In short, a good credit score is 700 or higher. But the definition of “good credit” is a moving target. That’s because each lender, bank and credit card issuer interprets credit scores a little differently. If you don’t have good credit you should treat it like a personal finance emergency, since it can seriously affect your financial future.
While a good credit score of 700 or higher can open the door to some loans and credit cards, locking in a mortgage or auto lease with low advertised rates often requires credit scores significantly higher than 700. So consumers should carefully monitor their credit scores and take steps to correct issues that drag them down.
Why are Good Credit Scores Crucial?
Having a good credit score generally makes people’s personal finance lives a lot easier. A good score can mean the difference between being approved or rejected for things like credit cards, mortgages and apartment rentals. It can also mean a huge difference in how much people pay for credit through interest rates, because those with poor credit get stuck with higher rates.
Since financial institutions don’t have the luxury of knowing all their potential customers on a personal basis, they need some way of judging whether someone is likely to repay any money lent to them. That’s where credit scores come in.
Credit scores are created by the three main credit reporting bureaus, Equifax, Experian and TransUnion. Each institution uses its own calculations to judge individuals’ credit worthiness and spit out a three-digit FICO score ranging from 300 to 850. There are a number of other credit scoring products that have different scales, but most institutions use the FICO scale.
The formulas that the credit reporting bureaus use are each a little different from each other and the exact ins-and-outs of them are proprietary. While the credit bureaus’ methodologies may vary, they generally judge how consumers use credit and how they pay it back. Paying bills late, maxing out credit cards and having accounts in collections are all signals that a consumer is unlikely to pay back lenders on time reliably. Having several credit accounts in good standing, low balances on credit cards and a history of consistently paying back lenders on time are all signs that a consumer is very likely to handle a new loan or line of credit responsibly.
Some people are only concerned about their credit scores when it comes time to get a new car or move into a new home, but there are no quick ways to earn good credit scores. Late payments and other black marks on credit scores generally take anywhere from two to seven years to fall off of credit reports. Some 18-year-olds might not care much about having a good credit score, but late payments on their first credit cards can make it difficult or impossible to make major purchases well into their 20’s.
Good Credit Scores Range
According to Experian, a good credit score is any score above 700. They say most credit scores fall between 650 and 750.
Wells Fargo adds that about 58% of consumers have a credit score of 700 or higher. Unfortunately, that means 42% of consumers don’t have good credit and that can be a big problem.
A Reason to Dig Deeper
700+ may be considered “good,” but why stop there when lenders don’t? Depending on a range of scores, lenders may grant or deny some credit applications, but there’s a whole array of different offers for credit cards and loans available, depending on a person’s credit score. The very best offers go to those with the best scores, while those with lesser credit scores get stuck with higher rates or even get refused completely.
Here’s a breakdown:
- 750-850 Great/Excellent
- 700-750 Good Credit Score
- 640-700 Fair
- 580-640 Poor
- 300-580 Very Poor
750-850 Great/Excellent Credit
People in this range are the cream of the crop as far as lenders are concerned. They’re the most trustworthy and the most likely to pay money back. Those with excellent credit can pick and choose their credit card and loan offers. They’ll almost certainly be approved for credit cards, and they command the lowest interest rates on cards, mortgages and other loans.
For example, a home buyer with a credit score in the 750-850 range can qualify for a more than 1.5% interest savings on a home mortgage. 1.5% may not seem like much, but with a $140,000, 30 year loan, that works out to a whopping $46,000 savings over someone with a credit score from 620 to 640.
700-750 Good Credit Score
Individuals with merely good credit scores might not get access to all the choicest offers, but they’re not going to get turned away empty handed. They won’t have trouble being approved for credit cards, and though they may not get the cheapest rates, their rates won’t be off by much compared to those with great credit.
A home buyer with a good credit score in the 700-750 range can qualify for more than a 1% interest savings on a home mortgage. On $140,000, 30 year loan, that’s around $40,000 cheaper than someone with a credit score from 620 to 640. Not as good a savings as if their credit had been excellent, but still considerable.
640-700 Fair Credit
The banks don’t see those with fair credit as a high risk, but they’ve still got more risk attached to them than those with excellent or good credit scores. For this reason, they’ll have a slightly harder time when borrowing. They’ll have fewer offers, higher rates and more fees.
A home buyer with a less-than-good credit score in the 640-700 range can still qualify for an interest savings on a home mortgage of a half percent or more. On $140,000, 30 year loan, that’s still around $20,000 less on average than someone with a credit score from 620 to 640.
580-640 Poor Credit
The 580-640 range is well below the good credit score range. Borrowers in this group are considered high risk, and that’s why lenders will do business with them warily, if at all. Their offers are few and far between. The only credit cards available to them might be secured cards requiring a deposit and carrying high fees. They may be turned down for home or auto loans. When and if they do manage to open new credit accounts, they’ll pay high rates. To these borrowers, everyday transactions like opening a mobile phone account can become frustrating experiences, requiring a deposit or ending in outright rejection.
For example, a home buyer with a credit score in the 580-640 range may find it impossible to secure a loan at all. They may have to seek a smaller lending institution, like a local credit union. If they do get approved, they’ll pay the highest interest rates — about 5%. On $140,000, 30 year loan, that can mean they’ll pay an extra $46,000 over someone with great credit.
300-580 Very Poor Credit
Lenders see this group as very high risk, and any lenders that do extend them credit will do so only in return for the highest interest rates allowable. People with very poor credit may be able to obtain secured credit cards, but they’ll likely be turned down for any kind of account requiring a credit check. They may have trouble getting approved for apartment rentals or getting cell phone contracts. They may have to pay security deposits for utilities, pay higher insurance premiums, or have trouble buying a car. In some cases, people with the worst credit may even be turned down for employment. These borrowers probably won’t be able to get a home loan of any kind without a cosigner.
Related: 7 Ways to Boost Your Credit Score
What Makes a Good Credit Score?
A good credit score is created by having good marks in several categories including:
- Credit Card Utilization: This is the amount of available credit a consumer uses. Using too much existing credit each month will hurt a credit score. Using 20% or less of available credit is a good target for those who want good credit scores.
- Payment History: Missing payments destroys credit scores for a long time, making it almost impossible to have a good credit score.
- Derogatory Marks: Tax liens, bankruptcies, and accounts in collection cause derogatory marks on credit reports, and that hurts the credit score. Those with good credit scores seldom have derogatory marks on their credit reports.
- Age of Credit History: Having an older average account age will help a good credit score, while a younger age will drag down a score.
- Total Accounts: While there’s no exact right number of credit accounts, too many or too few will hurt a good credit score.
- Credit Inquiries: Too many credit applications in the recent past will hurt a good credit score.
Not all the factors that make up a good credit score are weighted equally. For more information on the factors that impact credit scores, see our article on how to hack your credit score.