Having good credit is the essential foundation to a healthy financial life.
Your credit score is the numerical measure of your consumer credit health, the number that lenders look at when determining how creditworthy you are, i.e. how likely you are to pay money back that you’ve borrowed.
The most common used credit score is the FICO (Fair Isaac Corporation) Score, which has a range of 300 to 850.
According to FICO, 90 of the top 100 U.S. financial institutions use FICO credit scores. One competitor is the VantageScore. But how are these scores determined, and what exactly makes a good (or even great) credit score range?
How are Credit Scores Calculated?
Your FICO scores incorporate all your positive and negative borrowing/lending activity, and breaks it down according to a few factors:
- Payment history: 35%
- Accounts owed: 30%
- Length of credit history: 15%
- Credit Mix: 10%
- New credit: 10%
What is a Good Credit Score Range?
Scores are broken down into a few categories, from poor to excellent:
- Excellent: 750-850
- Good: 700-749
- Fair: 650-699
- Bad: 560-649
- Very Bad: 300-559
The average credit score in the United States is 695, according to FICO.com; that puts it squarely in the “Fair” credit range.
This number has steadily climbed since October 2005, when the average score was 688.
Credit score distributions have fluctuated over time, too. The higher echelons of the scale -- 750-799 and 800-850 -- have dipped down and up over the years, according to FICO.com.
In October 2005, 20.1% of consumers held a 750-799 credit score range, but that’s declined over the last several years; by October 2014, it was down to 18.1%.
Likewise, the highest range, 800-850, was at its lowest in October 2005, 16.9%. By last April, that had risen to 19.9%. Is it an indicator that Americans are getting better with their credit habits?
How Much Credit Card Does your Credit Score Give You?
Naturally, the higher the credit score, the better types of lending products and interest rates you’ll be able to land.
When it comes to credit cards, you may better qualify for a certain card depending on your score.
For instance, if you have bad or no credit, a secured credit card is an ideal “starter” card.
What about some cards for credit scores that aren’t bad or excellent, but fair to good? The Capital One QuicksilverOne Cash Rewards card is a good choice for people with average credit (650-699).
The card’s big selling point is a 1.5% unlimited cash back on any purchase, plus a feature called CreditWise so you can monitor how your credit score improves as you use the card.
Once you build up your credit, it might be time to trade up for a better card.
Citi Double Cash card is one choice for those with good to excellent credit (700+). It offers 2% cash back (1% for purchases, 1% for payments), eking out the Capitol One QuicksilverOne Cash Rewards by half a percentage point.
The $0 annual fee -- compared to $39 for the Capital One -- also reflects the better quality of the card.
How Much Mortgage Does your Credit Score Buy You?
By far, your credit score can make or break the type of mortgage loan you’ll be able to get when buying a home, since the interest rate you qualify for informs how much your monthly payment will be.
Consider how much you’re likely to save according to your credit score. Take a 30-year FRM, in Connecticut, with a loan amount of $100,000:
Take a 30-year FRM, in Connecticut, with a loan amount of $100,000
|FICO Score:||APR:||Monthly Payment:||Total Interest Paid:|
A borrower with average credit (620-639) ends up paying $536 per month on a 4.9% APR, for a total $93,124 interest paid.
Compare that to the person with excellent credit (760-850), who obtains a 3.4% APR, $445 monthly payment and $60,033 total interest paid.
Here’s how much more the borrower with excellent credit ended up saving:
- Monthly payment: $91
- Total interest paid: $33,091
The bottom of the table also illustrates how much more you’ll pay if your score were to lower -- here, we’ve given a hypothetical example of a 700-759 range.
For instance, the borrower with a range of 680-699 could pay an extra $3,569 on their mortgage; drop that down to 620-639, and you may be saddled with an extra $28,662.
How Your Credit Score Can Affect Your Future Mortgage Rate
|Credit Score Range||30-Year Fixed Rate Mortgage||5-year fixed rate mortgage||7/1 ARM|
How to Raise your Credit Score
If avoiding such huge differences in interest rates and payments are important to you, it’s imperative that you always make sure to keep building your credit score in every way possible (also, see how to improve your credit score by 100 points):
Don’t close old cards; open few new ones
Opening and closing too many accounts can wreak havoc on your credit score. According to MyFICO, closing down cards won’t give the impression of having less credit debt, and opening new accounts won’t help your score, either.
Always pay your bills in full
Even if it’s on time, a partial payment is like a slap in the face to your lender; it tells them they’re only good enough for some of the money you owe them. Even if you make it up the next payment cycle, it’ll still hurt your credit.
Always pay your bills on time
Late credit card or loan payments reflect poorly on your credit report and can negatively affect your credit score.
Keep credit card balances on the low side
If your monthly credit card balance is too high, too often, it can offset your credit-to-debt ratio, which tells the credit bureaus that you’re relying on credit too much, and this can put a dent in your score.
Check your credit report and score often
Make sure you check your credit report at least once a year; inconsistencies may affect your score in error. Likewise, take a look at your credit score from time to time to see which range you’re in, and set goals to see where you’d like it to be.