“What Is a Good Credit Score?” is a question that is often asked by those looking to improve their score and see if they will be able to qualify for important life purchases like cars, homes and opening up new credit cards.
Let’s dive into what constitutes a good credit score and how you can improve yours quickly.
Credit Scores Range From 300 to 850
According to the Fair Isaac Corporation (FICO), a credit score between 300 and 629 is considered to be poor or subprime. A credit score between 630 and 719 is considered to be good or prime. A credit score above 720 is generally considered to be excellent or superprime.
Most lenders refer to your FICO score when evaluating your request for a loan. However, some will refer to the number provided to them by VantageScore. As with FICO, VantageScore assigns borrowers a score between 300 and 850 based on their track record handling debt.
How Is Your Credit Score Determined?
Your credit score is based primarily on your ability to pay your debts in a timely manner. According to FICO, your ability to avoid late or missed payments makes up 35% of your overall score.
Other variables used to create your credit score include your credit mix and your credit age. Often, your credit score will be higher if you have a mix of secured and unsecured debts. Secured debts include mortgages, auto loans or any other type of loan that is backed by collateral. Collateral is anything of value that a lender can seize and sell to obtain the money it’s owed.
Unsecured debts include credit cards, medical bills and certain types of personal loans. As the name suggests, this type of balance is not backed by collateral. Instead, it’s backed only by your promise to repay the debt in a timely manner.
Credit ages are determined by averaging your oldest account and youngest account. For example, let’s say that you opened your first credit card 60 months ago. Let’s also say that you opened your most recent credit card two months ago.
In such a scenario, your credit age would be 31 months. It may also be reflected on your credit report as two years and seven months. Generally speaking, those who have a longer track record handling debt will have a higher score than those who do not. This is why it’s rarely a good idea to close your oldest account even if you no longer use it.
Finally, your credit score is based partially on your credit utilization rate and debt-to-income ratio (DTI). Your credit utilization rate is simply the amount of available credit that you are using at any given time. Ideally, you will use no more than 30% of your available credit. For example, if you have $1,000 on a credit card, you should aim to use no more than $300 at once.
Your DTI simply compares the amount of debt that you have to the amount of money that you earn in a given period. For example, let’s say that you earn $3,000 a month before taxes. Let’s also say that you have monthly debt payments of $1,500. In this pretend situation, you would have a DTI of 50%.
It’s generally recommended that you have a DTI of no more than 28% before factoring in a rent or mortgage payment. Ideally, this ratio will be no more than 40% after adding accounting for your monthly housing payment.
Your Credit Score Can Change Over Time
Your credit score is based on information that is provided to the major credit reporting agencies. Information may be provided by your auto loan servicer, a credit card provider or anyone else who you engage in financial transactions with.
For example, your landlord may put a note on your credit report if you fail to pay your rent in a timely manner. If you file for bankruptcy, that will be noted on your credit report.
The good news is that information only stays on your credit report for up to seven years. This means that anyone who checks your credit won’t know that you missed a car payment in 2002 or that you filed for bankruptcy in 2007. Of course, this also means that a lender won’t know that you successfully made all of your car payments in 2005 or that you paid off your mortgage in 2010.
It’s also worth noting that your score can drop after you pay off a secured loan. This is because it will alter your credit mix, which may make you less appealing to lenders. However, in such a scenario, your score should only drop a few points, and it will likely rebound over the next several months.
Negative Information Becomes Less Important Over Time
While negative information stays on your credit report for seven years, it tends to become less important over time. Typically, lenders, landlords and others who check your credit only care about what you’ve done in the last 12 to 24 months. In fact, you may be eligible to obtain a new credit card, a car loan or a mortgage within a year of filing for Chapter 7 bankruptcy.
The Benefits of a Good Credit Score
The primary benefit of credit score above 630 is that you’ll gain access to the best loan terms. For example, you may be able to obtain a car loan with an interest rate of less than 3%. It may also be possible to obtain an unsecured personal loan with an interest rate of less than 7%.
If you have a credit score of above 720, your landlord may give you a discount on your base rental rate. It’s also not uncommon for insurance companies to give discounts to people who have excellent credit. This is because research has shown that those who manage their finances well are less likely to file claims.
As a general rule, those who have good credit will be allowed to borrow more money than those who have poor credit. It may also be easier to obtain an increase to the limits on your existing credit cards. This can be helpful if you need to cover an emergency expense and don’t have the cash to pay for it all right away.
Don’t Apply for Too Much Credit at Once
While a good credit score can make it easier to gain access to credit, you don’t want to apply for credit that you don’t need. This is because each application that you send to a lender will result in a hard inquiry. A hard inquiry means that a lender is accessing the full version of your credit report to determine if you qualify for a credit card, auto loan or other type of financing.
Hard inquiries can stay on your credit report for up to two years. They will typically cause your credit score to drop anywhere from 5 to 25 points depending on your unique credit profile. In some cases, the hit to your credit score could be enough for a lender to deny an application.
However, the presence of multiple hard inquiries over a short period of time can also scare lenders away. This is because it shows that you’re having a hard time managing your money without going into debt. Ideally, you won’t apply for credit more than once every six months.
What Can You Do Today to Increase Your Credit Score?
If you have multiple missed payments, you should try to settle the most recent one first. This is because a payment that is 90 days past due will generally have less of an impact on your credit score than one that is 30 days past due.
If your credit utilization rate is higher than you want it to be, it may be a good idea to apply for more credit. The reduction in your credit utilization rate will likely negate the negative impact a hard inquiry will have on your score.
Of course, if you do obtain approval for additional credit, you shouldn’t use it. Otherwise, you’ll simply put yourself in a deeper hole that will be even harder to get out of.
In some cases, filing for bankruptcy can actually improve your credit score. This is because it can give you a chance to wipe out debts that are currently past due or in collections. If a debt is discharged in bankruptcy, it will likely be listed as paid or closed on your credit report.
Furthermore, filing for bankruptcy can also reduce your credit utilization rate and your debt-to-income ratio. If you currently have a credit score below 630, a Chapter 7 bankruptcy may increase your score by 50 to 100 points.
However, it’s worth noting that there is no way to guarantee how any single event will impact your credit score or creditworthiness. It may be in your best interest to speak with an attorney or financial adviser prior to submitting a bankruptcy petition to your local court.