What is a good credit score?

A good credit score is something many people strive for throughout their lives. Good credit opens the door to better interest rates, more credit card options and a higher chance of loan approvals. Your credit score captures your creditworthiness and helps lenders assess risk. A high credit score tells a lender that a borrower is more likely to repay a debt. If you tend to have a low credit score, lenders will see you as a risk.

What is a good credit score?

A good credit score is a VantageScore of 661 or a FICO score of 670. These scores represent the U.S. national average credit score and are a good goal to aim for if you want to have a positive experience when applying for financial products, like credit cards. Although these scores are good, the higher your credit score, the better odds of approval you’ll have when you apply for loans, cards, mortgages or other products.

Why good credit is important

Having good credit can provide many benefits for your financial future, such as helping you qualify for lower interest rates and being approved for a new credit card, loan or mortgage. Those with higher credit scores are often offered better loan terms as well, so if you’re considering financing a large project soon, you may want to consider having a good credit score beforehand.

Most of the best credit cards require good to very good credit scores, so if you’re eyeing a top-notch rewards card with exciting perks, you will first need a qualifying score. All these reasons (and more) are why you should aim for a good credit score.

FICO vs. VantageScore

The Fair Isaac Corporation (FICO) scoring model is different and older than the VantageScore model. Most of today’s top lenders use the FICO model, but the VantageScore model was created in 2006 and is jointly managed by the three credit bureaus: Equifax, Experian and TransUnion.

Both models attempt to foresee a consumer’s ability to repay money owed, such as funds borrowed using a credit card. However, both models work with a consumer’s financial information a little differently from one another.

Here is a look at how both FICO and VantageScore work:

• VantageScore

  The VantageScore model calculates your score using the following criteria from most influential to least influential:

  • Payment history
  • Age and type of credit
  • Credit utilization
  • Total debt
  • Recent credit behavior
  • Your available credit

• FICO

  The FICO model calculates your score using fewer criteria than the VantageScore model. They are as follows:

  • Payment history
  • Amounts owed
  • Length of credit history
  • New credit
  • Credit mix

What are the credit score ranges?

Credit scores typically range from 300 to 850, according to Equifax. The higher your score, the more reliable you appear as a borrower when lenders review your credit report. Here are the FICO ranges for each credit bracket, which you’ll land in based on your credit score:

• Poor credit: 300 – 579
• Fair credit: 580 – 669
• Good credit: 670 – 739
• Very good credit: 740 – 799
• Excellent credit: 800 – 850

The most recent VantageScore model has similar scoring brackets, but typically requires lower scores to land in a higher bucket. For example, the VantageScore model requires a score of 781 to be considered excellent credit and 661 to have good credit.

No matter the scoring model, your credit score will place you within a scoring range, defining your credit as either poor, fair, good, very good or excellent. These definitions don’t necessarily disqualify you from or qualify you for products that require a specific credit score range, but issuers take your score into consideration. Whether you are approved for a credit card will depend largely on what your credit score is. However, if you are on the cusp of a credit score range — within a few points, for instance — you could still receive approval for a financial product you are applying for.

What factors affect your credit score?

Your credit score is calculated based on a variety of factors. There are different versions of credit scores and different ranges, so while the ranges presented here are based on the standards of the credit reporting agencies, credit issuers may have more specific score requirements within a range to meet their approval standards.

Your FICO score is determined by a combination of five credit factors. These factors include amounts owed, credit mix, new credit, length of credit history and payment history. FICO assigns a percentage to each of these factors to determine how much weight they carry in your credit score calculation.

• Payment history

  Your payment history reflects your history of making payments on time (or not) and accounts for 35 percent of your credit score.

• Amount owed

  The outstanding balances on your credit accounts make up another 30 percent of your FICO score. Lenders want to know if you are using a high amount of your available credit, known as your credit utilization ratio, which could mean you are at higher risk for default.

• Length of credit history

  The longer you’ve had your credit accounts, the more positive it is for your FICO score. This factor takes into account the age of your oldest account and newest account, as well as the average age of all your credit accounts. It makes up 15 percent of your credit score.

• New credit

  Lenders view opening numerous credit accounts in a brief period of time as a credit risk, so only apply for new credit when necessary. This factor makes up 10 percent of your FICO score.

• Credit mix

  Lenders like to know that you handle different sorts of credit well. That’s why this input makes up 10 percent of your score and factors in accounts such as installment loans (such as mortgages and car loans) and revolving debt (such as credit card debt, store credit cards and home-equity lines of credit).

VantageScore calculates your credit score using similar factors as FICO, though VantageScore weighs factors differently. Payment history is still the most influential factor for VantageScore, making up 41 percent of your score.

However, your combined credit mix and credit history account for 20 percent of it, while your credit utilization counts for another 20 percent. Other VantageScore inputs are new credit (11 percent), balances (6 percent) and available credit (2 percent). Also, VantageScore uses “trended data” rather than just data at a particular point in time.

How to get a good credit score

Improving your credit score begins with knowing what your credit score is. You have the right to a free credit report weekly from each of the three credit bureaus (you can request your reports at AnnualCreditReport.com), although that doesn’t give you a credit score. You can find out your credit score from the credit bureaus, or FICO, for a fee. Some lenders also offer them for free to customers.

Here are a few steps you can take to get a good credit score:

• Pay your bills on time. Payment history is the most important factor that makes up both your FICO and VantageScore, so you should aim to never pay bills late. You can improve your score by always paying your bills on time and in full each month. If you miss a payment, it can linger on your credit report for up to seven years.
• Keep your card balances low. Credit utilization is another important factor in determining your credit score under any model. Experts suggest keeping your credit utilization at 30 percent or below. However, keep in mind consumers with excellent credit scores tend to have a credit utilization rate in the single digits.
• Try to avoid closing old credit accounts. Keep your accounts open and let them grow with you. Old accounts help add length to your credit history, so keep old accounts alive and in good standing. Closing an account cuts the amount of credit available to you, which drives up your utilization and ultimately impacts your score.
• Make sure your accounts are being reported to the credit bureaus. If you only have a few credit accounts, make sure those are being counted toward your overall credit score. For example, if you are an authorized user on someone else’s credit card, make sure you’re actually benefiting from being on the account. Alternatively, a history of on-time rent and utility payments can really boost your credit score without much hassle. You may need to use an alternative reporting service, such as Experian Boost, in order to add these accounts to your credit history.
• Limit credit inquiries. When you apply for new lines of credit, a hard inquiry is applied to your credit report. While this only dings your credit score a tad, you don’t want to apply for a ton of new credit cards all at once. Do thorough research when you are on the market for a new credit card, and be sure to only apply for the one that will best suit your financial needs.

The bottom line

Improving your credit score is all about building good credit habits and maintaining those habits over time. Keep in mind that it takes time to build a strong credit score. If you are recovering from a financial setback or simply looking to improve your credit score, then paying your bills on time, maintaining a low credit utilization and limiting new credit inquiries will put you on the right track toward the credit score of your dreams.