If you've ever gotten a credit card or taken out a loan for a car or a house, that means someone has decided you have a good enough credit score to borrow money. But what exactly is a credit score? And, more important, what is a good credit score? Also, if you want that shiny new card, here's how to get a good credit score.
XA credit score is a numerical grade of your financial health that helps determine whether you qualify for a loan and what the terms of that loan might be. The higher your credit score, the likelier you are to get a good rate on a loan, or a loan at all.
There are many different types of credit scores. When people ask what is a good credit score, they are most likely thinking of the FICO score. The FICO score is used by 90% of the top lenders to assess what kind of loan they will or will not give you. If your FICO score is 670 or above, that generally means you have a good credit score. Above 800, your credit score is considered excellent.
FICO is a data research company once known as Fair Isaac Corp. Before that, it was Fair, Isaac & Co., founded in 1956 and named after founders Bill Fair and Earl Isaac. FICO's credit-scoring system has become a benchmark for determining which borrowers can be depended on to pay back lenders.
When you apply for a loan or a credit card, the lender will check what is known as a credit report, provided by one of three credit bureaus, Equifax (EFX), TransUnion (TRU) or Experian. The credit report is a detailed breakdown of your credit transactions and payment history. Your credit score is based on your credit report.
But What Is A Good Credit Score, More Specifically?
Here's a quick breakdown of what is a great credit score, what is a good credit score, and what is not so good.
According to a chart put together by Experian, a credit score of 800-850 is considered exceptional. Around 20% of Americans have a rating in this bracket, according to that chart. A credit score of 740-799 is considered "very good." Folks that score in those ranges have a better chance of getting lower rates on loans.
A "good" credit score falls within the 670-739 range. According to Experian, only 8% of people with a good score "are likely to become seriously delinquent in the future."
Further down the scoring bracket, getting a loan can become more difficult. Twenty percent of Americans have a "fair" credit score – 580-669. "Fair" credit scores are also known as "subprime." Below 580 and down to 300, in the "very poor" category, people might have to pay fees and deposits if they want to get credit, Experian says.
How To Get A Good Credit Score
Now that you know what a good credit score is, here's how to get one.
Generally, the most important thing you can do to keep a good credit score is pay your bills on time. Your payment history makes up 35% of your FICO score, the company says. That's more than any other factor considered in calculating the score.
"What lenders care about, above all else, is the likelihood that you're going to pay back your debt," said Tim Devaney, a staff writer and personal finance expert at Credit Karma. "Doing so on time, every time, proves that you're reliable."
The so-called credit utilization ratio is also a big factor in how to get a good credit score. That ratio measures how much credit you're using compared with how much is available to you. It makes up 30% of your overall FICO score calculation.
Generally, you want to keep this ratio at around 30% or lower. That means, as Devaney explains, that if you have $10,000 in available credit across all your credit cards, you'd want to keep your credit card debt below $3,000. Paying that debt off, on time, in full every month keeps the utilization ratio low.
What Factors Affect Your Credit Score?
The length of your credit history accounts for about 15% of your FICO score. All of your existing credit accounts, combined, comprise your credit history. Be sure not to close out your first card, either, Devaney advises. Any account you close out is one less account that can contribute to the length of your credit history.
Credit mix makes up 10%. Lenders will want to see that you can manage a mix of revolving lines of credit — say, a credit card in which you build up debt every month, pay it off, then repeat — and installment loans. Installment loans are things like mortgages, student loans and car loans.
New credit — that is, how frequently you seek out new loans — also accounts for 10% of your score. But if you apply for a bunch of different loans over a short period of time, that can raise lenders' suspicions that you're taking on more debt than you can handle.
What New Factors Will Affect Your Credit Score?
Fair Isaac will introduce a new scoring system in 2019 that will change how to get a good credit score.
It takes into account how people manage their checking, savings and money market accounts. The scoring system, the UltraFICO score, could give more options to people who can keep their bank accounts in order even if they don't have the best credit score.
That new score "lets you show lenders indicators of responsible financial behavior, not visible on a traditional credit report," according to an outline of the scoring system.
Those indicators include maintaining a bank account over time and keeping negative balances at bay. They also include "evidence of savings and keeping a healthy average balance" and regular bill payments and other bank transactions.
But before you rethink how to get a good credit score, consider that the so-called UltraFICO score will first go through a trial run with a small group of lenders.
The scoring system during that time will be used for "consumers who cannot currently access credit or, in certain cases, could be eligible for better terms," FICO says. Customers will be able to opt into having the activity in their bank and other accounts checked.
"It's a bit of a chicken-and-egg conundrum because you can't get a credit card without credit, but how do you build credit without getting a credit card?" Devaney said.
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