What is a good credit score? You probably should know the answer if you ever plan to take out a loan, apply for a credit card, or rent an apartment. Learning as much as you can about credit scores can help you gain a better understanding of what is considered a good score.
You are assigned a credit score based on how well you have repaid debt in the past – also known as your credit history. There are also other factors reflected in your credit score. These include the total amount of money you owe across all lenders, the number of active loans you have, and your ability to make loan payments on time.
Basically, your credit score determines your creditworthiness or your likeliness to repay a loan. Not everyone has a credit score, though. Those who haven’t had the opportunity to build their credit history or have never taken out a loan or a line of credit won’t have a credit score. In many cases, it’s the younger population that doesn’t have a credit score. The majority (over 80%) of 18 to 19 year olds don’t have a credit score merely because they haven’t had the time or opportunities to build up their credit histories. Low-income immigrant populations also tend to have a higher proportion of people without credit scores.
Credit scores can range from 300-850 – and as you can guess, a higher score means you are more creditworthy.
There are two credit scoring companies, FICO and VantageScore. They each use a different scoring model, but FICO is the more widely used score among lenders. Over the years, more lenders have started using VantageScore, created in 2006 as a joint venture between the three major credit reporting bureaus.
First, it’s essential to start finding opportunities to build up your credit history so you can eventually be assigned a credit score. The time it takes to get a credit score depends on the type of score – FICO or VantageScore. FICO, the most commonly used score, takes at least six months after opening a credit line or taking out a loan, while VantageScore takes around one to two months.
Side note: Although the goal of FICO and VantageScore scoring models is the same (predicting how likely a person is to fall behind in payments within the next 24 months), they use a slightly different approach. Differences include the score range and the weight of each factor.
But remember, it’s much easier to ruin your credit score than it is to build it up. It just takes one payment that is delinquent for thirty or more days to decrease your credit score by 100 points or more. What was once a good credit score can be negatively affected by a forgotten payment.
Now that you know how long it takes to be assigned a credit score, you can learn why it’s so important to have it be in the “good” range. Having a good credit score will help you get approved for a loan or credit line and can give you favorable terms, including lower interest rates and fees. Because borrowers with higher credit scores pose less risk for lenders, they are rewarded with more favorable terms. So it’s advantageous to know what a good credit score is so you can set it as your goal if your score needs improvement.
The answer will differ slightly depending on which of the two credit score models are used. As mentioned, their method of calculating credit scores differs slightly and, therefore, will result in different scores.
Also, both companies periodically update their scoring models, so what is considered a “good” score may change with each subsequent version. VantageScore 3.0 and 4.0 are the most recent ones, and with these, the good credit score range is 661 to 780.
For the current FICO scoring model, a credit score of 700 or better is considered to be good/excellent.
For now, as mentioned earlier, the credit score range for both scoring models is 300 to 850. This range may change as the models are updated, and therefore, the ranges for what is a good credit score will slightly be modified as well.
Be sure to read your credit report carefully to be aware of any scoring model updates and how they affect your current credit score.
Start by understanding how the models calculate a credit score. Your credit score is partially calculated using your credit history, which includes the number of accounts you have open, your total debt levels, and your repayment history.
Both scoring models use the same general information: payment history, length of credit, types of credit, credit usage, and recent inquiries.
More specifically, the FICO scoring model uses the following factors and weights them as follows:
Payment history and amounts owed (total debt levels) together are the largest determinant of your credit score, accounting with a weight of 65%. So, if you’re looking to maintain or achieve a good FICO credit score, it’s important to make on-time payments and not have high debt levels.
The most recent VantageScore model (4.0) weights the factors as follows;
Similar to the FICO score model, payment history is weighed most heavily when calculating your VantageScore credit score. However, VantageScore weights unpaid debt balances less heavily than FICO (6% vs. 30%).
VantageScore is more inclusive as it only requires one month of credit history versus FICO, which requires at least six months to assign a credit score.
Also, VantageScore weighs late mortgage payments more heavily than late payments for other types of accounts. On the other hand, the FICO model treats all late payments the same.
Another difference is that, with regards to hard inquiries, VantageScore includes those for credit cards in addition to all other types. FICO only considers hard inquiries related to mortgages, auto loans, and student loans.
If you were to check your credit score from the three main credit reporting agencies, you may note slight differences. These differences occur because not all lenders report data to all three agencies. There isn’t a law that requires them to report credit information to agencies. Some lenders may opt to avoid the cost and effort required to report to agencies regularly. Else they may choose to only report to one or two of them.
You won’t find your credit score on your credit report, but some banks and credit card companies will offer customers their credit scores on a regular basis. Customers can usually find the credit score on their statements or if they log in to their account online. If you aren’t sure or can’t find it, inquire with your financial institution to find out if they offer this service regularly.
Also, each of the three major credit reporting agencies offers you a free credit report every 12 months. You can request these reports by visiting www.annualcreditreport.com. Although your credit score is not included in these reports, it’s beneficial to see the information on which they base your credit score. Some banks also offer free credit reports as long as you have an active account with them. Check to see if this service your bank offers this service.
Use these resources to monitor your credit score and continue to find ways to improve it.
At Easton Motors, if you are in the market for a car, we can work with you to help build a good credit score. Contact us, and one of our financial specialists can walk you through the process.
