Good Credit Score: What it Depends On & How to Get One

When you apply for a mortgage, seek a car loan, or simply try to secure a new card, the prime factor banks and financial institutions will check is your credit score. It can either ensure favorable borrowing terms or hinder your financial opportunities. So, knowing how credit ratings work and how to achieve a great credit score is important for anyone striving to successfully navigate the complexities of the modern financial landscape.

In this guide, we will explore such questions as “What’s a good credit score?” “What affects your credit score?” and “How do you improve your rating?” to help you easily achieve financial goals. So, whether you are a newbie or a seasoned borrower, we’ll reveal all the ins and outs of credit scoring to help you establish healthy habits and boost your rating over time.

Understanding Credit Scores

In short, a credit score is a widely recognized three-digit number that reflects your creditworthiness. Serving as evidence of your financial capabilities, this rating is a critical tool for lenders to assess the risk of establishing or extending credit to you.

This score is calculated based on the information in your report, which is a detailed record of your credit history maintained by the biggest bureaus, such as Equifax, Experian, and TransUnion. Data from this report is processed using various credit scoring models that use complex algorithms to deliver authentic and reliable results.

It’s essential to maintain a great credit score since it can positively impact various aspects of your financial well-being:

• Access to Credit: When applying for different types of loans or a card for daily expenses, a perfect credit score will increase your chances of approval. Lenders are more eager to finance loans for individuals with higher scores since they are perceived as low-risk borrowers.
• Lower Interest Rates: Credit score levels directly align with the financial terms you’ll be offered. Thus, the higher your rating, the higher the likelihood of getting lower interest rates. Paying less interest less in interest over the life of a loan will save you money in the long run.
• Higher Limits: With a good credit score, you’re more likely to qualify for higher limits on credit cards and lines of credit to gain greater purchasing power and financial flexibility.
• Lower Insurance Premiums: Many insurance providers calculate premiums based on credit scores. A higher score can lead to lower premiums, as companies see you as a lower-risk policyholder.
• Employment Opportunities: During the hiring process, especially for positions involving financial duties or access to sensitive information, some employers might check your credit history. A strong score can boost your perceived reliability and credibility, enhancing your job prospects.
• Better Rental Options: Landlords and property management companies tend to use scores as a screening tool when evaluating rental applications. As a potentially credible tenant, you can even negotiate more favorable lease terms.

What Is a Good Credit Score?

The two leading credit scoring models, FICO and VantageScore, both rate creditworthiness on a scale from 300 to 850. A higher credit score scale signifies stronger creditworthiness. While these two models use a bit different approaches, the score classifications are very close.

What is considered a good credit score, though? To answer this question, let’s look into FICO and Vantage Score ranges and how they compare.

As you can see, VantageScore has a more extended good credit score range. Thus, what makes a good credit score under the VantageScore classification splits into two categories for FICO also including a very good credit score range. In terms of figures, it translates into 781–660 for VantageScore and 739–670 for FICO, accordingly.

If you ask, “What is a good credit score on average?” the answer would be anything that hits 700 and above. Meanwhile, ratings lingering close to 800 are considered excellent or very good credit scores.

Credit Score Requirements for Different Financial Objectives

When you consider your financial goals and plan big purchases such as a house or a car, you should be aware of the varying requirements lenders typically have for different borrowing purposes. While there are no documented score benchmarks, the data below reflect common figures taken into account by financial institutions and agencies when they approve borrowing.

• For a no-hassle car loan or lease approval, you don’t have to fall in a perfect credit score range. Yet, if your rating is below 700, you should be ready to comment on negativities in your report and get prepared for higher rates.
• Mortgage loans usually require scores above 500. In this case, though, borrowers from higher ranges could count on more competitive interest rates.
• When renting an apartment, you should stick to the principle “the more, the better.” Landlord expectations in terms of safe scores might greatly vary across states and localities as well as depend on their personal rules for tenants.
• When it comes to credit cards, borrowers with a flawless payment history and a good credit score won’t have problems opening a new account. Those with a poor financial track record might struggle to get rewards or balance transfer cards. They should rather start with options specifically designed for building credit to further qualify for more favorable terms.

5 Key Factors That Impact Credit Scores

Now that we’ve answered the question “What is a very good credit score?”, it’s time to find out what stands behind this number that reflects your financial behavior and determines your financial opportunities to a great extent. Knowing what factors impact credit scores, you’ll be able to maintain a healthier profile.

Payment History

Both FICO and VantageScore consider this a prime factor for determining your rating, which accounts for 35% of the total score. It demonstrates how responsible and consistent you are in making credit payments and catching up with payment schedules. Thus, late payments, defaults, bankruptcies, and accounts set to collection can significantly lower your rating.

Credit History Length

Normally, people start building their history from student loans in their young years and proceed to more serious financial commitments as they go up the career ladder and grow older, hitting their financial goals. The period you’ve had credit accounts also matters for your score calculation. A longer history allows lenders to assess your borrowing behavior over time and adds points to your overall rating.

Credit Use Ratio

This metric represents the percentage of your total available credit that you’re currently using. By keeping your credit utilization under 30%, you may elevate your score to a higher range.

Credit Mix

It’s yet another decisive aspect of achieving a great credit score. Lenders prefer to see a diverse pool of accounts on your report, including credit cards, installment loans, and mortgages. Diversity showcases your financial literacy and prowess, proving your ability to juggle different types of borrowing and get the most out of such an approach.

New Credit Inquiries

Each time you apply for new credit, a hard inquiry is triggered on your report, showing that a lender has checked your history. Suppose you have several such inquiries in a short span. In that case, it may appear to lenders that you are experiencing financial distress, which can adversely affect your perceived creditworthiness.

What Is Not Considered for Credit Scores?

While providing a valuable snapshot of your credit history and financial behavior, the rating doesn’t capture every aspect of your financial life. Here are some factors that you might think are considered when calculating your score, yet they actually have no impact on it.

• Personal Data: Though some part of personal information is requested during the application process, such data as your race, gender, religion, nationality, marital status, or income don’t play a role in determining your score. Speaking of age, older individuals tend to have higher ratings due to naturally longer credit histories.
• Employment History: Stable employment and a steady income can positively impact your ability to repay debts. However, your employment status, job title, or income level are not included in your report.
• Bank Account Balances: While your financial stability hinges on having sufficient funds, the balance of your bank accounts, including checking, savings, or investment accounts, is not reported to bureaus.
• Soft Inquiries: Unlike hard inquiries initiated by banks and credit unions with a potential negative impact on your score, soft inquiries performed for monitoring purposes leave no mark on your score.
• Utility Bills and Rent Payments: Although landlords do pay attention to their tenants’ credit score levels, timely payments of utility bills and rent don’t affect your rating since these details don’t show up on your credit report.

Tips on Building a Good Credit Score

Notably, credit scores aren’t set in stone. They’re dynamic, constantly evolving markers of your financial health. It means you have the power to influence them and improve your score over time by practicing good habits:

• Pay Your Bills on Time: Since your payment history is the most influential aspect in calculating your rating, stick to your payment schedules with diligence. Watch for delays and overdue settlements. Set up automatic payments or reminders to help you stay on track and pay all your bills on time.
• Keep Your Card Balances Low: It’s wise to maintain card balances significantly below your limits. Ideally, aim to pay off these balances monthly. By doing so, you’ll also steer clear of accruing interest.
• Avoid Opening Too Many Accounts: Stay away from filing multiple credit applications within a short period since each of them will entail a hard inquiry on your report, showing lenders your potential facial instability.
• Stay on Top of Your Credit Standing: Be vigilant about monitoring your report for any changes or suspicious activity. Regularly review your report to promptly detect any inaccuracies or fraudulent activity that might injure your rating.

How to Check Your Score

Monitoring your score is crucial to staying informed about your creditworthiness. You might want to check your rating before applying for a new loan to assess your chances of approval and see if you qualify for better conditions.

You can check your score by requesting your annual credit report from each of the three major bureaus via annualcreditreport.com. Or you can find it on your card or loan statement provided by your lender on a monthly basis.

Many monitoring services, such as an Experian monitoring tool, allow you to not only check your rating but also set up alerts to receive notifications when your score changes, reaches a certain threshold, or when new activity appears on your report. Such notifications will enable you to trace important changes to your credit profile.

Conclusion

If you’ve wondered, “What is a great credit score?” the answer is simple. It’s the rating that lingers around 700 on average. However, you should remember that a good credit score is just one piece of the financial puzzle. While it can open doors to opportunities, your overall financial health and commitment to sound money management practices will ultimately determine your long-term success.