Your credit score is one of the key factors on credit applications such as a mortgage application, car loan or new credit card. To have maximum flexibility to make big financial calls, ensuring you have a good credit score is THE measure you need to stay on top of. Read on to find out how a credit score is generated and what is considered a good credit score, for you.
The most widely used risk indicator is called the FICO score. The FICO score measures your creditworthiness as a borrower.
Scores typically range from 300 to 850 with higher numbers giving you a more favorable grading. Each financial institution applies its own acceptance rules. Credit scores greater than 650 are generally being accepted as a good credit score. Credit scores higher than this may qualify for better lending terms.
Many lenders rely on multiple credit bureaus to calculate FICO Scores. Since each bureau extracts different data about you, your scores will vary between bureaus.
The fine detail behind credit scoring criteria has remained a guarded secret. FICO has indicated that each score is computed with weightings from each of the following five categories:
The Amount of Debt you currently owe is allocated 30 percent of your FICO score. Best practice suggests that housing debt should be no more than 28 percent of your gross monthly income. Other loans (cars, tuition, credit cards, etc) should add only an additional 8 percent.
The Payments History generally accounts for 35 percent of the overall credit score. Missing individual payments from time to time only results in small penalties. Consistency is critical. If a pattern of late payment is established, your credit score will go down quickly. Please remember, late payments will generally stay on your credit report for 7 years.
Length of Your Credit History
This accounts for 15 percent of the calculation. It considers how old your oldest accounts are, how new your newest ones are and how long you’ve had certain kinds of accounts. In general, having kept open, and used, the same accounts for a long time can be a positive factor.
Types of Credit
The FICO scoring formula considers the Types of Credit you rely on. This includes both the number and variety of accounts (mortgage, car loan, etc). Having experience with multiple types of accounts evidence responsible practices. This will positively influence your score. This is allocated 10% weighting when determining your FICO score.
Finally, New Credit also influences your FICO credit score. There isn’t an easy reckoner to apply to this criteria but this will look at how many new accounts you have by type of account. A pattern of successful new accounts being opened is positive. However, if you overuse this factor by triggering too many new account requests, your credit score could be negatively impacted. Like Types of Credit, this is also allocated 10% weighting when determining your FICO score.
What is a Considered a Good Credit Score, for me
You now have a great understanding of how your credit score is generated! The final step is to determine for your upcoming financial decisions, what should your credit score goal be before applying. What will the lending company consider as a good credit score? As you now know, credit scores are a definition of risk. Different companies have differing opinions so there is no such thing as a single definitive score. However, as your score lowers, the interest rate associated with the loan typically increases. Not good for you or your bank balance!
Our friends over at Credit.org created a useful infographic to help. It illustrates how the cost of a loan increases as you apply with a lower the credit score. Please note, the interest rates may be dated as the interest numbers used are a few years old:
Credit Score General Rules
In conclusion, in response to the question ‘what is considered a good credit rating’? Anything below 550 will make it tough to find reputable lenders to loan to you, regardless of loan type. If you are in the range 550 to 680 you can achieve your goals but you’ll pay for the privilege in terms of increased interest rates. If you are in this bracket, it may be cost-effective to work on improving your credit rating before applying to qualify for better terms. 680 above and you have the ability to shop around and get the best deal for you. More so when you are in the top bracket, 740 and above.
We hope you now want to find out more about your current credit score position. Major credit bureaus will give you a copy of your credit report each year for free, as required by law. You can get those reports from https://annualcreditreport.com. Also, many banks and credit card providers are now providing free credit monitoring services. If you have them, use them.
Do you know your current credit score? How is it impacting your life financially and can we help?