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Today we are discussing all things credit score! Is credit score important? What credit score is considered good?
We are going to be breaking down all of the factors for credit score! The goal of this post is to help you learn how credit scores are determined and hopefully help you increase your credit score.
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Table of Contents
Types of Credit Score
First of all, there are different types of credit scores. The most widely and commonly used are the FICO Score and the VantageScore. These are used by the major credit bureaus (TransUnion, Experian and Equifax). However, some large lenders can use their own models to generate credit scores.
Today we will be discussing the FICO credit score because it seems to be the most widely used,, but I wanted to make sure to mention there are other types you can run into!
What Credit Score is Considered Good?
As you can see from the chart below a 670 and above is considered good, with anything above 740 considered very good, and the credit score excellent range at 800+.
| Credit Scores | Credit Ratings |
| <580 | Poor |
| 580 to 670 | Fair |
| 670 to 740 | Good |
| 740 to 800 | Very Good |
| 800 < | Excellent |
If your credit score isn’t where you want it to be, don’t worry! There are ways to increase it! Keep reading for those tips.
Why is Credit Score Important
Before we get into how credit score is calculated, let’s talk about why it matters. Your credit score represents how likely you are to repay a lender.
A bank doesn’t want to give you money if you’re not going to pay it all back on time.
Having a good credit score means getting access to benefits you wouldn’t otherwise receive. You get more access to credit cards with bigger perks and lower interest rates on big loans!
For example, if you want to buy a home and have a good credit score, you will most likely be offered a lower interest rate. If you’re purchasing a $500,000 house with a 30 year fixed rate at 3% that is $258,887 in interest. However if you have 4% that’s $359,348 you’re paying in interest.
A 1% difference might be small, but you would save $100,467 simply for having a better credit score! Not to mention the opportunity cost of investing that money instead.
How Credit Scores are Determined – Credit Score Factors
Five credit scoring factors are taken into account.
Payment history – 35%
The largest factor when it comes to calculating your credit score! Payment history means if you are paying off your balances consistently and on time.
The lender wants to know if you will pay them back on time, in full. They take into account just how late your payments are. Lenders are less likely to give you money if your patterns show you will be paying them back late.
Increase your credit score: Make sure you are paying on time, in full, consistently. Not every once in a while. Every month, on time, in full. Learn to not spend more than you can afford. If you can’t pay the bill at the end of the month, don’t buy it.
Amount owed – 30%
Number two is the amount owed with respect to credit available. They take all of your accounts that have balances and factor that against the amount you have available.
It is important to factor this number against available credit. Someone who spends $500 a month and has a $5,000 credit limit has a much higher credit utilization than someone who spends $1,000 dollars a month and has a $50,000 credit limit.
You can’t compare how much you spend with someone else when it comes to credit score.
Additionally, although this is calculated for all of your credit lines, how much you spend on one card matters! If you have two credit cards with a $5,000 credit limit, spending $500 on each is better than spending $1,000 on one and zero on the other.
Increase your credit score: You want to try and keep your utilization rate at less than 30% in total and per card! Calculate your utilization by dividing your total debt by your total available credit. Additionally, ask your credit card company for MORE credit! This will in turn decrease your utilization, (assuming you don’t spend more).
Length of credit history – 15%
Factor number 3, how long you’ve had a credit account. In good standing, I might add. This takes into account the average length of all your credit accounts.
Length of credit is my least favorite, if you are new to the credit card game, all you can do is wait.
Increase your credit score: Even if you don’t use your first card, DO NOT CLOSE IT. Unfortunately there is not much else we can do here except wait. As time goes on this will increase!
New credit – 10%
Also known as recent inquiries. A lender looks at how many credit checks (or inquires) you have had recently. This happens when you apply for a new card. If you’re opening new credit accounts frequently that’s a red flag.
Increase your credit score: The only way to score excellent here is to have 0 inquiries in the last two years. That’s pretty difficult. I’d aim to not have more than 1 or 2 inquiries every two years. If you’re considering opening more than one new credit account within two years, I might wait until you hit the two year mark.
Credit mix – 10%
Last but not least, credit mix! Lenders want to know you can handle multiple types of credit. Not only are you paying your credit card bills but you’re also paying your car loans on time. Having a nice mix of different credit lines benefits you here.
Increase your Credit Score: This might be the only time having a small loan might benefit you. However, I would never recommend getting a loan if you only have credit cards. On the contrary, if you have student loans and don’t have a credit card, I might open a credit card to help this out.
Final Thoughts
So, what credit score is considered good? Above 670! However, getting into that “very good” range of 740 to 800 is attainable! You can do it, if you follow all these tips!
Because payment history and amounts owed are the largest factors, I would focus on consistently paying off all your debts on time! Additionally, do not spend more than 30% of your credit on one individual account and in the aggregate!
Hopefully this helped give you some insight into your FICO credit score!
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