We all want to have "good" credit, but what does that mean exactly? The answer to this question isn't so simple. In fact, it mainly depends on what you're trying to qualify for. For instance, if you have a credit score of 690, you'll probably have no problem getting a loan for a new car with a pretty competitive interest rate. However, a mortgage lender may be a little more cautious, unless you have a big down payment or are willing to accept an FHA mortgage.
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Here's what you need to know about the numbers you see when you check your own credit score, and what lenders consider to be "good" credit.
First, know what you're looking at
As far as credit scoring goes, there are many services out there that offer scores along with your credit report, but unless you're looking at your FICO score, you're not getting an accurate picture of where you stand.
The FICO scoring formula is used in more than 90% of lending decisions, and is available only through the Fair Isaac Company or one of its partners. For example, Discover offers access to the FICO score as a perk for some of its cardholders. If you don't currently have access to yours, myFICO.com is the only place you can buy your actual FICO score from all three credit bureaus.
The exact formula used to calculate your FICO score is a closely guarded secret, and is updated regularly, but the company does offer some insight into what makes up your score. Specific weights are given to five broad categories of credit information, which include payment history, the amounts you owe, the types of credit accounts you have, the length of your credit history, and any new credit you have. A full description of each category is available here.
Auto loans are one of the easiest types of credit right now
You can get an auto loan even with an awful credit score, but you're going to pay for it. Some subprime auto loans come with interest rates higher than 23%, which has resulted in a surge of repossessions as many consumers can't afford the high payments.
Many auto lenders use "tiers" of credit scores in order to qualify customers for car loans. According to FICO, a top-tier score is 720 or above, and consumers in this category can expect to pay about 3.3% on a 60-month new auto loan. And, the next tier of scores from 690-719 has a slightly higher average of 4.7%.
However, beyond that tier, the rates rise rapidly. Someone with a 670 can expect their rate to be around 6.8% and anyone below 660 can expect to pay a double-digit interest rate, and those in the lowest tier (below 590) get an average rate of above 17%.
To put in perspective, consider two buyers who purchase a $20,000 new car, one with a 750 FICO score and one with a 550. The difference in monthly payments is substantial, at $362 and $497, respectively. And, over the life of a five-year car loan, the poor credit borrower will end up paying more than $8,000 extra for the same car.
So, for buying a car, it's safe to say that a "good" credit score is above a 690. Below that level, interest rates get very high, very fast.
Mortgages are a bit more selective
There are two main varieties of mortgage loans; conventional and FHA. Now, an FHA loan is relatively easy to qualify for since they are guaranteed by the government, and many lenders simply require a 600 credit score and a small down payment. However, you'll have to pay FHA mortgage insurance (which isn't cheap) both up front, and annually for the life of the loan.
For "good credit" borrowers, a conventional loan is usually the cheaper option, and the credit score requirements are substantially higher. Most lenders want a 760 in order to provide the lowest interest rates. And, while the difference in interest rates between "bad credit" and "good credit" borrowers is narrower than for, say, car loans, the longer timeframe makes the difference in payments even more substantial.
For example, a borrower with a 760 FICO score or above can expect to pay about 3.8% on a 30-year mortgage. And a borrower with a 630 can expect to pay about 5.4%. While this doesn't sound like a big difference, it makes the difference of $85,000 over the life of a 30-year, $250,000 mortgage.
To give you an idea of how strict home lending is right now, consider that the average score for an approved conventional purchase mortgage is 755, and the average FICO score for a rejected loan is 723, which is well in the range that is considered to be "good credit" in other types of lending.
In other words, a "good" credit score is actually pretty high, for the purposes of buying a home.
There's a credit card for everyone, but what's a "good" credit card?
Even with poor credit, most people can qualify for a credit card. However, you'll probably end up paying high fees and interest rates.
A good credit card is one that not only has a competitive interest rate and annual fee, but also rewards you for your business. The qualifications vary among individual credit cards.
And, while the numbers vary slightly, it seems that the average score to get approved for the better reward cards is well into the 700's.
Aim as high as possible
Basically, the higher your credit score is, the lower you'll pay to borrow money throughout your life. So, why not shoot for the best credit score possible?
From looking at the categories above, it seems that home buying is the strictest, meaning that the "top tier" of credit scores for mortgage lending is higher than that of auto lending or credit card approval.
What I mean by this is that if you aim for a 760 FICO score or higher, you should never have to worry about being denied the best interest rates, no matter what you're buying.
So, since the FICO people give you a pretty good idea of what they are looking for, take a look at your own finances and make adjustments accordingly. Maybe you could pay down some of your credit cards, or stop applying for new credit for a while in order to boost your score.
While building your credit score up to the higher levels might require some sacrifice on your part in the meantime, it will be well worth it in the end.
