Have you ever wondered what exactly is considered a good credit score? Or why this one number is important in terms of your finances? In this article, we take a look at the different credit score ranges. We also discuss why your credit score matters and how to improve or build credit if you’d like your score to be higher.
Credit Score Range
Your credit score can range from 300 to 850. Here’s a breakdown of how credit score ranges are ranked, according to myFICO:
Poor: less than 580
Fair: 580 – 669
Good: 670 – 739
Very Good: 740 – 799
Exceptional: 800 and over
It’s important to know that this ranking is a general standard. Each lender has its own methodology for determining what’s a good credit score. For example, one lender may offer its best rates to people with credit scores above 750, while another lender may be more strict and only offer its best rates to people with credit scores above 800.
The average credit score across consumers in the U.S. is 695. Most lenders consider this a “good” score. If your credit score is in this range, many lenders will approve your application for a loan. However, you probably won’t get the lowest interest rate the lender has to offer since your credit score isn’t as high as it could be.
Why Your Credit Score Matters
Your credit score matters for many reasons. To put it simply, having a higher credit score will save you money in the long run. Here are three instances where your credit score matters:
Getting approved for a loan or credit card. The higher your credit score, the higher your likelihood is of getting approved for a new loan or credit card. With the availability of personal loans for debt consolidation and balance transfer credit cards, you can see how important it is to increase your chances of being approved.
Getting the lowest interest rate. Lenders consider your credit score when determining what interest rate to offer you on their financial products. Landing a lower interest rate can save you thousands of dollars over the course of a loan, especially for large loans like mortgages.
Renting an apartment. Landlords/property managers can ask for your credit score during the tenant screening process. Having a poor credit score can lead to your rental application being denied. This is because landlords/property managers see poor credit as an indicator that you may not pay your rent on time or in full every month.
Having no credit can be just as bad as having bad credit. Both are a long way from good credit. On one hand, having no credit means you haven’t necessarily made any drastic financial mistakes. On the other hand, it also means you have no history of paying loans or credit card bills on time. Lenders may see this lack of payment history as risky.
How to Improve or Build Credit
If you’ve found that your credit score is not where you want it to be, there are numerous ways you can fix it. First, to improve or build your credit, you’ll need to know how your credit score is calculated. These five categories make up your credit score at the following percentages:
Payment history: 35%
Amount of debt: 30%
Length of credit history: 15%
New credit: 10%
Credit mix: 10%
Improve bad credit. Bad credit can be the result of financial mistakes such as missing credit card payments, having bills go to collection agencies, or defaulting on loans. To get your credit back on the right track, you’ll need to find a financial product designed specifically for people with bad credit. For example, OneMain is known for providing personal loans to people with low credit scores.
Build credit. If you have no credit and are looking to build your credit history, you can do so through a secured credit card. A secured credit card requires you to make a refundable deposit. Then, your payments on the card are reported to the credit bureaus to begin building your credit history. One highly rated secured credit card is the Discover it Secured Credit Card. There are plenty more on the market as well.
How Long Does It Take to Improve Credit?
How long it takes to improve credit depends on so many factors that it’s very difficult to predict the time frame it’ll take for your credit score to go up any number of points. If you just signed up for your first secured credit card, you’re not going to have a score over 800 right away. If you have a poor credit score, but a long credit history, you may find that just getting current on all your bills can have a huge effect on your score. Instead of obsessing over the exact time frame, consider making the process of building or improving your credit a long-term goal.
Given that the average credit score in the U.S. is 695, we aren’t doing that bad as consumers. A good credit score can get you approved for loans by most lenders’ standards. It becomes advantageous to have an even higher score when you begin to look at things like interest rates. Lenders reserve their lowest interest rates for consumers with the highest credit scores. If you’re in the market for a loan, whether it be a mortgage or an auto loan, it would be in your best interest to get your credit score as high as possible. With a very good or exceptional credit score, you’ll be offered the best interest rates and save money in the long run.