We can’t emphasize enough how important it is to have a good credit score.
Actually, calling it "important" would be a bit of a gross understatement, since your 3-digit credit score may be the one, singular thing responsible for opening or closing the door on getting you approved for the credit line you need to make major purchases like credit cards, auto loans and home mortgage.
A good credit score also becomes the deciding factor in the type of interest rates you might obtain for any credit card or loan you receive, which can save you -- or cost you -- hundreds to thousands of dollars per year. Pretty straightforward stuff, yet it begs the question: Just what exactly is "good" credit, anyway?
Credit can run the gamut between simply bad and exemplary. While "good" credit isn’t exactly shabby, it’s also not quite the best, either. What confounds matters even further is that what makes for a good credit score when applying for certain types of loans or accounts may not be the same for others, since many lenders have their own perceptions of what constitutes good credit.
Do you have a good credit score? If you’re unsure, keep reading to find out, and see how to raise yours for the best credit in the world.
What makes a good credit score?
Your FICO score (at 90%, one of the most widely used scoring models with lenders and creditors) is calculated based on the information in your credit report, a history of your credit behavior that’s reported by your lenders to three national credit bureaus: TransUnion, Experian and Equifax.
FICO (short for Fair Isaac Corporation) scores and VantageScores range from 300 to 850, from poor to excellent:
Bad: Below 600
Your credit may have been excellent at some point, but a series of financial missteps, debt or other unfortunate circumstances can cause your score to drop slightly. Maybe your credit was once poor or even nonexistent, and your current score is the result of working hard to build your score up to where it is now.
Either way, a good credit score will likely see you approved for most credit cards or loans you apply for. Your interest rates may be just a bit higher than a fellow borrower with better credit, yet far lower than someone saddled with poor credit.
Different lenders operate by different standards when it comes to considering candidates with good credit:
Most conventional home loans call for a credit score of at least 620 for approval, though your interest rate, while competitive, may still be higher than someone with very good or excellent credit. For FHA (Federal Housing Administration) loans, a minimum credit score of 580 will qualify you for a 3.5% down payment, versus a comparable 10% down payment with a poorer credit score of 500. A good credit score in the range listed above would qualify you for a mortgage based on this criteria.
The minimum credit score needed for a car loan also varies from lender to lender, and it’ll reflect a majorly in the interest rate you’re offered (if approved for the loan). According to recent data from Experian, good credit holders fall into the prime and super prime borrower range, and pay an average auto loan APR of 2.7% to 3.67% on new car purchases. Data from the credit bureau also indicates that borrowers with deep subprime credit (lower than a 550 FICO score) are offered an average 12.42% interest rate.
Compare the difference that makes in one’s loan payments. The average price of a new car is about $33,000, according to Kelley Blue Book; with the same 2.7% interest rate, a customer with very good credit will have a $589 car payment. The borrower with poor credit, on the other hand, will pay $741 for the same car and same terms, but with an overly inflated 12.42% APR.
With a good credit score, there’s no need to apply for a secured credit card or take extra special measures to build your score. Compared to mortgage or auto lenders, card providers may be a bit more flexible with credit scores, since a good-to-excellent score is generally all that’s needed to qualify for some of the most competitive rewards credit cards offering cash back, miles, points and introductory 0% APR offers.
According to myFICO, consumers within the good to excellent credit score range may be eligible for popular credit cards such as the Chase Freedom Unlimited, Capital One VentureOne Rewards, and the American Express Blue Cash Preferred.
Getting a good credit score
Not all credit activity is created equal. Some factors are weighed more significantly than others when it comes to determining your FICO score. Follow some of these tips to maximize yours.
Pay your bills in full, on time.
The majority of your credit score -- 35%, to be exact -- counts towards your payment history. Keep making sure that you pay all your installment and revolving expenses off each month by their due dates: credit cards, home loan, auto loan, auto insurance, cable bill, cell phone. Despite the myths, carrying a balance on your credit cards does not help your credit. Instead, always strive to pay off your full amount due at the end of each month, even if it’s just a few bucks, and your credit score will see the biggest improvements.
Limit your credit usage.
Nearly one-third of your FICO score (30%) reflects upon the amount of credit you utilize, or, in industry terms, your credit utilization ratio. The less credit you use or money you borrow, the better it looks on your credit score, since it tells the bureaus that you don’t rely too much on credit to get by, thus, posing a lower risk of going into debt. The 30% figure isn’t random; in fact, we would conservatively suggest never utilizing more than that percentage at all times. It’s important to always keep credit utilization in mind when using your credit cards. (For example, if you have a $10,000 spending limit on your credit card, try to never exceed $3,000.)
Don’t cancel old accounts.
If you’ve graduated up to a better class of credit card, don’t cancel, cut up or neglect your old credit cards. Fifteen percent of your FICO score is determined by the length of your credit history. If you’ve had a longer relationship with some of your revolving accounts, keep using them, even if sparingly -- it’ll reflect positively towards your credit.
Limit applying for new credit.
Though a small percentage, 10% of your credit score is determined by the amount of credit you’ve applied for. Example: if you recently sent out 25 applications for the newest credit cards, your credit report will receive several "hard" inquiries that will cause your score to decline. Pace yourself to applying for new credit accounts -- be it a credit card, auto loan or other line of credit -- a couple of times a year.
Diversify your credit.
Another 10% of your FICO score accounts for the types of credit you use. Credit bureaus like to see that you can manage a mix of credit accounts without relying on, say, credit cards too much. If you can juggle responsible usage of your cards, a car payment, student loans, or other revolving/installment expenses, it proves your creditworthiness and serves to improve your credit score.
Final words: It’s not just a number
Aiming for a good credit score is actually a bit of a low goal. Good credit is good, but it should never be good enough.
Instead, we should all be setting our sights on an excellent credit score, since a good credit score just happens to be what you might achieve on the way up the FICO scale. Good credit doesn’t exactly mean you’re tasked with rebuilding your credit -- more with maintaining it and watching for slight improvements. Make an 800 score your goal and follow some of the above tips to watch your credit score climb.
As always, check your credit report annually, and don’t hesitate to dispute errors that can negatively impact your credit standing. Before you know it, you’ll go from good to excellent and have the FICO score to prove it.