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What Is A Good Credit Score?

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Credit scores are critical to the consumer debt and insurance markets.

Your score can make a big difference in your financial future. Your chance of approval for a mortgage, credit card, or any other type of loan depends on it.

But still, people don’t fully understand what a credit score is or what makes a good credit score.

A 2016 Ipsos survey asked consumers what they consider a good credit score. The responses varied quite a bit.

 

Which of the following do you consider a good credit score?

Source: Statista; Ipsos Online Survey
Location: United States

Balance transfers offer consumers a lot of benefits. They can help you better manage your cash flow and pay off debt. If you use several cards, balance transfers allow you to consolidate your credit accounts with one issuer.

Why do issuers offer balance transfer cards?

Good question. Understanding the issuer’s motivation can help you make better choices.

Credit card issuers use balance transfers, and specifically the low-interest introductory periods, to lure customers away from competitors.

 

What is a Credit Score, and Why Does it Matter?

A credit score is a three-digit number that reflects how risky you are to lenders. In other words, your credit score reveals how likely you are to pay back a loan on time and in full.

Credit scores usually range anywhere from 300 to 850. A higher score means that you are less risky and vice versa. A person can have multiple credit scores.

The two most common types of credit scores are FICO® Scores and VantageScore scores. Industry-specific scores also exist. TransRisk, as an example, is a credit score that uses TransUnion data to measure a person’s new account risk.

When you apply for a loan, the lender requests your credit report from one of the three major credit bureaus. The three major credit bureaus are EquifaxExperian, and TransUnion.

Once a lender has your credit report, they’ll run the data through a scoring model to calculate your credit score.

Why are credit scores so important?

Lenders and insurers use credit scores to decide if they will issue you a loan or grant you an insurance policy. Credit scores also factor into essential terms like the interest rate and the credit limit.

For most of us, the stress of managing personal financial planning is real. Having good credit can make a big difference. Especially in some of life’s pivotal moments.

Buying a home? With better credit, you can mortgage more of the sale price and pay a more attractive interest rate.

Do you need a credit card? A better credit score increases the chance you get approved.

Applying for a homeowner’s insurance policy? Your credit score might factor into your approval and the premium you’ll pay.

 

How Is My Credit Score Calculated?

It depends on the model, but according to Equifax, the following factors are almost always considered.

Payment history (~ 35% of your score):

  • Number and frequency of late or missed payments
  • Number and type of accounts paid on time
  • Instances of bankruptcy, foreclosures, and delinquencies reported to collection agencies

Amounts owed (~30% of your score):

  • Amount of outstanding debt
  • Number of credit accounts with outstanding debt
  • Credit limit utilization across your accounts

Length of credit history (~5-7% of your score):

  • Age of credit accounts
  • Time since last activity

New credit (~10-12% of your score):

  • Number of new accounts
  • Number of new accounts as a percentage of total
  • Number and frequency of credit inquiries
  • Time since last inquiry
  • Recently opened account balance

I’m sure your beginning to think that creditors have free rein to access information about you.

That’s not the case. There are some things about you that creditors use when calculating your credit score.

The Equal Credit Opportunity Act (ECOA) is a law enforced by the Federal Trade Commission (FTC). It forbids creditors to discriminate based on race, color, religion, national origin, sex, marital status, age, or because you get public assistance.

You can find the complete list of your rights under the Equal Credit Opportunity Act (ECOA) here.

 

So, What is a Good Credit Score?

First of all, remember that there are different models used to calculate credit scores.

As I already noted, the two most common credit scores are FICO and VantageScore scores.

The Fair Isaac Corporation created the FICO score in the late 1980s. Today, it is the most widely used score and often referred to as the “standard measure of consumer credit risk in the United States.”

A FICO score above 670 is good. If your FICO score is above 740, that’s very good. A score of 800 and above is excellent.

In 2006, Equifax, Experian, and TransUnion created the VantageScore as an alternative to the market-dominating FICO scores.

VantageScores are gaining traction. In 2019, the Federal Housing Finance Agency decided that Fannie Mae and Freddie Mac must review alternatives to FICO scores when evaluating an applicant’s creditworthiness. This is especially meaningful for the mortgage market since Fannie Mae and Freddie Mac are mortgage finance companies responsible for a large part of the mortgage market in the United States.

What’s a good score for the VantageScore model? A score above 700 is good. A score above 750 is excellent.

 

How Do I Find Out What My Credit Score Is?

When was the last time you looked at your credit report? If it’s been a while, then you should request one soon. Make sure to review your credit report carefully. You could find errors that hurt your score. The Federal Trade Commission completed several studies on errors found in consumer credit reports. One of the more recent studies from 2013 found the following:

  • 25% of consumers found errors on their credit reports that might affect their credit scores
  • 20% of consumers had an error corrected by a credit reporting agency
  • 80% of consumers that filed disputes had some change made to their report
  • About 10% of consumers that fixed a mistake on their report experienced a change in their credit score after
  • Around 5% of consumers that fixed errors increased their credit score by more than 25 points
  • 1% of consumers that fixed errors increased their credit score by more than 100 points

So, it’s not likely that your score will change by more than 100 points, but even a few points can make a difference The Fair Credit Reporting Act (FCRA) gives you the right to order one free copy of your credit report from each of the three major credit bureaus every 12 months. To request your free credit report, call 1-877-322-8228 or visit www.annualcreditreport.com. There are also credit card companies that give customers their credit score for free. Capital One®, for example, allows cardholders to check their TransUnion credit report at any time for free using CreditWise®.