What is a Credit Score?

A credit score is the 3 digit number that represents your creditworthiness to lenders.  It is calculated using information from your credit report and used to influence the credit available to you and what terms may be offered.  There are many different types of credit scores, however 90% of lenders use the FICO scoring model, created by the Fair Isaac Corporation.  Most credit scores range from 300-850.  The lower the score, the higher the risk to lenders.  A score of 670+ is therefore considered to be good.

FICO credit score ranges

Poor: 300 – 579

FICO scores in this range are considered very poor and a good indication of bad credit.  Most lenders will decline applications for credit from borrowers in this range.  Poor credit scores often indicate the presence of derogatory items on a credit report.  These can include bankruptcies, collections, charge-offs, etc and will stay on your report for 7 years from the first day of delinquency.  Credit card applicants will most likely only qualify for secured credit cards which require a deposit.  Paying bills on time, reducing your amount of debt and new accounts are some of the things  you can do to improve your scores.

Fair: 580 – 669

These are the subprime borrowers.  It’s typically below average and indicate that you have trouble repaying your debts.  As a result, you are less likely to get approved for loans or credit cards.  In the event you are approved, you will be offered a much higher interest rate than someone with good credit.  For example, if you apply for a mortgage, you might be required to pay a larger down payment.

Good: 670 – 739

The average FICO credit score for U.S consumers is now around 704.  Very few people with a good credit score will be late on payments.  Lenders view this scores in this range as creditworthy but you will most likely not receive the very best terms.  A score in this range either means a short credit history with good management of bills or long history with some negative items along the way.  Borrowers in this range want to improve their scores to increase chances of approval and getting much better terms.  A good credit will save you money in the long run.

Very good: 740 – 799

Borrowers with scores in this range are above average.  These people with very good credit scores are attractive to lenders.  They are likely to receive better than average rates from lenders and studies show they are less likely to be delinquent in the future.  A very good credit score signifies excellent credit management.

Excellent: 800 – 850

The crème de la crème of borrowers.  A score in this range signifies a near flawless credit report. Borrowers with this exceptional score are eligible for the best borrowing opportunities.  You can easily qualify and be approved for a credit card like the Amex Platinum and get a lower APR.  The likelihood to default on loans or pay bills late is extremely low.  Although a score of 760+ will still get you the same opportunities as borrowers in this range, a score of 800+ is still great for bragging rights!!

Factors that impact your credit score

It’s very important to know what goes into the calculation of credit scores and the impact they have.  Using different information from your credit report, here is a breakdown of how FICO scores are calculated.

–  Payment history (35%)

–  Amount you owe (30%)

–  Length of credit history (15%)

–  New credit opened (10%)

–  Types of credit you have (10%)