What is a Good Credit Score

Determining Credit Scores

Credit scores are not doled out arbitrarily. Creditors don't look at you and say "You're cute, you look like a 720" or "You need a haircut, 600 for you." Credit scores are actually based upon five major criteria:

• Payment history – Your payment history makes up 35% of your total credit score. A couple of late payments on your credit cards are generally no big deal, more than a couple and you're in trouble. When you are consistently making your payments late you are labeled as a habitual late or slow pay.
• Outstanding balances – The total outstanding credit balances make up 30% of your score. When you are nearing the top of your credit limits, pay them down ASAP. Even if you are near your credit limits because your car broke down or you had a medical or financial emergency, it doesn't matter. Being at or near your limits drops your credit score in a hurry.
• How long you have had credit – The amount of time you have been using credit accounts for 15% of your overall credit score. Sometimes, it is easier for people with bad credit to acquire loans and credit cards (albeit at a high interest rate) than it is for someone with no credit.
• New credit – Whenever you apply for additional credit, especially over the course of a short period of time, this drops your credit score and looks bad for lenders. There is one major exceptions and that is, when you are shopping around for the best interest rate for a home loan. If your interest rate shopping is done within a one to two week period of time, it is reported as only one inquiry into your credit.
• Type of credit – Having a good mix of credit types is great; having too much is not so great. It is okay to have an installment loan, a mortgage and a few revolving credit accounts (credit cards), but to have too many open lines of any type of credit is looked down upon by lenders.

What is a Good Credit Score Anyway?

According to Fair Isaac, more commonly referred to as FICO, the average credit score in the United States is 723 on a scale of 850. Fair Isaac is the main credit-scoring model that most all creditors use; here is their credit-scoring breakdown:

• 700 and above – Very good to excellent. Lenders will have no problems giving you a loan with a credit score of 700 or above.
• 680 to 699 – This credit score puts you in the "Good" category. That one point between good and very good to excellent credit generally makes little difference to lenders so don't sweat it.
• 620 to 679 – If your credit score falls into this range, you fall into the "Okay" category. The closer your score is to 679, the better. 620 is consider to be a "par" credit rating and you may be required to provide supporting information such as additional income statements, personal and professional references as well as documentation confirming time at your current job.
• 580 to 619 – While you aren't in the "Bad" category yet, you are teetering on the edge if your credit score falls in this range. 620 is the prime rate cut-off, so plan on paying a higher interest rate.
• 500 to 580 – You can still get credit in this scoring range, but expect to pay a very high interest rate and look closely at the terms of your agreement. Closely examine how your interest rate is calculated. Some predatory lenders will charge interest rates on car loans that are calculated like credit cards, on a daily average balance. If you see these words in your disclosures for a car loan, put the pen down and walk away.
• 499 and below – Yes, even with as score of 499 or below you can still be extended credit, but the interest rates will kill you financially. Take a year or two to pay off your collections or bad debt, clean up your credit and reapply at a later date.

Be Patient

If you have a low credit score, it isn't going to be repaired overnight. No matter how badly you want that new car or new home, wait. When you are considering longer termed loans, interest rates make a huge difference. Here's a small example for a $165,000 30-year fixed mortgage from Bank Rate:

The monthly mortgage payment for a 30-year fixed mortgage of $165,000 is up to $400 more a month for a low credit score than a high credit score. That is an extra $4800 a year and tens of thousands of dollars over the life of the loan. It does really pay to be patient and raise your credit score to at least 620 before applying for credit, especially long-term credit.

Responsibility Matters

Be responsible with your credit, don't spend more than you can afford, make your bill payments on time and you will never again ask, "What is a good credit score?" because you will already know yours is just fine.