Your credit score can impact your life in several ways. If you maintain a high credit score, you can enjoy lower interest rates, access to increased levels of credit, and easy approval for apartments, mortgages, and other loans. By contrast, a low score can have the opposite effect. Interest rates that are offered to you will be higher. You may find it more difficult to gain access to personal credit. And getting approved for an apartment, mortgage, or a loan can prove challenging.
So, what is defined as a "good" credit score? The answer isn’t as simple as you may imagine (or hope). In this article, we’ll describe how scores are derived, defined, and perceived by lenders, landlords, and other business entities.
How Is A Credit Score Determined?
The most commonly used credit scores are FICO scores. They are calculated based upon 5 criteria. Your history of payments, the amount you currently owe, the age of your credit history, new credit accounts, and other factors all have an affect. Some factors (such as your payment history) are weighted more heavily than others (i.e. how much new credit you have). In the end, your score will be between 300 and 850.
It is important to note that your score fluctuates whenever the above factors change. If you max out your credit cards, your credit score will decline. If you significantly lower your credit card balances, your score will rise (other factors remaining the same).
Do You Have A Good Credit Score?
Most consumers’ FICO credit scores are between 600 and 750. These numbers require some explanation. First, most lenders consider any score above 700 to reflect good financial management. Credit scores below 600 suggest that a person has had trouble paying their bills or managing their credit in the past. The higher your score is, the less risk the lender perceives in offering you a loan.
If your credit score is above 700, you will enjoy lower rates, more credit, and greater availability of financial opportunities. Below 700, the picture becomes less clear because some lenders will be more forgiving than others. For example, assume that your credit score is 660. It’s far from perfect, but it’s certainly not catastrophic. You might have high balances on a number of credit cards, and may have even missed a payment. A mortgage lender may be wary of offering you a competitive rate for a 30-year prime loan. But, your bank may be more forgiving if you want to purchase a car.
Improving Your Credit Score Over Time
You won’t be able to hide your credit score from lenders, landlords, and banks. The good news is that you can raise it over time. Remember, your FICO score moves up and down, reflecting changes in the factors I’ve described above. If you establish a history of timely bill payments while reducing the amount of consumer credit you’re carrying, your score will gradually creep up. With diligence, it can climb past the vaunted 700 mark.
Credit scores are not complicated. But, unless your score is approaching 800, relying on a number to reflect your creditworthiness can oversimplify the picture. The important thing is that your score is largely within your control.
