What is a ‘good’ credit score, anyway?

Whether you deal mostly in cash or you nab up every store and airline credit card you’re offered, your credit score will likely have a major impact on your life.

That elusive three-digit number sums up your money management skills in a tidy way for anyone trying to figure out whether to lend, rent, or extend credit to you. It could make or break your desire to buy a house, and it could cost or save you tons of money in interest payments throughout your life.

So that begs the question: when is your credit score good enough?

What is a good credit score?

In most credit scoring models, a good credit score is anything above 670. Technically, credit scores are broken into categories, where “good” officially means a score between 670 to 740 and 740+ is considered “excellent.” Typical categories look like this:

Defining a “good” score is tricky, though, because credit scoring models and how lenders interpret the information both vary.

Credit scoring models

You have more than one credit score, despite how much we like to talk about “your credit score.” Instead, you have a credit history based on how you’ve handled your finances in the past, and lots of companies use their own mathematical formulas to calculate a credit score from that information.

Note that credit scoring models aren’t the same thing as credit bureaus. Credit bureaus — dominated by the big three, Experian, Equifax, and TransUnion — are the companies that track your credit history. 

Scoring models use the information from your credit history to calculate your credit score. Each model includes information differently; they’re all trying to give weight to the most important information to most accurately figure out your creditworthiness.

Major credit scoring models include:

FICO score

This is the oldest credit score, and it’s what about 90% of lenders and creditors still rely on. The model was launched by the Fair Isaac Corporation in 1958 and has been the go-to score for general use since 1989.

You can get your FICO score for free from many banks if you’re a member, or you can get it along with credit monitoring and identity theft protection from myFICO.

A good FICO score is considered any score from 670 to 739. A score from 740 to 799 would be very good, and a score of 800+ would be exceptional, according to Experian.

VantageScore

The three major credit bureaus developed VantageScore as a competitor to FICO in 2006, and it’s evolved significantly since. It originally used a different credit score range than FICO, but moved to the familiar range of 300 to 850 in 2013 with VantageScore 3.0. 

The current model, VantageScore 4.0, keeps that range and includes updates to give different weight to different types of debt (like less weight for medical debt) and looks at credit utilization as a trend instead of a snapshot in time — both major differences from FICO.

When you get your credit score from a service like Credit Karma, you’ll see your VantageScore. 

Though lenders are more likely to use the FICO model, this information at least gives you a way to gauge where you stand and how you’re progressing — and it’s free, which access to your FICO score may not be.

A good VantageScore is considered any score from 661 to 780, according to Experian. A score of 601 to 660 is fair, and 781 to 850 is excellent.

Industry-specific models

Throughout history, industries such as mortgage lenders and auto dealers have developed their own scoring models that use different score ranges and weigh criteria differently from FICO or VantageScore.

Since the late 1980s, though, most industries, except insurance, have moved to the FICO score, and we give a lot less attention to the specifics of these other models. 

If you apply for credit or a loan with a company that uses a different model, they might assign you a score anywhere between 250 and 900. Ask which model they’re using to make sure you’re interpreting your score correctly.

What do lenders consider a good credit score?

Regardless of which score they use, lenders and credit card companies want to see a credit score that shows them you can repay the money they lend you on time. Because most of them use a FICO score, they’ll want to see a credit score of 670 or higher.

Lenders have varying standards, though. Some cater to bad credit and may approve borrowers with scores as low as 620. Some offer costlier perks and huge credit lines, so they look for borrowers with excellent credit above 740.

Most private companies consider credit scores below 620 to be subprime, and you’ll likely have trouble getting unsecured credit or loans in that category. Government-backed loans, like an FHA mortgage loan or USDA loan, are usually available to borrowers with credit scores as low as 580.

Once you know your credit score, look for financial products that are built to set people in your financial situation up for success.

Why a good credit score matters for your money

A good credit score is a strong measure of your financial health, even if it’s not the whole picture. It’s a quick, however imperfect, way to gauge your ability to manage money and keep up with major financial obligations.

Your credit score comes into play throughout your financial journey, including:

Applying for a mortgage and loans

Lenders use your credit score to determine your interest rate and loan amount when you apply for a mortgage or other kind of loan. The better your score, typically, the more you can borrow and at a lower interest rate.

Even though interest rates might only vary by a few percentage points, a lower rate can mean thousands of dollars of savings over the life of a loan, especially for bigger loans like mortgages.

Getting new credit cards

You typically need at least a good credit score to qualify for a credit card. Just like with loans, a high credit score usually means a lower interest rate. 

Credit card rates vary wildly, by 10% or 20%, and a low rate can help you save hundreds of dollars each month if you ever get behind on payments.

Opening new bank accounts

Banks may run a soft credit check when you apply for an account. Your credit score doesn’t typically make a difference, but factors including payment history could.

More often, banks use a service called ChexSystems to check your bank account history. That’s mostly to make sure you don’t have a habit of overdrawing accounts and walking away. Other marks on your credit report don’t factor into that check.

Renting a home

When you apply to rent an apartment or house, the leasing company might run a soft credit check to see your payment history. They don’t care specifically about your credit score, but because payment history factors heavily into your score, a low credit score could be a good sign you might have trouble getting approved.

Nine ways to get a good credit score

The good news is that, regardless of where your credit stands at any point, you have a ton of power to get a good credit score. Your credit score is based on your financial behavior, so changing your behavior will change your score.

You just have to know which behaviors go into the tally.

The weighting might vary among models, but typically a credit score is made up of these factors, in descending order of importance:

• Payment history (35%) – Do you repay debts on time?
  
• Credit utilization (30%) – How much of your available credit — e.g. your credit card limit — do you use at a time? FICO looks at a snapshot, while VantageScore looks at a trend over time.
• Credit age (15%) – How long have you been using credit?
• Credit mix (10%) – Do you have a variety of credit cards and loans, or is your credit use concentrated in one area, like a single mortgage or several credit cards?
• New credit (10%) – Have you recently applied for several credit cards or loans?

Considering those factors, follow these steps to build or improve your credit score.

1. Pay bills and loans on time

Not making existing loan payments or credit card payments on time is a huge red flag for lenders that you probably won’t keep up with a loan from them.

Stay on top of existing debt payments — even if you’re repaying debt already in collections. This stable history goes a long way toward raising your credit score.

If you don’t have existing debt accounts, you can get your utility, phone, and cable bills added to your credit report by signing up for Experian Boost™, a free service that monitors your bank account for bill payment activity and adds it to your Experian credit report.

2. Don’t use all of your available credit

Having credit cards or a line of credit open is helpful for your credit score, but you do NOT have to use it for your score to benefit. The lower your utilization, the better for your score — 0% is ideal! The rule of thumb is to keep your utilization below 30% max.

Credit utilization takes all of your available credit into account, so it includes the total of all of your credit card and line of credit limits.

That means you can easily reduce your utilization by raising your credit limit — either by requesting a higher limit with a single creditor or opening a new credit card.

Because this factors so heavily into your credit score, opening a credit card can do wonders for your credit score.

3. Keep old credit cards open

In most cases, you’ll benefit from keeping credit cards open even after you stop using them. That lets your credit age get older as the years go by.

You should cancel any credit cards you’re not using if they come with fees — or if you just don’t resist the temptation to use available credit. Otherwise, keep them open and cut up the card to keep your credit age and utilization healthy.

4. Use a variety of products

A weak credit mix could have a small impact on your score if your credit history shows only one credit card or loan, for example. To boost this factor, try opening a mix of accounts — like a credit card, a bank line of credit, and a car loan.

5. Spread out applications for new credit or loans

You might be tempted to open several new credit cards this year to take advantage of credit card sign-up bonuses (that can be worth several hundred dollars, or more!) Or maybe you just want to raise your credit limit.

That could be a smart move — but don’t do it all at once.

Each application for new credit (a hard credit inquiry) dings your credit history and can impact your score. If you’re opening five credit cards in just a few weeks, that could mean your score is not as good as it could be by the fifth one, which means higher interest.

The same goes for applying for a mortgage. Don’t apply for credit or loans within a couple of months before applying for a mortgage, so your score has time to recover from any impact.

6. Keep an eye on your credit score and reports

Checking your credit score before applying for credit or loans is a simple way to avoid getting multiple dings on your report. When you know where you stand, you can make moves to improve your score before applying, rather than risk being denied.

Signing up for a service like CreditWise from Capital One lets you see your credit score anytime and monitor your credit report. You’ll get a notification anytime something on your credit report changes, so you quickly dispute errors and keep your score in ship shape.

7. Open a secured credit card

Without a credit score, you can’t qualify for most credit cards. But you can usually qualify for a secured credit card, which gives you a low limit in exchange for a refundable deposit.

A secured card lets you build a credit history by giving you access to credit you can use and repay. You make it less risky for the company by putting down a deposit, which is often the same amount as your credit limit.

Most secured credit cards set a period after which you’ll get your deposit back and could be eligible for an increase to your credit limit. If you keep your spending low, that increased limit can help your credit score even more.

8. Become an authorized user

You can build credit history just by adding your name to someone else’s credit card. This is similar to becoming a joint holder on a bank account — you get a card in your name and access to their line of credit.

Becoming an authorized user for someone with responsible credit usage helps you build credit because that same usage is reflected on your credit report. You don’t even have to use the credit card at all for it to impact your score.

9. Take out a credit builder loan

Credit builder loans are designed specifically for people with no credit history. Though they’re called “loans,” you don’t ever actually receive the money.

Instead, the lender — usually a bank or credit union — sets aside a small amount, around $500 or $1,000, in a locked savings account. Or, you can secure the loan by putting up the money yourself. 

You repay the loan with interest and get access to the money at the end of the repayment period. That could be a year or two, which, on such a small loan, means small, manageable monthly payments.

What doesn’t affect your credit score?

Your credit score doesn’t account for everything that could affect how you manage money. It also doesn’t include every move you make with money, which is often frustrating for borrowers who, say, have always paid rent and bills on time but have never had a credit card.

Some factors, however, are left out to protect borrowers from direct discrimination or credit decisions that are otherwise made on statistics that aren’t related to your personal financial behavior.

These factors don’t affect your credit score:

• Characteristics protected by law. Under the Equal Credit Opportunity Act of 1974 (ECOA), lenders can’t consider “race, color, religion, national origin, sex or marital status” to make credit decisions, so scoring models don’t use these factors. Creditors might ask for this information for their own records, but they can’t use it to make decisions.
• Age. Though credit scores tend to be lower on average when you’re younger, your age isn’t a factor in figuring out your score.
• Getting public assistance. The ECOA also prohibits credit decisions based on whether or not you receive public assistance.
• Employment status or history. Lenders will probably ask for and consider your employment status with your application, but it doesn’t affect your credit score.
• Income, net worth, or assets. Your income doesn’t affect your credit score, but lenders will likely use it to make credit decisions because it has a major impact on your ability to repay debt.
• Residence. Where you live within the U.S. doesn’t impact your credit score. However, if you move out of the country, your U.S.-based credit score becomes obsolete in other countries, which use their own credit scoring systems.
• Soft inquiries. Also called a “soft pull” or “soft credit check,” these are the checks that employers, leasing companies, and banks sometimes do to get a look at your credit history without leaving a mark on your credit report. An inquiry only impacts your credit score and report if you’re requesting new credit (e.g. applying for a new card or loan).
• Checking your credit score or report. Requesting your free annual credit report via AnnualCreditReport.com and checking your credit score through a service like CreditKarma, myFICO or CreditWise is different from a hard or soft inquiry, and they have no effect on your credit score or history.
• Rent payments. For many of us, paying rent on time is our first major show of financial responsibility. So it’s kind of a bummer to apply for your first credit card — or student loan refinancing — and learn that particular brand of adulting doesn’t help you build credit.
• Banking activity. Credit scoring models don’t include information from debit or deposit accounts like checking, savings, and money market accounts. But your banking activity could be a great showcase of your creditworthiness, so FICO is working on changing this to increase access to credit.

Summary

Understanding your credit score is one of the most important steps you can take for your financial health. A good credit score is key for many major money moves you’ll make throughout your life. And your credit score is a quick and easy gauge that can guide your financial decisions.