The FICO credit score is what most banks and lenders use, and anything in the 660-720 range is considered a good credit score under the FICO model (the higher the better).
However, there are more than 1,000 different types of credit scores, and they often utilize different score ranges. So, what’s a good credit score under one model might not be considered good under another. For example, 700 would denote good credit if it’s from FICO but would be below the good credit score range of the Vantage scale. The chart below shows the breakdown for the two most popular credit scores.
Why is Good Credit Important?
Most people understand that credit scores are important. But just how important is another story altogether. Your credit standing not only dictates your ability to garner a loan or line of credit as well as the rate at which you’ll pay interest on what you borrow, also impacts your insurance premiums, your ability to lease an apartment, and even your job prospects.
“Many companies think credit history is a way to find out if an applicant is responsible,” says Michael M. Oswalt, assistant professor of labor and employment law at Northern Illinois Law School. “Companies may use a credit score in combination with other data points – including references, work history, and interview performance – to determine whether an applicant will be a good fit for the job.”
While the use of credit history in hiring is on the decline – a sign of companies understanding that Great Recession difficulties aren’t necessarily indicative of overall trustworthiness – just under half of all companies still request permission to review applicant’s credit history. The practice is most common with jobs that involve handling money or sensitive information, which means jobs seekers in those fields should be especially cognizant of where their credit stands.
In short, the difference between good and bad credit is a lot of money and a lot of strife. “Good credit scores just make your financial life easier to maneuver,” says Martha Doran, an associate professor of accountancy at San Diego State University. Without it, “you need to pay higher rates, deal with secondary lenders, ask parents to co-sign … none of which are quick or satisfying solutions.”
Do I Have Good Credit?
While purchasing one of the 1,000+ credit scores will obviously enable you to get a sense of whether or not you have good credit, it can also become an expensive, inefficient proposition if you take that number too literally. Even if your lender uses the same version of that particular credit score (which is far from guaranteed), chances are that they’re only using it as a reference point within their own propriety credit score models.
The various different types of credit scores included in the graphic to the left only scratch the surface of what’s actually out there.
As luck would have it, there are two additional ways to approximate your credit standing. First, you can estimate whether or not your credit score is good by answering a few general, anonymous questions that indicate what’s likely to be on your credit reports and therefore what kind of credit standing you have. You can see for yourself by using our free credit estimator.
Second, you can reference the check list below to approximate what credit score range you fit into.
|Credit Score Classification||ALL of the Following Criteria Apply:|
|Excellent Credit||• I have had a loan or credit card for more than 5 years|
|• I have a credit card with a limit above $10,000|
|• I have NEVER been more than 60 days late on a credit card, medical bill or loan payment|
|• I have never declared bankruptcy|
|Good Credit||• I have had a loan or credit card for more than 3 years|
|• I have had a credit card with a limit above $5,000|
|• I have NOT been more than 60 days late on a credit card, medical bill, or loan payment in the last 12 months|
|Fair Credit||• I have a loan or credit card|
|• I do NOT have a credit card with a limit above $5,000|
|• I may have been late on more than one credit card, medical bill, or loan payment in the last 6 months|
Bad, or damaged, credit is the result of your credit reports containing negative information. This information may reflect missed payments, accounts that you have defaulted on, bankruptcies, real estate liens, etc. In fact, you likely have bad credit if ANY of the following criteria apply to you:
- I am currently late on a credit card, medical bill, or loan payment
- On most of my credit cards, the balance is close to the credit limit
- I declared bankruptcy in the last 3 years
- I have been more than 60 days late on a credit card, medical bill, or loan payment in the last 9 months
The effect negative financial records have on your overall credit standing depends largely on the type of information in question and the extent of your credit history. For example, a single missed payment is likely inconsequential to someone whose files at the major credit bureaus reflect years and years of responsible money management, but it would likely prove significant for someone who has little else in their reports.
It’s important to keep in mind that whether you access one of your actual credit scores or approximate your credit standing using one of the methods described above, the results will only be as accurate as your underlying credit report information. After all, every credit score is based upon this data and it will not change based on which particular score a lender decides to use.
You should therefore first take advantage of the fact that federal law enables you to get free annual credit reports from each of the big-three credit bureaus – Experian, Equifax, and TransUnion.
How to Get Good Credit
If you don’t already have good credit, your goal should be to attain it. And while many people ask how to “get” good credit, it’s perhaps more appropriate to wonder how to “build” good credit. It’s a formulaic process, after all.
The basic premise is that you want to infuse your major credit reports with positive information on a consistent basis in order to devalue any negative information already contained therein or simply add to a thin file. The easiest and least expensive way to do so is to open a credit card with no annual fees and keep it in good standing by making on-time payments (if you decide to make charges with the card). Your credit will actually improve even if you simply leave the card locked in a drawer, but the process moves a bit quicker when you make purchases and pay for them as agreed upon. To learn more, please check out our detailed explanation of how to improve your credit score.
The fundamentals of credit building hold true regardless of your exact starting point, but if you begin with damaged credit you’ll also want to stop the bleeding immediately. If you’re delinquent on an account, making the payment necessary to become current will prevent further credit score damage. Unfortunately, the damage is already done if you’ve already charged off or defaulted on an account.
You Need More Than a Good Credit Score
A good credit score is undoubtedly important, but that alone isn’t always enough. Lenders and other decision makers also pay a lot of attention to your assets, income, and liabilities when evaluating your overall credit profile.
For example, a lot of people are surprised to hear that even people with immaculate credit history will not be able to get approved for a new loan or line of credit if their debt is already much higher than what their income justifies.
That’s why it’s important to not only monitor your payment habits, but also to concentrate on keeping your debt-to-income ratio below 30%. Taking the following steps will help you do so:
- Make a Budget: It’s hard to determine whether or not you’re spending beyond your means if you don’t know how much you’re spending each month and on what. It’s therefore important to rank your monthly expenses in order of importance as well as cut any excess spending.
- Build an Emergency Fund: A financial safety net is essential to preventing income disruptions or unexpected expenses from becoming major problems. You should strive to amass about a year’s take-home in an account that you can draw from whenever necessary.
- Utilize the Snowball Approach: Some debt can be good in that it may allow you to buy a home or secure transportation to work. But you don’t want everyday expenses to exceed your income. Developing a budget will help prevent future overleveraging, but it’s also important to pay off amounts already owed. The best way to do so is to use the Snowball Approach. That entails attributing the majority of your allotted monthly debt payment to the balance with the highest interest rate while making only the minimum payments on the rest of your debts. Once the most expensive balance is paid off, repeat with the second most costly, and so on.
If you now know that your credit is good, good for you. Keep up the good work, make on-time payments to all loans and lines of credit, stay out of useless debt, and your standing will continue to strengthen.
If you’re less-than-pleased about your current status, do something about it. Open a secured card if necessary to get that monthly infusion of information into your credit reports. Just make sure the information being relayed to the credit bureaus is positive by following the same advice as above.