There is no formal definition of a good credit score. It varies depending on what you're applying to borrow for, but it's generally accepted to be in the range of 670 to 739 in the FICO scoring model. Here's how the FICO score works, what is considered a good credit score, and how to increase your credit score from good to great.
How the FICO credit scoring model works
First of all, when I use the term "credit score," I'm referring to the FICO score. There are other scoring models out there, but FICO is the model lenders most commonly use, by far.
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The formula that determines your FICO score is a well-guarded secret, but we do know that the FICO score is made up of five categories of information:
- Payment history (35% of score): Do you pay your bills on time, every month?
- Amounts owed (30%): How much do you owe on your credit accounts, particularly relative to your credit limits or original loan balances?
- Length of credit history (15%): This considers various time-related factors, such as the age of your individual accounts, the age of your oldest account, and the average age of all of your accounts.
- New credit (10%): Newly opened credit accounts, as well as your recent applications for credit, are included in this category.
- Credit mix (10%): Lenders want to see that you can be responsible with different types of credit, so having several different types of accounts (credit card, mortgage, auto loan, and so on) can boost your score.
FICO scores range from 300-850, with higher scores being better, and most consumers have FICO scores in the 500-800 range.
Many credit card issuers give a free credit score to customers. These days, many offer the FICO score, but not all of them do. If your credit card company gives you a credit score that's not based on the FICO model, it's still probably a solid indicator of how you're doing, but the scoring model and range may be a little different from those discussed here.
What is considered a "good" FICO credit score?
To be clear, there is no set number that is defined as the cutoff between a "bad" and "good" FICO score. And in practice, a good score depends on what you're buying. For example, if you're getting an FHA home loan, any score above 580 will get you approved. However, a score in the upper 700s can be required for the best credit cards.
The average American consumer has a FICO score of 700, so that's a good reference point to determine how you're doing relative to others. Additionally, FICO offers these guidelines to help you interpret your own credit score:
Data source: www.myFICO.com.
What can you do with good credit?
If your score is in the "good" range in the chart, you'll generally be able to qualify for a mortgage loan with a competitive interest rate. The best rates are reserved for top-tier buyers, but the difference in interest rates between good and excellent credit scores may be less than you think. As of this writing, here are the mortgage rates consumers with various levels of credit scores can expect, and the difference they can make to your mortgage payment:
Data source: www.myFICO.com.
The same can be said for auto loans. As long as your income is enough to justify the loan, a good credit score will generally get you approved for a car loan, new or used. Your interest rate won't be quite as good as an excellent-credit borrower would get, and your dealer may require more money down, but approval is generally not a problem with good credit.
As far as credit cards go, there are some credit card products specifically designed for individuals with fantastic credit scores, and these may or may not be beyond your reach if you have a good credit score. Fortunately, there are some excellent credit card products available to people with good credit scores, and you can check out our favorites here.
How to increase your credit score from good to great
There is no way to build great credit quickly. I always tell friends that it's possible to go from no credit to good credit in a fairly short period, but that building excellent credit takes time.
Furthermore, there is no magic formula to getting a top-notch credit score. You can read my thorough discussion of the habits of people with great credit, but the general rules are:
- Pay your bills on time, every month, without fail. Over time, this step alone can boost your credit score into the next level.
- Keep a low (but not zero) balance on your revolving credit accounts relative to your available credit. The average person with a FICO score over 800 uses 4% of his or her revolving credit limits.
- Don't open new credit account too often, and let your open accounts age. The average in the "800+ club" opened their oldest account 25 years ago.
- Use several different kinds of credit, which will help maximize the "credit mix" category.
The best path to a fantastic credit score is smart credit behavior over a period of several years, and the behaviors needed to get there aren't much more than financial self-discipline and good old-fashioned common sense.
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