What is a Good Credit Score?

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Good credit is crucial for effective financial management and securing favorable credit lines. It allows access to the best interest rates and terms for credit cards, auto loans, and home mortgages. But what makes a good credit score? This piece aims to demystify credit scores and provide insights on improving your credit standing.

Why do we need credit scores? Credit scores were created to encourage customers to make purchases even without immediate funds, leading to the offering of installment loans. However, businesses needed assurance that customers would repay these loans. Hence, customer information was sent to local credit bureaus, which monitored payment history and debts. In the 1960s, over 2,000 bureaus performed this function.

Credit scores were introduced in the 1950s by the Fair Isaac Corporation (FICO). They used various factors to assign scores to borrowers, becoming an essential tool for lenders to assess borrower risk.

The Fair Credit Reporting Act of 1970 aimed to control the collection and reporting of consumers’ personal and lending information. This Act has been modified multiple times since its inception.

In 1989, a consolidated credit scoring model was developed to evaluate all consumers’ data. This model gained popularity in credit decision making when Fannie Mae and Freddie Mac started requiring mortgage applicants to submit a FICO score.

How is your FICO score determined? The FICO score, widely used to assess a borrower’s creditworthiness, evaluates how well you manage money. It considers factors such as payment history, credit utilization, credit history length, and new accounts opened.

FICO scores range from 300 to 850 and are based on the data in your credit report. The agency evaluates five significant factors and assigns weight to them based on their importance.

  • Payment history: 35% of your score.
  • Credit utilization: 30% of your score.
  • Credit history length: 15% of your score.
  • New credit: 10% of your score.
  • Credit mix: 10% of your score.

What is a VantageScore? In addition to the FICO model, the VantageScore 3.0 model, created in 2006 by TransUnion, Equifax, and Experian, is used to determine creditworthiness and the probability of debt repayment. It applies a different set of criteria but shares many similarities with the FICO model.

Like a FICO score, payment history is crucial in a VantageScore. Credit utilization rate is highly influential, while recent credit behavior and the amount of debt carry less weight. The actual percentages may vary slightly, with payment history accounting for 40% of your score and recent credit applications 5%.

A VantageScore has an advantage as it takes less time to establish a score. You can have a score within 1-2 months of opening a credit account, while a FICO score requires six months of history. Other differences include:

  • Late mortgage payments have a greater impact on the score compared to other late payments.
  • Rate-shopping on a loan or line of credit must be done within a 14-day window rather than a 45-day window for FICO.
  • It includes provisions for consumers affected by natural disasters.

Who determines your credit score? Your credit scores are calculated by the three major credit bureaus in the United States: Experian, Equifax, and TransUnion. Each bureau collects data from your creditors to calculate your credit score. Fortunately, you are entitled to a free credit report once a year through AnnualCreditReport.com.

Your credit scores may slightly vary among the three bureaus as they fine-tune their scoring models. They might also not have accurate credit data on you, which we will discuss later. Additionally, not all creditors report activity to all three bureaus, which can affect your credit utilization and payment history.

A strong credit score offers many benefits. For example, it can improve loan conditions for purchasing vehicles or real estate, resulting in lower interest rates and fees. Credit card companies may also offer better rates and rewards. A good credit score makes it easier to open new credit lines, like a Home Equity Line of Credit (HELOC) for home renovations. Additionally, it enhances eligibility for jobs, leases, insurance, and telephone services.

But what qualifies as a “good” credit score? The FICO credit score ranges from 300-850, with anything above 670 considered “good.” This score is usually sufficient for most consumer loans at competitive rates. However, it’s important to note that a “good” score doesn’t guarantee the best terms for every credit line, as criteria can vary among lenders.

FICO scores are categorized as follows:

  • 800+: Excellent
  • 740-799: Very Good
  • 670-739: Good
  • 580-669: Fair
  • 579 & under: Poor

If your credit score is below 670, considered fair, you may still qualify for certain types of credit, but options may be more limited with higher interest rates.

Around 67% of Americans have a good or better FICO Score, with an average of 714 in 2021. VantageScores follow similar ranges with slightly different classifications.

To achieve an excellent credit score, open a credit account, maintain a long-standing line of credit, make timely payments, and manage your credit utilization ratio effectively. Regularly check your credit report for accuracy and fraud. If your score is low, consider seeking assistance from a financial advisor or credit counseling service.

The credit invisible population refers to 26 million Americans without a credit history. Some credit bureaus are working on initiatives to help establish a credit history, like Experian Boost, which includes utility bills or monthly subscription payments in credit files.

Unlocking Homeownership: Credit Scores and Financial Opportunities

Credit scores are used by mortgage companies, lenders, insurance companies, landlords, utility companies, telephone service providers, and some government benefit programs. When buying a house, your credit score determines loan eligibility and terms. However, a low credit score doesn’t mean homeownership is impossible. There are loan products available for borrowers with varying credit scores and savings. Alternatively, you can start investing with Foothold with as little as $200 and find your first investment properties today.

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