You might not realize it, but having a good credit score may directly impact your ability to achieve your personal and financial goals. For instance, you might not be able to purchase a home or new car unless your credit is in good standing. Nearly all lenders conduct thorough credit checks prior to approving a loan. If you don’t have at least a good credit rating, you’re apt to have trouble securing a loan.
But what is good credit, and how can you get good credit? Read more about what “good credit” is below to help you better understand this important credit term and how it could influence your financial standing.
In This Piece
- What Is a Good Credit Score?
- What Do Credit Scores Mean?
- Do Lenders Prefer a Good VantageScore Score Over a Good FICO Credit Score?
- What Are the Differences Between FICO and VantageScore?
- What Makes a Good Credit Score?
- Is a Credit Score the Only Thing Lenders Consider?
- What Doesn’t Matter to Your Credit Score?
- How to Get a Good Credit Score
- How Do I Check My Credit Scores?
What Is a Good Credit Score?
Every lender has its own requirements for what’s a good credit score. Most lenders use either FICO scores or VantageScore scores when determining approval for a loan or credit card. These credit scoring models identify what each considers a poor, fair, good, very good, and excellent credit score.
FICO and VantageScore aren’t the only credit scoring models. However, they are the most commonly used models and the ones used by the three major credit bureaus: Experian, Equifax, and TransUnion. Some lenders even have their own scoring models. But most lenders and credit card companies use FICO scores or VantageScores.
Below is a closer look at these ratings.
What Is a Good FICO score?
The FICO scoring model takes several factors into account when determining credit scores. They are:
- Payment history — 35%
- Credit utilization — 30%
- Age of credit history — 15%
- Mix of accounts — 10%
- New credit — 10%
FICO also breaks down these scores into these credit score ranges:
- Excellent — 800-850
- Very good — 740-799
- Good — 670-739
- Fair — 580-669
- Poor — 300-579
What Is a Good VantageScore?
The VantageScore scoring model also uses several factors when determining its final credit score but places the most weight on payment history. Factors are:
- Payment history — 40%
- Age and type of credit — 21%
- Credit utilization — 20%
- Credit balances — 11%
- Recent credit applications — 5%
- Available credit — 3%
Final VantageScore credit scores are also broken down into various ratings, which are:
- Excellent — 781-850
- Good — 661-780
- Fair — 601-660
- Poor — 500-600
- Very Poor — 300-499
What Do Credit Scores Mean?
The three-digit numbers called credit scores are how the scoring institutions break down your credit profile. That number is calculated based on the information in your credit report at a credit bureau. Each bureau has its own file, which explains why your score might differ from one scoring institution to the next. Your file is a picture of how you’ve used credit to date.
Your score and where it falls tells lenders and credit card issuers how likely you are to pay off a loan, pay off a credit card, make late payments, and default on payments. In other words, it tells them if you’re an acceptable risk and if they should approve you for a loan or credit card.
A low score doesn’t necessarily mean lenders won’t give you a loan or card. Instead, it can mean they do so at a higher interest rate and with inferior loan terms. In other words, to offset the risk you pose, they charge you more interest or a higher annual fee.
For example, if you’re buying a $300,000 house with a 30-year fixed mortgage and you have good credit, you can end up paying around $94,000 less for that house over the life of the loan than if you had bad credit.
Scores are also used by landlords, cell phone companies, and even employers to check how risky you are.
Do Lenders Prefer a Good VantageScore Score Over a Good FICO Credit Score?
Lenders don’t necessarily prefer one score over the other. It’s likely, though, that a given lender uses only one credit scoring institution.
FICO reports that 90% of the top US lenders use FICO scores when deciding whether to loan money to an applicant. On the other hand, VantageScore states that between March 2021 and February 2022, approximately 14.5 billion VantageScore credit scores were used.
The VantageScore model offers these advantages to lenders and consumers:
- It was developed by the three major credit bureaus to offer a model across all bureaus that’s more consistent than FICO.
- It calculates scores for more people by giving a score to people with a shorter credit history.
Both models are consistent enough that knowing where you stand in one gives you a reliable indication of your credit in general.
What Are the Differences Between FICO and VantageScore?
While FICO and VantageScore are similar in that they use the details of your credit history to evaluate and rate your creditworthiness, there are key differences.
First, FICO is one of the oldest and most popular credit scoring models. Most home mortgage lenders use FICO scores when approving loans. FICO also offers a tri-bureau scoring model, which merges data from the three major credit reporting bureaus: Experian, TransUnion, and Equifax.
In comparison, VantageScore is a newer model but is growing in popularity. Instead of a tri-bureau rating system, VantageScore uses a different scoring model for each credit reporting agency. VantageScore also offers industry-based scoring models, such as credit card scoring models and auto loan scoring models. This feature makes VantageScore a popular option for some lenders.
What Makes a Good Credit Score?
The same primary considerations go into calculating VantageScore credit scores and FICO credit scores:
- Payment history
- Credit utilization
- Credit age
- Mix of accounts
- New credit inquiries
A history of late and missed payments for either scoring model lowers your credit score more than any other factor.
When determining your score, the FICO and VantageScore scoring models look at how recently you missed a payment or were late, how many accounts you were late on, and how many total payments on each account were missing or late.
Credit Utilization Ratio
Your credit utilization ratio is the amount of credit you’ve used divided by your total available credit limit. For example, if you have credit cards with a combined credit limit of $8,000 and balances of $3,000, your credit utilization ratio is 37.5%.
A good credit score requires a credit utilization ratio of 30% or less, although 10% or less is ideal.
Your credit age is how long you’ve used credit. More specifically, the length of your credit history is how long your credit accounts have been reported open, and your credit age is the average of how long all of your accounts have been open.
Say your oldest account was closed and fell off your file, and the next oldest account is 10 years “younger” than the account that fell off. Now, instead of showing how long you’ve actually used credit overall, credit files may show the age of the oldest account on file and your score may decrease.
To maintain a high credit age, keep at least one account on your credit file that is at least six months old. As you grow older, it should be easier to maintain a higher credit score as your accounts continue to grow in credit age.
Account mix is how many installment accounts and revolving accounts you have.
- Installment accounts are loans—such as mortgages, car loans, or personal loans—with a fixed monthly payment for a specific term (number of months or years).
- Revolving accounts are credit cards and credit lines with a credit limit that you can charge against.
Lenders want to see you can handle both types of accounts, so a good mix of the two makes for a better credit score.
Hard inquiries happen when a lender looks at your credit report because you’ve applied for credit. A hard inquiry affects your credit score—lowering it by 5 to 10 points. The inquiry can stay on your credit report for up to two years, but it will impact your score for only 12 months. Though hard inquiries make up only 10% of your score, try to minimize credit inquiries to maximize your score.
When you need an auto loan or mortgage, it’s normal to shop around to find the best rates. Depending on the scoring model used, if you do your loan shopping in a 14- to 45-day span, the inquiries can be lumped into a single inquiry and affect your score less. FICO score models allow 45 days. On the other hand, the VantageScore model uses only a 14-day span.
Soft inquiries don’t affect your credits score.
Is a Credit Score the Only Thing Lenders Consider?
Lenders look at more than credit scores. The score plays a large factor, but so does your full credit report—sometimes from one bureau, sometimes from all three. Lenders may also look at your annual income and your debt-to-income ratio or overall debt.
Your debt-to-income ratio is calculated by dividing the total recurring monthly debt you have by your gross monthly income. This determines the percentage of debt you have compared to your income.
Credit card issuers and lenders may also look at how many reported delinquencies you have, how many hard inquiries were added to your credit file, your overall credit card utilization rate, your annual income, and your credit history’s health.
What Doesn’t Matter to Your Credit Score?
Credit card companies don’t use your personal demographical information, such as age, race, or marital status, when determining your credit score. In fact, the Equal Credit Opportunities Act prohibits these practices. However, you might be surprised to learn that these credit scoring models also don’t take into account your salary, job title, or occupation. This information may be listed on a credit report, though, which lenders may use to make a determination about whether to lend you money. However, this information will not impact your credit score one way or the other.
How to Get a Good Credit Score
If you have poor credit or no credit report at all, there are several steps you can take to start building good credit today, such as:
- Open credit accounts. If you don’t have any credit history, it might be because you don’t have any open credit accounts. Consider opening a credit card in your name. If you can’t qualify for a credit card, consider opening a secured credit card, using a cosigner or asking a trusted friend or family member to add you to their account as an authorized user.
- Report rent and utility payments. In most cases, rent and utility payments aren’t reported to the major credit reporting agencies. This means you’re not getting credit for making these payments every month. Consider using your credit card to make these payments each month, or work with a credit reporting service to make sure these payments are included on your credit report.
- Pay bills on time. Once you obtain a credit account or loan, it’s critical you make on-time payments every month. Even just one late payment can significantly impact your credit score.
- Monitor your credit report. Request a free copy of your credit report and dispute any inaccuracies. You can also use a service, such as Credit.com’s Free Credit Score, to track your credit score on a regular basis. This step can help you take immediate action to address any changes in your credit report before they have a long-lasting impact.
- Pay down debt. If you have a large amount of outstanding debt, take steps now to pay this debt down as quickly as possible. There are several strategies you can use, such as a debt consolidation loan and the snowball method.
How Do I Check My Credit Scores?
Most online options for viewing your credit score—free or paid—are limited to one or two scores. ExtraCredit from Credit.com takes it twenty-six steps further by offering you 28 of your FICO scores from all three major credit bureaus. When you sign up for an ExtraCredit account, you can also earn money when you get approved for select offers, monitor your accounts with $1 million identity theft insurance, and get exclusive discounts on credit repair services. All for one low monthly price.
If you’re not ready for ExtraCredit, Credit.com’s free Credit Report Card offers you your Experian VantageScore 3.0 credit score for free for life.
You can get your full credit report from each credit bureau free once a year from AnnualCreditReports.com. Through April 2022, you can get a free copy of your credit report from each bureau weekly to help protect your financial health during the COVID-19 coronavirus pandemic. Those reports don’t include your credit score.
Why Did My Credit Score Change?
Any changes to your credit report, such as new credit or credit inquiries, late payments, or an increase to your credit limit, can impact your credit score. You can request a free copy of your credit report from each credit reporting bureau once per year. Checking these reports can help you determine what changes may have impacted your credit score.
What Are the Differences Between FICO and VantageScore?
One of the biggest differences between the FICO and VantageScore modeling systems is that FICO uses your credit history from the last 45 days, while VantageScore uses a 14-day credit history. VantageScore also creates a different scoring model for each credit bureau, while FICO uses the same model for each credit reporting agency.
Why Are There Different Credit Scoring Models?
Credit bureaus only collect and manage your credit history. It’s credit scoring models that actually determine your credit score. Each model takes into account various factors of your credit report, which means you could have different scores using different models. By offering different scoring models, lenders and other relevant parties can choose the model that best provides the information they need. Besides different models, there are also different versions of scoring models that lenders use.
What Is a Good Credit Score to Buy a House?
The exact credit score you need to buy a house varies from lender to lender. Most lenders want you to have a credit score of at least 500 for an FHA loan and at least 620 to buy a house. Additionally, the higher your credit score, the better interest rates you’re likely to get, meaning lower monthly payments.
What Is a Good Credit Score to Buy a Car?
Just as with buying a home, credit requirements vary between lenders. It’s best to have a credit score of at least 662 if you want to get a car loan. While you may be able to get a loan with lower credit or even no credit, it will likely be at a subprime rate, meaning a significantly higher interest rate. Subprime rates may be more than double the rates charged to those with good credit due to the increased risk on behalf of lenders.
What if My Credit Score Is Less Than Good?
Now that you know what’s a good credit score, it’s crucial to act on yours. If your credit is fair or poor, find out why. Then you can address the factors and work to improve your score. Do you need more credit history? Check out our ExtraCredit Build It feature! ExtraCredit identifies rent bills you’re already paying and adds them to your credit profile as tradelines. This allows the credit bureaus to see additional payment information from you, which can help you build your credit profile.
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