What Is A Good Credit Score?

Having good credit benefits your personal and financial life. Find out why and tips on how to improve your credit score.

A credit score is a three-digit number based on a complex compilation of your financial history credit report that follows you throughout your life. The difference between a good and bad credit score will determine whether you get a loan for a car, a mortgage, a rewards credit card, even the potential relationship of your dreams. And even if you get the loan or card you want, with a bad score it will likely come with sky-high interest rate that will potentially cost you thousands of extra dollars.

Don't worry if your score isn't great or you don't have one yet—building your score is as simple as applying and using a credit card responsibly. Moreover, knowing what good credit is and bad credit goes a long way toward getting the amazing interest rates you want and deserve.

Graphic showing why Americans don't check credit scores (2017)

Before we jump into a comprehensive look at good credit scores and how to get one, here are two quick tips off the bat to boost your score:

  • Pay all your bills on time
  • Reduce your month-to-month credit card debt

While perhaps obvious, these are the two biggest impediments to a good score. And while there is no way to boost your score overnight, (companies that say they can are lying), with patience and perseverance, you can start improving your score today! With the strategies outlined below, from understanding FICO to avoiding the biggest credit score mistakes, take charge and keep reading

How Credit Bureaus Work

Three major credit bureaus control most of the credit reporting in the United States. Each has their own formula for calculating your score, and all three also use a standardized formula called FICO, which is what the majority of lenders will be looking at.

Here are the three major bureaus:

Equifax. Founded in 1899, it's the oldest of the three and was originally based in the southeast United States but has since spread across the globe.

Experian. Founded in 1996 and part of the larger information services company Experian PLC., it's now a global company based in Dublin, Ireland.

Transunion. Formed in 1968, it is based in Chicago and continues to dominate the Midwest.

These companies collect and store your financial information as reported to them by your creditors.

Creditors include everyone from credit card companies to utilities and student loan providers.

Almost any company that is owed money from customers can report to the bureaus.

While credit bureaus do essentially the same thing, their approaches are different

Think of three pizza restaurants: Buella's, Gino's, and Ray's. They all make pizza, but Ray's makes deep dish, Gino's loves New York style, and Buella's is strictly vegetarian. They all make pizza, but they use different techniques and ingredients. In other words, each sets its own criteria, ranking scale, and scores, just like Equifax, Experian, and Transunion.

The important difference to keep in mind between the bureaus is varying credit score scales. When it comes to getting a loan of almost any type, from a car loan to a mortgage, 90% of all lenders reference your FICO credit score.

Graphic showing American opinions on own credit scores

The Fair Isaac Corporation created a standardized set of 5 criteria for measuring credit scores. Each credit bureau uses this criterion to calculate a FICO credit score. This means a customer will have an Equifax credit score and a FICO score calculated by Equifax. And yes, scores from Equifax, Experian, and Transunion will differ—but only by a little. When lenders pull FICO scores, they see a combination of the three bureaus, and this minimizes inconsistencies or errors.

How Credit Scores Work

It is critical for your financial well-being to understand how credit scores work and ways you can boost your score if yours is low. In general, FICO credit scores, the most common type of score that lenders use, range between 300 to 850. The majority of consumers have credit scores that range from 600 to 799, with few at the top or bottom of the scale.

What your score means

FICO's credit scale has four ranges. Bad credit, poor credit, average credit, good credit, and excellent credit—numerically ranging from 300-850.

Spiral staircase graphic of credit score ranges

  • Excellent credit. A score of 750 or higher is generally needed for a mortgage, car loan, or personal loan that has the lowest interest rates.
  • Good credit. Scores in the 700-749 range are considered "Very Good" and generally bring low-interest rates.
  • Fair credit. Scores of 650-699 are considered "Fair." While average scores qualify for most loans higher interest rates offset some of the extra risk that lenders take.
  • Bad credit. Bad credit borrowers have scores in the 550-649 range. Although they still qualify for most loans, the interest rates are higher.
  • Poor credit. Of course, it's better than having a credit score of 560-619, which is considered poor. Risky borrowers have trouble convincing lenders to give them a loan.

Those with scores under 560 have work to do, as few (if any) conventional lenders will loan money to them.

The importance of credit scores

For those looking to purchase a house, the credit score is especially important. If the score is in the 520-620 range, only specialized lenders (subprime lenders) will qualify the borrower. These lenders often excessive interest rates, but they do allow people to have access to the money needed for a mortgage. Scores between 620 and 650 qualify for mortgage loans from most lenders but these lenders charge higher rates and fees because the default risk is higher. Those with scores of 650 to 720 will easily qualify for low-interest car loans, personal loans, and mortgages. Those with scores above 720 will not only qualify for the best loan products, they'll pay the least amount to borrow this money.

Graphic showing median credit scores of people accepted for mortgages (2000-2017)

Lenders consider them to be low credit risks, and therefore charge the low-interest rates, but keep in mind that lenders look at other factors too. Some lenders will approve people with a 650 FICO score while others may decline someone with a perfect score. If you are not comfortable with the loan offer, search for another one!

The 5 Primary Factors of Your Credit Score

Don't make the same mistake a lot of inexperienced people do and just assume more cards or swipes translates into a better score. Instead, learn these five factors like the back of your hand and you'll be set:

  1. Payment history makes up 35% of your score

    This is the biggest one. Are bills, such as utilities, medical bills, credit cards, and loans paid on time? Late payments over 30, 60, or 90 days can show up on your report. If they aren't paid, they can go to collections. Both hurt your score.

  2. Money owed makes up approximately 30% of your score

    How much debt exists compared to income to pay for it? This number shows if a person can safely handle new debt. (It's also known as the debt-to-income ratio or credit utilization.) A high debt-to-income ratio is risky while low debt to income shows that a customer can handle new debt.

  3. Credit history makes up 15% of your score

    How long have your credit accounts been open? Consumers who successfully manage their credit accounts over a long period of time are considered a safe risk. But someone with little to no experience with making payments on time is not going to have healthy credit accounts. Remember: A long credit history is only good if it is not riddled with late payments and overdue fees.

  4. New credit makes up 10% of your score

    Have you applied for any new credit recently? Applying for several credit offers within a week, a month, or even a year can raise red flags. The trick is to know the difference between a "hard pull," which is an application that will ding your credit score, and a "soft pull," which is an application that will not hurt your score. Nonetheless, to a lender, too many applications overall can be a warning that you are biting off more than you can chew.

  5. Credit mix makes up 10% of your score

    What kinds of credit do you have? Types of credit include secured loans, like car loans and mortgages, and unsecured loans such as personal loans, credit cards, and student loans. Lenders consider having a variety of credit better than only having one or two types.

The biggest "no-no's" that will ruin your score, from missed payments to maxed cards

All the time and hard work it takes to get that great score can be ruined instantly if you make these mistakes. While common, they should be avoided at all costs.

Avoid missing payments at all cost. This is the biggest and most common error. Forgetting to pay a bill, whether it's a car loan payment or a utility bill, harms your credit. Many companies offer grace periods before reporting to the bureaus. Just remember, payments over 30 days can be reported.

Graphic of reasons for Loan Deliquencies 2016

Don't max out your card just because you can. Maxing out your credit card is always a bad idea. It shows lenders that you're more likely to spend above your means, go over limits, and start missing payments. Remember, 30% of your score is calculated by your debt-to-limit ratio or credit utilization.

Avoid applying for new cards too frequently. Resist the temptation to "save 15%"" by filling out a credit application at your favorite store! Specifically, avoid "hard pulls" and look out for cards that offer "pre-approval" or "soft pulls"—these will save you a ding to your credit score. Adding credit on top of credit, especially in a short amount of time, indicates to lenders that you're in over your head and could make it hard to obtain excellent credit.

Avoid defaulting, foreclosure, or filing for bankruptcy. Defaulting on loans, foreclosure, and/or bankruptcy are traumatic events that indicate financial turmoil. While unavoidable in some cases, these result in bad credit scores, often for many years in the future.

Now for the fun stuff … Here's what having a good score can do!

What a good score does for your life and bank account

A high credit score not only makes you an attractive customer, it helps you save money! Here are just a few of the rewards:

Greater access to a wide-range of rewards cards. Once your credit is in the good to excellent range, you will have access to the best rewards cards on the market — from cashback cards, business cards, hotel cards, to gas and grocery cards.

Lower-interest loans and APRs add up over time. This is one of the best benefits. Why? Because getting the best interest rates means saving hundreds or thousands of dollars over the lifetime of a loan.

Fewer down payments mean fewer headaches. In many cases, low or no down payments are offered. These offers scream "$0 Down For Those With Excellent Credit!" Sounds great, but this perk can be tricky. Remember—down payments usually makes sense because they lower the amount borrowed.

Afford your dream house with a good mortgage. You likely can't afford to buy a new condo or house if you don't have good to excellent credit. Without a good score, a lender will either deny you a mortgage or approve you with a super-high interest rate.

Graphic showing decline in Americans Are Carrying Mortgages

Quicker approval can save you in a crunch. Looking to rent or sign-up for a new service (like a gym or cell phone plan)? Having great credit can make this quick and painless, and may even save trees by reducing paperwork!

Better insurance rates will keep you stress-free. Insurance companies love making money. When your score is good, insurers believe you are a good risk. To them, you're a better driver and less likely to take chances (like running stop signs, driving fast, etc.), so your premiums will be lower.

Improving your bad credit score takes time, but it's achievable

If you're trying to make your score better, here are some great tips to start:

Check your credit reports often. According to the 2015 Chase Slate Credit Survey, 39% of Americans do not know whether they have bad credit or good credit. It's not enough to just pull them, either — the last thing you want is a faulty credit report!

Here are the steps to fix any errors you might find:

  • Get a copy of your credit reports
  • Look for any mistakes or inaccurate information
  • Investigate mystery accounts or old debts
  • Write the credit reporting agency to get them removed
  • Repeat

Credit monitoring services, like those from TransUnion or from Equifax, help too.

To order a free copy of your credit report:

  • Visit Annualcreditreport.com
  • Call 1-877-322-8228
  • Or, complete the Annual Credit Report Request Form and mail it to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

Note: Do not contact the three nationwide credit reporting companies individually.

Set up automatic bill pay to simplify your finances. This one's great for anyone who has trouble remembering due dates. Next time you receive a bill in the mail, call the customer service number from that credit card issuer to set it up. Just think, no more late payments!

Pay off debt as aggressively as possible. Have too much debt? You're not alone. According to the U.S. Census, in 2015, the average American had $15,355 in credit card debt. This debt is exactly how credit card issuers make most of their money, so don't fall for the bait! Resolve to pay off your debt—you can do it!

Take out a secured loan to avoid high-interest rates. Have little to no credit history? This one is for you. Save $1,000 and get a loan for $500. Then use the loan or secured card as if it were cash. Pay back the loan with automatic payments using the other $500. Yes, you'll pay some interest, but when you have next to nothing on a credit report, this can be an investment in your future.

Graphic showing percent of Americans with Savings to Cover Six Months of Bills

5 Keys to Building an Excellent Score

We all come from different circumstances, and when it comes to building a credit history, that tends to make a difference. For example:

If you're young, or you've just recently arrived in the United States from someplace else, establishing the kind of credit history that will allow you to rent an apartment, finance a car, or successfully apply for a job can be tough. You need a good or excellent credit history to qualify for almost everything. To help ensure that your credit history ends up where it should, have a look at the following tips for building one the right way.

  1. Open bank accounts, and sub-accounts

    Open yourself a checking account and practice using a debit card. Next, open a savings account and make sure you add to it every month—even if it's only a few dollars at a time. The relationship you make with your bank or credit union will be the first step towards securing a credit card or a loan.

  2. Use a business credit card (wisely)

    Business credit cards and business credit scores can provide new entrepreneurs, whether young or recently arrived, with a way to build positive credit histories. Be sure to check the credit reports of your business periodically for any discrepancies.

  3. Set up auto-pay and never leave a balance

    Some vendors will offer cash discounts for advance payments. Paying promptly can make them more willing to vouch for you as a credit reference. Leaving a balance, while permitted, is exactly what your credit card issuer wants you to do. That means interest payments and the risk of forgetting to pay altogether.

  4. Don't go at it alone – get help early on

    Your bank or credit union will have educational resources to help you on your financial journey. If you're unclear about the fine print on your credit card, call your issuer and they'll help you understand it better. Thanks to the Employee Assistance Program, some larger employers also provide free financial guidance.

  5. Be patient, credit takes years to build

    Building great credit takes time—for everyone!

Credit scores reign supreme in today's economic climate

Credit scores are king now more than ever. Everyone from mortgage lenders to auto finance companies and even employers increasingly rely on these three-digit FICO scores to determine who gets loan money and at what interest rate. Good FICO credit helps you get the best rates, while a bad credit score could keep you from buying that dream home or financing the new car you want. Increasingly, even employers are looking at credit scores when they evaluate job applicants.

Recent surveys show that employers consider credit scores when deciding which job applicants are right for their open positions. Many people do not like this, considering a bad credit score has nothing to do with how potential employees will perform on the job. If you want an excellent score, the truth is that paying attention to your credit score will continue to remain important for a long time.

How's your credit score? Any tips to improving your score that we missed?

Let us know in the comments below.

Ready to find the perfect card?
Ready to find the perfect card?
Compare cards for all credit ranges.

Leave a Comment

Advertiser Disclosure:

The credit card offers that appear on this site are from credit card issuers from which CardGuru.com receives compensation. This compensation may impact how and where products appear on this site, including the order in which they may appear within listing categories. CardGuru.com does not include all credit card offers that might be available to consumers in the marketplace.

Editorial Note:

Any opinions, analyses, reviews or recommendations expressed on this page are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.