rent — if you have bad credit because they’re worried you won’t pay the rent on time.
  • It can be easier get your utilities hooked up: If you have good credit, you won’t have any issues getting the electric or cable company out to your house. But a bad credit score can mean you’ll have to plunk down a deposit or submit a letter of guarantee (this names someone who will pony up the money for your bill if you don’t pay) before the electricity, gas, water, phone, or internet is turned on.

As you can see, good credit is about more than borrowing money — it can help you in deeply personal ways, from easing your apartment hunt to landing your dream job. As if that isn’t enough, 30% of women and 20% of men say they would refuse to marry someone with bad credit — so a good credit score may even help you get hitched.

  • Related: Should You Share Your Credit Score on the First Date?

Credit Score Basics

Now that we know why your credit score matters, let’s discuss the nitty-gritty of how credit scores are calculated.

This three-digit number is based on the information in your credit report. Your credit report details how you’ve used credit in your lifetime, including whether you’ve paid bills on time, the amounts you currently owe, and how long you’ve had each account.

Simply put, your credit score takes into account all that information and assigns you a number within a certain range. Higher is better, indicating that you are less of a credit risk.

Different companies offer different credit scores

There are a handful of different credit scoring models out there. Here are the most common scores you’ll see:

  • FICO score: This is by far the most widely used credit score. Your main FICO score ranges from a low of 300 to a high of 850. FICO gathers information for its scores from Equifax, Experian, and TransUnion, which are the three major credit reporting agencies. You actually have several dozen FICO scores that vary depending on the credit bureau and the industry that’s using them, but the key takeaway is that FICO is the biggie in this business, and it’s what most people are referring to when they use the term “credit score” generically.
  • VantageScore: This model was created by the three credit bureaus to compete with FICO scores. The latest version, VantageScore 3.0, also ranges from 300 to 850; older versions have slightly different ranges. You can read up on the main differences between FICO and Vantage scores in this Credit.com article. Lenders do use the VantageScore, but not as often. One billion Vantage Scores were sold in 2014 compared to 11 billion FICO scores.
  • PLUS score: Developed by Experian, this score is based only on what’s in your Experian credit report and is simply for educational purposes — lenders do not use it. It ranges from 330 to 830.
  • TransRisk score: This score was developed by TransUnion based on its own credit reports. Instead of taking into account your entire account history, it only predicts risk for new accounts. It ranges from 100 to 900.
  • Equifax score: This is the Equifax version of your credit score, and it ranges from 280 to 850. Like the Experian PLUS score, it is an educational tool only.

Don’t get overwhelmed by the different credit scores that are out there. Simply be aware that lenders are much more likely to look at your FICO credit score than any other, and it’s up to you to double-check which score you’ll be getting before you pay to receive a your score from any service. Later on in this guide, I’ll detail several places where you can get your credit score and specify which one you’ll be receiving.

Credit Score Ranges: What’s a Good Credit Score, and What’s a Bad One?

Every lender will use slightly different criteria to determine whether or not you’re creditworthy enough to lend to. For instance, it can be difficult to get a low-interest mortgage with anything less than a great credit score, but you may still be able to get a decent auto loan even with mediocre credit.

That said, there are still some general guidelines, particularly since the two largest companies, FICO and VantageScore, use the same overall point range of 300-850.

We tend to trust consumer credit expert John Ulzheimer’s more practical breakdown above, where bad credit is a score under 650 and excellent credit is anything above 760. However, for comparison’s sake, FICO also offers its own credit score ranges:

  • Exceptional Credit: 800+
  • Very Good Credit: 740-799
  • Good Credit: 670-739
  • Fair Credit: 580-669
  • Poor Credit: Under 580

Ulzheimer says the reality is much simpler. “I think the tendency is to want to slice up the ranges too much,” Ulzheimer says. “The truth is one man’s trash is another man’s treasure… If you find any lender that considers a 580 to be a ‘fair’ score and a 799 anything other than exceptional, I’d be surprised.”

In practical terms, what really determines a good credit score, Ulzheimer says, is whether you can qualify for the best interest rates. “If you get approved at the best rate, then your scores are good. If you didn’t get approved at the best rate, then they’re not good enough,” he says.

Perhaps you already know what your credit score is, but wonder how it stacks up to the rest of America. It turns out that the average American is no credit slouch: The average FICO credit score was 695 in 2015, an all-time high, and nearly 20% of consumers had a credit score of 800 or higher.

More than half of Americans (54.2%) had a good or excellent credit score of 700 or higher. But nearly a third (32.2%) had a score below 650, which is typically considered subprime.

Credit Score Affects Loans and Credit Cards

As mentioned earlier, having a good credit score can make your life easier. Now let’s take a closer look at the impact your credit score has on what loans you qualify for and how much you’ll pay. Specifically, I’ll look at three of the most common types of credit accounts — mortgages, car loans, and credit cards.

Credit cards

You’ll probably be able to get a credit card with just about any credit score. What varies dramatically will be the type of credit card for which you will qualify.

  • Excellent credit: With a top-notch credit score, you’ll be able to obtain the lowest advertised interest rate on most credit cards — this varies by card, but may be less 10%. More notably, you’ll be able to qualify for the best rewards credit cards that allow you to earn incentives, including cash back, airline miles, and hotel stays. Only consumers with excellent credit will be able to qualify for the best rewards offers.
  • Good credit: If you’re a notch below top credit, you can still qualify for a wide range of cards. While you may be shut out from some of the best rewards cards, you still may qualify for 0% introductory APRs that can be ideal for balance transfers. Your ongoing interest rate may be a bit higher, creeping into the mid-teens.
  • Average credit: You may be able to qualify for many of the same cards those with good credit can snag. The main difference is that you’ll probably be paying a much higher interest rate for the privilege, typically approaching or above 20%.
  • Bad credit: With bad credit, you can still get a credit card. However, you may be limited to a secured credit card that requires a security deposit. This deposit is often equal to or greater than the amount you can charge, and the credit-card company can take your deposit if you don’t pay your bill. If you do qualify for an unsecured card that doesn’t require a deposit, your credit limit will probably be very low.

Mortgages

A good credit score can make all the difference when you want to become a homeowner. While loans to those with bad credit have recently been on the rise in other sectors, that’s not the case with mortgages. Lenders were burned by the subprime mortgage crisis of 2008 and have kept a lid on loans to subprime, or bad-credit, borrowers.

For a more concrete example, let’s say I’m applying for a fixed-rate, 30-year mortgage for $200,000 in Tennessee. Take a look at the chart below, drawn from the myFICO loan savings calculator, to see how my credit score would affect my interest rate, monthly payment, and what I ultimately pay in interest over the life of my mortgage.

FICO Score Interest Rate Monthly Payment Total Interest Paid
760 and above 3.485% $896 $112,710
700-759 3.706% $921 $131,648
680-699 3.883% $941 $138,900
660-679 4.096% $966 $147,736
640-659 4.525% $1,016 $165,884
620-639 5.069% $1,082 $189,553

 

As you can see, if I have a FICO score in the bottom tier of this table, I’ll be paying $186 more a month for my mortgage than someone with a score of 760 or above. I’ll also be paying almost $67,000 more in interest over the life of the loan.

Interestingly, mortgage lending has tightened so considerably that it’s difficult to get a mortgage below, or even at, the 639 mark. One exception can be the Federal Housing Administration loan program, which may make loans to borrowers with scores as low as 580.

Car loans

The good news: It’s much easier to land a car loan than a mortgage if you have bad credit. In fact, bad credit auto loans made up more than two-thirds of subprime lending volume in the first 11 months of 2014, according to Equifax.

The bad news: You will pay a much higher interest rate than someone with a good credit score.

Let’s say I want a 48-month, $15,000 auto loan to finance a new car in Tennessee. Here’s how the numbers shake out:

FICO Score Interest Rate Monthly Payment Total Interest Paid
720 and above 3.07% $332 $959
690-719 4.292% $341 $1,351
660-689 6.049% $353 $1,925
620-659 9.598% $378 $3,122
590-619 15.177% $419 $5,103
500-589 16.909% $432 $5,742

 

As you can see, you can still land a loan with a bad credit score, but you pay a big premium. I would pay $100 more a month and nearly $4,800 more over the life of my loan if I have a credit score on the bottom tier of this list instead of the top tier.

Know Some Factors that Affect Credit Score

Now that we know what credit scores are out there and what makes a good and bad score, let’s explore the variables that make up your score more in depth. Given FICO’s dominance, we’ll focus specifically on what makes up your FICO credit score.

Here’s the breakdown of how your credit score is calculated, according to FICO:

  • Payment history, 35%: Your payment history tells potential creditors whether you’ve paid your bills on time. Foreclosures, collections, bankruptcies and the like will also cause your credit to take a hit here, if applicable. Your score will reflect how late you were making payments, how many times you’ve been late, how much you owed, and how recently you missed them.
  • Amounts owed, 30%: If you’ve used too much of your available credit, that signals to potential creditors that you could be spreading yourself too thin. How much you owe on all of your accounts versus your total credit limit — as well as what you owe on certain types of accounts, such as credit cards versus installment loans — are among the factors that can affect your score in this category.
  • Length of credit history, 15%: A long credit history makes you less risky to potential creditors than someone who has only recently opened their first credit accounts. Your credit score reflects the age of your accounts as well as how long it’s been since you’ve used them.
  • New credit, 10%: Opening too many new credit accounts at once can hurt your score. So can too many inquiries into your credit when you’re shopping for a credit account.
  • Types of credit, 10%: Potential creditors like to see a variety of credit accounts instead of just one type. In particular, they like to see both revolving credit lines, which allow you to borrow money again and again after repaying it (such as credit cards), and installment debt, or a loan disbursed in a lump sum and repaid in fixed payments for a fixed period of time (such as a car loan or student loan).

How Do I Build Good Credit?

If you’re starting from ground zero with very little or no credit history, there are certain steps you can take to make your credit shine in as short a time as possible.

Perhaps you’re just starting out and haven’t thought much about your credit yet, but know you want to be as proactive as you can and lay the groundwork for a good credit score. Here are some tips on how to do that responsibly.

Learn how to manage ‘real money’ first

Before you open any credit accounts, you should be adept at budgeting. That includes using a checking account to pay regular expenses without incurring overdraft fees, and using a savings account to start building an emergency fund.

A debit card that’s linked to your checking account is as convenient as a credit card without the responsibility of the monthly bills, or you can opt for a prepaid card. Just beware of fees if you go this route, and check out our guide to the best prepaid debit cards before you pick one.

Start small with a credit card designed for first-timers

The Simple Dollar recommends several special types of credit cards that can help you build your credit without risking too much debt.

  • Student credit cards can teach financial responsibility, often with more forgiving terms and fees than other credit cards. Your credit limit will probably be low, and you may need to have a parent co-sign your application. Check out our own recommendations if you’re shopping for the best credit cards for students.
  • Secured credit cards require you to deposit a certain amount of cash in order to open an account. The card issuer can then use this deposit as collateral in case you don’t pay your bill. A secured credit card won’t have the perks of many other cards. You’ll also want to double-check that your card activity will be reported to credit bureaus, which is the only way you’ll be able to build your credit history. We offer a few recommendations on secured credit cards in our guide to the best credit cards for bad credit.
  • Retail credit cards may be an option because they have low limits and are often relatively easy to qualify for, but they also have high interest rates that make them better suited for when you’re more comfortable — and responsible — with credit cards.

Add another kind of credit to the mix

Once you’re feeling more comfortable with your new credit card, diversifying your credit can start to raise your score. You can apply for a small personal loan at your bank and pay it back quickly, or opt for an installment loan, such as a car loan or a student loan — but only if you really need it and can afford to pay it back.

Maintain good credit habits

Good credit habits start with the basics of budgeting, spending, and paying on time.

Paying your bills on time is the number one rule. However, getting in the habit of making more than the minimum payment due is also a good practice. This helps you pay off your loans faster over time. Even paying just a little bit more than you need to can save you a lot in interest.

Your credit utilization is also important to understand. As you become more experienced with credit, your card issuer may raise your credit limit. But just because you’re suddenly allowed to charge $5,000 doesn’t mean you should.

A good rule of thumb is to use less than 30% of your credit limit to build a healthy credit score. That means keeping your monthly balance under $1,500 if your credit limit is $5,000