What Is a Good Credit Score?
A person’s entire financial health is frequently assessed only on a single criterion: whether or not they have a good credit score.
When you purchase or rent a home, finance a car, apply for a credit card, or even sign up for cell phone service, your credit score comes into play. But, during a pandemic, what is a decent credit score, and how can you earn one? We asked experts to weigh in on how lenders analyse your credit and what constitutes a good credit score.
Credit Score Fundamentals
Your credit score is a numerical number used by lenders to determine your creditworthiness—how likely you are to repay your obligations and hence whether they want to lend to you. Your credit score is determined using information from one of the three main credit bureaus: Experian, Equifax, and TransUnion. FICO and VantageScore are the most commonly used scoring models. However, it is feasible that a lender will employ its own rating methodology. As a result, depending on where you check, you may discover that you have varying credit ratings.
What Influences Your Credit Score?
The five criteria that influence your credit score are as follows:
- History of payments At 35%, your payment history is the most important factor in calculating your credit score. Payments that are more than 30 days late will have a severe negative impact on your credit score and will remain on your credit record for seven years.
- owed balances Credit card balances account for 30% of your credit score. This is where your credit usage ratio comes into play: total debt divided by total credit available. Try to maintain your credit usage ratio around 30% for the greatest credit score.
- Credit history’s age. Your credit history’s age accounts for 15% of your credit score. Assuming you haven’t had any bad marks, the longer you’ve kept credit accounts open, the higher your credit score will be.
- Credit allocation. Lenders want to see that you can manage multiple forms of credit responsibly, thus credit mix accounts for 10% of your credit score. In general, having a diverse credit mix of instalment credit, revolving credit, and open credit can help you improve your credit score.
- Recent events. The final 10% of your credit score is determined by recent activity. Hard credit inquiries, which lenders do when you apply for a loan, mortgage, or credit card, can lower your credit score and can remain on your credit record for up to two years. It’s better to avoid creating too many new credit accounts too quickly.
What Is an Appropriate FICO Score?
The FICO scale is divided into five separate categories ranging from “Very Poor” to “Exceptional,” allowing you to easily assess your credit health by determining which area your score falls into. A “Good” credit rating on the FICO scale ranges from 670 to 739. However, despite its name, this range is not what experts mean when they say “excellent credit score.” In actuality, scores in this range are deemed ordinary at best and are unlikely to secure you the best loan rates. If this is the case, what precisely is a good FICO score?
“While FICO’s score is important, their score labels are meaningless,” Todd Christensen, education manager at Money Fit by DRS, a nonprofit debt reduction programme, explains. While those credit score ranges are useful for education, lenders will ultimately set their own requirements for what constitutes a good credit score. “The only definition of a good score that matters,” Christensen argues, “is the score that qualifies you for the best interest rates and repayment conditions that a specific lender has to offer.”
Most lenders provide the best offers to customers with credit scores beginning in the mid-700s.
However, the long-term financial consequences of COVID-19 may impact how lenders analyse credit ratings. By the second quarter of 2020, 39% of US banks had already tightened limitations on consumer loans and credit card applications, a trend that most analysts anticipate will continue. Lenders may want higher credit ratings than usual and may even request additional evidence, such as proof of regular income, which is not factored into your credit score. Those who are authorised for new lines of credit will most likely have lesser limits than usual.
It’s more important than ever to keep an eye on your credit score.
Credit Score Levels
| Credit Score | Credit Rating |
| 300–579 | Very Poor |
| 580–669 | Fair |
| 670–739 | Good |
| 740–799 | Very Good |
| 800–850 | Exceptional |
What Is an Appropriate VantageScore?
VantageScore employs many of the same elements that FICO does to calculate your credit scores, such as payment history and credit mix, but it has its own algorithm for determining how relevant those aspects are in your score. VantageScore’s ranges are identical to FICO when it comes to defining a “good” or “poor” score. Previous VantageScore models had a different range (501-990), while the newest VantageScore models use the same 300-850 range as FICO, with minor changes in what scores fall inside each range. However, because each lender’s criteria vary, these ranges are less important than the actual score you’re issued.
The VantageScore credit rating ranges are as follows:
| Credit Score | Credit Rating |
| 300–499 | Very Poor |
| 500–600 | Poor |
| 601–660 | Fair |
| 661–780 | Good |
| 781–850 | Excellent |
Why Are Credit Scores Different?
A lender will eventually decide whether or not to lend money to you based on your credit score (and the information in your credit report). However, these considerations, as well as lender decisions, are always changing.
When you check your credit score with Experian and it differs from the number you receive from your bank, it might be because your bank obtains your score from TransUnion or Equifax – each agency receives fresh information for your file at different times, which can cause your score to change. If your credit report contains inaccuracies, your credit score may suffer as well.
Different scoring models can also result in different scores. According to Experian, FICO and VantageScore frequently alter their models to reflect changes in technology or consumer behaviour, and lenders and reporting agencies do not adopt these new models all at once. For example, in 2018, FICO unveiled its UltraFICO Score, which integrates non-traditional data such as banking information to assist persons with less credit history in accessing financial goods. Furthermore, certain lenders may employ industry-specific ratings; specialised older versions of FICO scores are common in the mortgage business.
Regardless of these distinctions, credit ratings are mostly determined by how successfully you utilise and manage credit over time. If you have solid credit habits and examine your score on a regular basis, it will show up in your score regardless of the scoring method utilised.
What Is the National Average Credit Score?
According to Experian statistics, the average FICO credit score in the United States in 2020 will be 711. According to credit.org, the median credit score in the United States is 722. However, the split differs depending on other criteria such as geography and age group. In general, older generations have higher credit scores than younger generations, both because they have more experience with excellent financial practices and because they have had more time to develop their credit history.
Credit Scores by Age Group in 2020
| Age Range | Average FICO Credit Score |
| 18-23 | 674 |
| 24-39 | 680 |
| 40-55 | 699 |
| 56-74 | 736 |
| 75+ | 758 |
While typical credit scores might provide insight into where you stand in comparison to the rest of the country, the only score that ultimately matters is your own. Is it high enough to qualify you for the loans you desire and assist you in meeting your financial objectives? If it is, make sure to keep it by developing healthy credit practices. If it isn’t, consider how you can enhance it.
How to Raise Your Credit Rating
The greatest approach to getting a strong credit score is to always pay off your amount on time and in full, but it isn’t the only thing you should do to maintain a high score. Make the following steps a habit, and you’ll watch your score rise in no time.
- Every time, payment is made on time. 35% of your FICO credit score is based on your payment history. After 30 days, late payments appear on your credit record and remain there for seven years. The later they are, the worse your score will suffer. It’s ideal to pay off your account in full each month, but make sure you’re at least making the minimum payment needed by your lender. If you believe you will be unable to make a payment, contact your lender right away, advises Miriam Mitchell, senior vice president of lending at Addition Financial. To help you prevent delinquency, the lender may provide relief alternatives such as loan deferments or adjustments.
- Don’t utilise all of your available credit. Keep track of your credit usage ratio, which is the ratio of your outstanding liabilities to your available credit limit. When your balances exceed 30% of your available credit, you will begin to lose points.
- Maintain previous accounts that are still active. Your overall credit score is affected by the duration of your credit history, so the longer you keep accounts like credit cards active and in good standing, the more you’ll benefit. You may keep old accounts operational by making one little purchase each month and paying it off promptly.
- Request better terms. If you’ve been a loyal customer for a long time, many lenders would gladly reward you with better conditions, such as reduced interest rates and bigger credit card limits. You’ll never know unless you ask your bank.
- When it comes to new accounts, be picky. A hard inquiry is recorded on your credit report every time you apply for a new loan or line of credit for two years and can reduce your score by a few points. Too many new accounts opened in a short period of time raises a red signal for lenders, so only apply for additional lines of credit that you require. Be extra cautious if you’re planning a large purchase, such as a mortgage because any red flags on your credit report might jeopardise the conditions of your loan.
- Use many sorts of credit. Having a variety of accounts, known as a credit mix, is a favourable indicator to lenders since it demonstrates your ability to manage diverse forms of debt responsibly. Credit is classified into three types: instalment credit, revolving credit, and open credit. As long as you use them appropriately, try to have a mix of all three.
- Keep track of your credit. Normally, you may get a free copy of your credit report once a year from each of the three credit bureaus (Experian, Equifax, and TransUnion). Credit reports can now be obtained for free once every week until April 2022. The quicker you detect and respond to problems or unlawful behaviour, the easier it is to keep your score from dropping.
Why Is a Good Credit Score Important?
Your credit score is one of the most essential elements lenders use when establishing your creditworthiness, but it may affect you in ways other than loan applications. Here are some of the reasons why having a good credit score is essential:
- It may have an impact on your loan eligibility. Most lenders will consider your credit score when deciding whether to accept you for a house loan, vehicle loan, personal loan, or credit card. The higher your credit score, the more likely you are to get accepted
- It can have an impact on the interest rates and terms you get. Even if you are qualified for a loan, you may not be able to get the best interest rates if you have poor credit. The more lenders believe you are a credit risk, the higher the interest rate they will charge you to lend to you. A low credit score might also limit the amount and term of the loan you qualify for.
- It may have an impact on your insurance prices. Although it is not the most important consideration, your credit score might have an impact on your insurance prices. According to credit.org, persons with good credit (740-850) pay 24% less than those with medium credit.
- It can have an impact on how employers see you. Even if your work has nothing to do with lending or finance, your credit score may be checked as part of a background check. Employers may view a high credit score as evidence of personal responsibility and judge you appropriately.
Read more about How to Improve Credit Score Fast
Frequently Asked Questions
Why should I check my credit score every year?
You may not need to obtain your free credit report every year, but it can assist you in staying informed. A free credit report issued once a year can assist Australians in keeping track of the impact of various financial activities on their credit score.
Your credit score provides information to financial institutions, notably lenders, about the type of payer you are. Your credit score will have been influenced in numerous ways depending on how you’ve paid down debt in the past. The addition of Comprehensive Credit Reporting (CCR) in Australia means that you may learn which transactions have a positive influence on your credit score as well as those that have a negative impact.
As a result, regardless of whether you intend to apply for a loan or incur additional debt, you should consider obtaining a free credit report once a year. Checking your credit report might reveal whether there are any inaccuracies in your credit file that are affecting your credit score and must be fixed.
Where can I get a free copy of my credit report?
While there are other ways to obtain a free credit report, RateCity’s credit checking system allows you to obtain your score from two credit history databases, Experian and Equifax.
When you order your free credit report, you will most likely be asked to provide some personal information, such as your name, contact information, and a form of identities, such as your driver’s licence number or another type of identification.
A credit report not only shows a credit score but also comprises good and negative credit transactions over the previous five years of payments.
What if your credit score has fallen for no apparent reason?
The significance of constantly reviewing your credit score cannot be overstated, since the changes may not be as significant to your life, and there may be a rare error, but what should you do if it declines for no apparent reason?
Credit reporting organisations generate your credit score using data from lenders, banks, credit card issuers, and utility companies, among others. This report considers both the credit inquiries made by these firms and your payment history with them, as well as other variables. However, because some reports arrive at various times, delays might look like declines.
If you fail to pay a bill while on vacation and the supplier is unable to reach you, or anything similar, the provider may report the default to the credit reporting agency, which can cause your credit score to decline when the credit reporting agency receives the information. The drop may appear random due to the noticeable delay.
Regularly examining your credit score and the transactions that have shown can give some insight into why a credit score decrease may have occurred, as well as insight into how you might repair the decline and improve your credit score in the process.
Can a poor credit score have an impact on rental applications?
A landlord may analyse your credit score to determine your reliability and ability to meet your rental obligations on time. So, does a poor credit score prevent you from renting a home?
When it comes to rental applications, landlords may not consider a poor credit score as a cause to reject applicants right away. Some landlords may be more liberal and may be ready to consider a renter with a lower credit score or even seek an extra deposit as protection against any future difficulties.
What factors might affect my credit score?
Your credit score is not fixed and might fluctuate with each financial choice and action you take. While checking your score is a soft check that has no effect on the outcome, payments and other actions can.
Your payment history (late or on time), the age and type of credit you have and owe, your debt balance (both current and delinquent, if any), recent payment behaviour, the credit available to you now, and if you have any court judgements or actions resulting from bankruptcy can all have an impact on your credit score.
Australia’s Comprehensive Credit Reporting (CCR) system also monitors your good payments and allows your credit score to improve.
