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What defines a “good” credit score?
It’s common knowledge that a having a good credit score is important. But what defines a “good” credit score and a “bad” credit score?
The distinction gets more involved than just “good” and “bad.” The first thing you must know is how to determine a credit score.
Defining your credit score
There are many different credit-scoring organizations, but two of the most prominent are FICO and VantageScore, according to Experian. For each, you can be rated on a scale that ranges from “Very Poor” to “Exceptional” or “Excellent.”
For FICO, the distinctions are as follows:
• Very poor: 300-579
• Fair: 580-669
• Good: 670-739
• Very good: 740-799
• Exceptional: 800-850
For VantageScore, the distinctions are:
• Very poor: 300-549
• Poor: 550-649
• Fair: 650-699
• Good: 700-749
• Excellent: 750-850
Calculating your credit score
Knowing your score is a good start, but if you find that yours is less than ideal, you’ll need to know how to bring it up. These scores are calculated using algorithms that differ between credit scoring companies. However, the factors that are taken into account when computing the score are generally the same across platforms. FICO’s breakdown is:
• Payment history (accounts for 35 percent of your score)
• Amounts owed (30 percent)
• Length of credit history (15 percent)
• Credit mix (10 percent)
• New credit (10 percent)
Based on this, if you need to improve your score, it’s best to look into your payment history and amounts owed first. Be sure to pay all bills on time, and do your best to pay off old debts.
If you don’t know your credit score, it’s advisable to look it up before making any major purchases. A better credit score will open the doors to lower interest rates and possibly better deals. NerdWallet pointed out that people who have a credit score of about 750 or higher have a high chance to qualify for 0 percent financing on cars or 0 percent interest on credit cards — not a bad deal!
Tracking your score
You are entitled to one free credit report per year from each of the three credit bureaus. These are:
If you’re working to improve your score, check your reports regularly to monitor your progress. Online services including Credit Karma offer access to free credit scores and report monitoring.
Why lenders care about credit scores
When a lender approves a loan, you make an agreement to pay that lender back before a predetermined date with an agreed-upon interest rate. The lender may not know you, or how well you manage money, but it’s important to the company that it isn’t taking too big of a risk by lending you funds.
A lower credit score might signal that you don’t have much experience managing debts, don’t have a history of paying bills on time or have outstanding debts that you are still working to repay. While none of these inherently are bad, they are red flags to a company that relies on regular payments to remain healthy. And for some lenders, like LightStream, your credit score is not everything. It’s one data point among many that will be considered.