Source: Sean MacEntee via Flickr.
It's a lot easier and cheaper to borrow money if you have a good credit score. The range of what's considered a "good" score depends in part on which credit scoring method the lender is using to make its decisions. Most common credit scoring methods are also known as FICO scores, since they were developed by Fair Isaac and Company. FICO® Scores are the credit scores used by 90% of the top lenders to determine your credit risk. Because they're developed by the same company and because they're looking at largely the same factors, most credit scores for any given person will tell a very similar story.
According to Fair Isaac's "My FICO" site, the three key factors within your control when it comes to improving your credit score are:
- "Make payments on time,
- Keep credit card balances low, and
- Open new credit accounts only when needed." "
Why being in the good credit score range matters
Your credit score is a key factor in determining whether you can borrow money, how much money you can borrow, and what it costs for you to borrow money. For instance, searching on Bankrate for a 30-year fixed rate $250,000 mortgage with a 20% down payment recently delivered the following rates:
|
Credit Score |
Interest Rate |
Estimated Monthly Payment |
|---|---|---|
|
740+ |
3.75% |
$1,158 |
|
720-739 |
3.875% |
$1,176 |
|
700-719 |
3.875% |
$1,176 |
|
680-699 |
4.00% |
$1,194 |
|
660-679 |
4.25% |
$1,230 |
Source: Bankrate.com, on Sep. 15, 2015. City: Chicago, IL. Term: 30 year, Fixed rate. Down payment: 20%. Mortgage: $250,000
The higher your credit score, the lower your payment on the same mortgage. And while a typical FICO score will fall in the range of 300 to 850, note that Bankrate's standard tools don't even publish mortgage comparison rates for credit scores below 660. It is often possible to get a mortgage or other loan with a lower credit score, but it typically requires a manual review (known as 'underwriting') of your information, and the costs will almost certainly be higher.
In addition to mortgages or other loans, your credit score may be used to determine your car insurance rates, and the data that go into those scores can also be checked by prospective employers, too. So your ability to get certain jobs, what you pay for car insurance, and your ability to borrow money may all be affected by how your credit appears. That makes being in the good credit score range incredibly important for most people.
So what is a good credit score?
The ranges in the mortgage table above reflect scores typically considered to be in the "good" to "excellent" range, with the higher the number the better. Scores below that are typically considered "fair" to "poor." With the impact your credit score can have on factors above and beyond your ability to borrow money, it can be incredibly important to get to or stay in the good credit score range.
As Fair Isaac points out, paying your debts on time, keeping your credit card balances low, and not applying for too much new credit are all keys to getting and keeping a good credit score. If your score isn't good, taking steps to do just that will start the process of improving your score. It does take time to rebuild a damaged credit score, but the sooner you get your accounts current and start tackling the balances, the sooner the clock starts ticking to repair your score.
Of course, there are those like personal finance guru Dave Ramsey, that advocate living without debt -- and thus without a credit score. If you're the type that's tempted to overspend by having a credit card, that guidance can save you more over the long run than the benefits like lower car insurance premiums that you can get from having a high credit score.
If, on the other hand, you use your credit cards for the benefits like theft protection, fraud protection, and potential rewards, and you pay your balances in full on time every month, they can be useful tools. Like most tools, however, credit can cause incredible damage if misused.
Use the tool of credit well, and the benefits derived from a high score can be your reward. If you're looking for a high credit score just so you can take on more debt, then chances are that you'll be better off following Ramsey's advice and seeking "no score" as the best credit score for you.
