Your credit score can range anywhere from 300 to 850 and a credit score of 800 and above is considered excellent. A credit score of 700 and above is considered good. Most credit scores fall between 600 – 750. Having a high credit score means that you’ve made better credit decisions. The scores give creditors confidence that you’ll pay back any loan or other debts agreed upon. In other words, your credit score is much more than just a score.
Credit scores are often utilized by lenders to make important financial decisions. For instances, banks use it for providing mortgage loans. Also, credit card companies and car dealers use the scores to determine the terms on which they’ll offer their services.
Lenders make decisions on whether to offer credit to the individual and the terms of the offer (such as down payment and interest rate) based on credit scores. You’ll be able to negotiate better terms with lenders if you have a good to excellent credit score.
There are different types of credit scores. The two most common types of credit scores include:
FICO (Fair Issac Corporation) is one of the most popular types of credit scores. It’s used by many lenders. The credit score is in the range of 300 – 850.
A FICO score above 800 is considered exceptional and a score above 670 is considered good.
FICO Score Ranges
The Vantage Score is one of the most well-known credit scores used by lenders. The Vantage Score was developed by three major credit bureaus (Equifax, Experian, and TransUnion).
The Vantage Score is calculated in the range of 300 – 850. A credit score above 750 is considered excellent and a score above 700 is considered good.
Vantage Score Ranges
Factors that Affect Credit Scores
The factors that affect credit scores include:
Total debt owed
Payment history for credit cards and loans (this includes the severity and number of late payments)
Number, type and age of credit accounts
Credit utilization rate
Number of new credit accounts opened
Public records (bankruptcy)
Number of inquiries on the credit report
Credit Scores Matter
Lenders use credit scores as a decision-making tool. The scores help lenders anticipate whether you’ll be able to pay the loan on time. Credit scores are also popularly known as risk scores. This is because it enables lenders to assess the risk of lending money to a particular borrower (such as yourself).
A good credit score is important as it’ll determine whether you qualify for a loan. Your credit scores will also determine the interest rates of your loan. When you qualify for a low interest rate, you’ll save hundreds of dollars on your loan over time.
FICO Score Factors
Less influential – credit mix (the type of accounts) and new credit
Moderately influential – length of credit history
Highly influential – total amount and debt owed
Most influential – payment history on credit cards and loans
Vantage Score Factors
Less influential – recent credit inquiries and behavior
Moderately influential – total debt and balances
Highly Influential – type and age of credit. Percent of credit limit used
Most influential – payment history
The following information is not considered for credit scores:
Place of residence
Occupation, salary, employer, title, date employed and employment history
Sex, color, race, religion, marital status and national origin
There are certain types of inquiries (request for a credit report) that aren’t considered for credit scores
Minimum Credit Scores
There isn’t a minimum credit score that’s necessary to apply for credit cards or loans. If you have a low credit score you’re less likely to qualify for a credit card or loan. You won’t receive favorable rates if your credit score is low.
If you try to apply for a conventional credit card or loan, you’ll have to wait until you improve your credit score. This will ensure that you get the best rates.
Mortgage services such as the Federal Housing Administration (FHA) provide general guidelines for individuals with low credit scores. The guidelines are:
FHA mortgage loans require a minimum credit score of 580 or higher with a 3.5% down payment
For applicants with a credit score below 580, qualification for a loan is possible only when a 10% down payment is made. The applicants will also have to meet other requirements specified by FHA
Tips for Getting a Good Credit Score
Pay Bills on Time, Every Time
On time payment of all bills help build a track record of responsibility. Missed or late payments on any accounts (credit cards, car loans, mortgages) will impact the credit scores. Avoid skipping payments.
Pay Off Debts
Pay off all debts as quickly as possible. This will help improve your credit score.
Avoid Spending Too Much
Avoid spending more than 30% of the credit limit. Remember that you don’t need to make purchases to improve your credit score. Make small purchases at regular intervals to avoid a period of inactivity.
Check Credit Reports Regularly
Get a free copy of your credit report and check it thoroughly. Check for any incomplete or inaccurate information. If you find any discrepancies, you should correct it immediately. Checking your credit report won’t affect your credit scores.