A good credit score can mean better interest rates on your mortgage loan. It also means that you’re likely to get approved for a credit card, a home loan or a car loan. Moreover, having a good credit score can save you thousands of dollars in interests. So it’s important to know what is considered a good credit score before you decide to buy a house or buy a new car.
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Before we delve into the question of what is a good credit score, let’s define what a credit score is.
What is a credit score?
A credit score is a three digit number that lenders, such as banks who provide loans, car dealerships, credit card companies, and landlords use to determine whether to give you a loan or offer you credit. A good credit score makes your lenders more confident in you as a borrower that you will likely repay your loan.
A credit score takes into account your payment history on your loans and credit cards; your total debt and amounts owed; credit utilization rate; length of credit history; and recent credit inquiries.
What is a good credit score?
A credit score scale ranges between 300 and 850. 300 being the lowest credit score you can get, and 850 represents the highest credit score you can get. However, a credit score of 700 or above is considered a good credit score; a credit score of 800 or above is considered excellent.
While you may not be able to have a 850 credit score, you may be able to get a credit score in 700 range. In fact, most people have a credit score around 600 to 750. A less than stellar score like 580 may not get you qualified for most loans, but you might get approved for an FHA loan.
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Credit score scale: what is a good FICO credit score?
FICO stands for the Fair Isaac Corporation. FICO scores are generally used by many lenders. A FICO credit score of 670 is considered a good credit score. Refer to this credit score scale below to learn what is a good credit score:
| Credit Score | Rating | % of people | Impact |
| 300- 579 | very poor | 17% | Applicants may be required to pay a fee or deposit, and they may not be approved for credit at all. |
| 580-669 | fair | 20.2% | Applicants with this credit score range are considered to be subprime borrowers |
| 670-739 | good | 21.5% | Only 8% of applicants in this credit score range are likely to become seriously delinquent in the future. |
| 740-799 | very good | 18.2% | Applicants with this credit score range are likely to receive better than average rates from lenders. |
| 800-850 | exceptional | 19.9% | Applicants with this credit score range are at the top of the list for the best rates from lenders. |
Why having a good credit score is important?
Lenders use an applicant’s credit score, before offering a loan or credit, to determine whether that applicant will likely repay the loan on time, or whether you will default on the loan. So it’s crucial to have a good credit score, because it determines whether you will qualify for a loan, or a credit card. It also determines whether you will be approved for the apartment you want to rent.
But most important of all is the amount of money you can save in interests just by having good credit. When you have good credit, not only will you be qualified for a loan, you will also get a better, lower interest rates on the loan. Therefore, you’re able to save thousands of dollars.
Related: How to Pay Off Your Mortgage Early
Having said that, lenders also check other things on your credit report besides your credit score. Before they extend you credit or offer you a loan, they also look to see if you have any derogatory remarks, including bankruptcies, the types of credit in your report, etc. They can also look in your credit report to see the total amount of debt you have.
So to make sure you have a good credit score, you have to regularly check your credit report.
How to check your credit score for free?
Knowing what your credit score is before you even apply for a loan or credit card is not only the best thing to do, it also does not cost you any money anymore. There are several ways to check your credit report for free. For example, Credit Karma and Moneytips.com, all offer free credit report with credit scores.
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In addition, you can get a free copy of your credit report from each of the 3 credit bureaus (Equifax, Experian, Transunion). However, note that the 3 credit bureaus only offer free credit reports, and not free credit scores. If you obtain a credit score from them, you will have to pay them.
Credit Sesame on the other hand is totally free.
Here is the contact information:
- Equifax: 800-685-1111; www.equifax.com
- Experian: 888-397-3742; www.experian.com
- Transunion: 800-916-8800; www.transunion.com
Once you get a copy of your free credit report, check it for any errors or inaccuracies. If there are some listed, address them immediately.
Related: 3 Things Mortgage Lenders Will Hate About Your Credit Report
How to improve your credit score?
If you have a low credit score, don’t be discouraged. There are several ways to raise your credit score. First, pull your credit report from a free credit monitoring service. Check your credit report for any errors or inaccuracies. If you do find any mistakes, address them immediately by calling any of the 3 credit bureaus.
Another way to improve your credit score is to pay your bills on time (i.e., your credit card bills, utilities, etc). According to myfico.com, on time bill payment accounts for 35% of your credit score. So it’s crucial to make on time payments.
Another way to raise your credit score is to keep your credit utilization rate low. Your credit utilization rate is the amount of credit you’re currently using divided by the total amount of credit available. For example, if you have $5,000 in credit available, and you have a balance of $2500, then your credit utilization rate is 50%. That means you are using half of the total credit you have available.
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A good rule of thumb is to keep your credit utilization rate below 30%. For example, if your total credit limit is $5,000, your total balance should’t exceed $1500. A low credit utilization rate shows to lenders that you can manage your credit responsibilities well, because you’re far from overspending. Whereas a high credit utilization rate can be an indicator that you’re too good at managing your financial responsibilities.
Lastly, try not to apply to new credit unless you really have too. Too many inquiries on your credit report sends a red flag to lenders that you are desperate for credit.
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