You know you need solid credit to get ahead in life. But what is a good credit score, exactly? Is it 650, 700 a perfect 850? More importantly, is your credit score good enough to qualify for that new set of wheels, kitchen remodel, or new home you’ve been wanting? Knowing what your score is and how it measures up to credit scoring standards is crucial to securing that line of credit for a home improvement loan, or mortgage you need to reach your short- and long-term goals.
Whether you are heading to the car dealership, design showroom, looking for a moving loan, or mortgage lender tomorrow or next year, now’s the time to dig into this all-important topic and understand what “good” credit is—and what it means for your future.
While there are multiple credit scoring systems currently in use, most banks and lenders rely on the FICO score to determine the creditworthiness of a potential borrower.
The FICO score has a set range of 300 to 850 and will vary depending on which of the three major credit bureaus are reporting your score: Equifax, Experian, or TransUnion. Generally speaking, a score between 700 and 749 is usually considered “good” when this scoring range is being used.
For those wondering what is an excellent credit score, anything above the 750 mark tends to qualify. The difference between good and great credit scores may seem trivial, but what they tell lenders is anything but.
A good score is usually enough to secure a loan or line of credit, but a great credit score will enable you to do so at the most competitive rates and terms.
Borrowers with great credit qualify for the best credit cards with the most rewards, highest credit limits and lowest interest rates. Individuals in this category also enjoy guaranteed approval on personal loans for home improvement mortgages, auto loans and business lines of credit. And while borrowers with good credit typically have no issues securing similar loans, they will pay more in interest, incur additional fees, and be capped at a lower borrowed amount than their more-qualified peers.
The line between good and great credit can seem inconsequential, but we assure you—it is not. Imagine you have a credit score of 700 and are seeking a 30-year, fixed-rate mortgage of $240,000 for your next home. Your good credit score has afforded you a rate of 4.12 percent and a monthly payment amount just over $1,160 before taxes and potential association/homeowners’ fees.
Now, consider the identical scenario as a borrower with great credit. If your credit score was just 100 points higher at 800, you could easily secure an interest rate of 3.87 percent on the same home for the same 30-year, fixed-rate loan. Your monthly payment amount would be whittled down to $1,125, saving you more than $12,000 over the life of your loan. Regardless of the amount, that’s extra money in your pocket every single month.
If a great credit score lands you better rates, a perfect 850 score must be the ultimate money-saver, right? Not necessarily, says John Ulzheimer at Magnify Money. “It’s almost impossible to achieve the magical 850. It’s also entirely unnecessary.” Ulzheimer points to data from Informa Research, which shows that the lowest mortgage rates routinely go to borrowers with 760 or higher scores.
Now that we’ve established that a great credit score is better than a good one (and potentially even better than a perfect one), let’s dive into how credit scores are determined and the steps you can take to put your score in the “great” range.
Keep in mind many variables go into determining your overall credit. Ultimately, credit decisions are up to the individual lender who will also analyze other factors not mentioned here, such as your income. That said, it helps to know FICO scores are calculated based on the following five key factors:
Before handing over a lump sum of money or approving you for a line of credit, lenders want to know that you will make regular, on-time payments. While they can’t predict the future, they can look to your past payment history for reliable insight into whether you will be a responsible borrower. Late payments, bankruptcies and collections will impact this area, which holds the most weight in the calculation of your overall score.
How much debt do you have compared to your credit limits? Are your credit cards maxed out, or close to it? The higher your credit utilization is, the less desirable you are as a borrower. If your balances are currently high, aim to reduce them down to at least 30 percent of your overall limit. Better yet? Eliminate them altogether.
The longer you’ve been borrowing money, the more detailed your credit report will be. Lenders prefer borrowers with longer credit history as it provides them with more information about spending habits and the reliability of an individual.
Whenever you apply for a line of credit—regardless of approval or acceptance—an inquiry will be added to your credit report. If you have multiple applications in a short amount of time, it can signal financial instability and desperation to lenders.
The more diverse your credit report is, the better off your score. Borrowers who are able to show experience with a variety of credit types (mortgage, credit card, line of credit, etc) tells lenders they can manage a range of loans and debt responsibly.
If you want to increase your credit score, work on improving your credit report and credit behavior in these five important areas. Start by making on-time payments and getting your credit utilization down to 30 percent, as these two have the biggest impact on your overall score. Read more tips on how to improve your credit score.
Once you’ve established healthy habits and laid the basic foundation, building your credit score over time will soon become second-nature.
Buying a car soon? Check out our article on what is a good credit score to buy a car.