What is a good credit score?


How much do you know about your credit score?  If you don’t know your credit score or don’t understand how it’s calculated, you stand a good chance of loosing thousand if not hundreds of thousands of dollars over your lifetime.

It turns out that a significant number of Americans take a passive approach to their credit score.  A surprising 32% have never checked their credit score and 44% in 2016 had not checked their score in the past 12 months.  With the potential risk of identity theft and hackers getting to your private information, it’s surprising how many Americans just don’t seem to be aware of their credit information.

Your credit score or FICO, which stands for Fair Isaac Corporation, is a 3 digit number that’s used as a measure of your creditworthiness.  It tells creditors and lenders how likely you are to pay the amount you borrow. 

The FICO credit score is the most widely used score in lending decisions and ranges from 300 to 850.  A Higher score is better resulting in lower cost of borrowing.  VantageScore, the model developed by Equifax, TransUnion, and Experian, has a similar ranking system, although FICO is still the model used by most financial institutions, at least for now.

Credit scores break down as follows:

  • 750 - 850 Excellent
  • 700 - 749 Good
  • 650 - 699 Fair
  • 550 - 649 Poor
  • Below 550 Bad

Although a good score is between 700 and 749 it may not get you the best rates available.  For example, a good score could result in 1% to 2% higher interest than you’d get with an excellent score for a 30-year mortgage.  This could add up to thousands of dollars in additional interest paid.

How is the FICO score calculated?

The following percentages are taken into account when calculating your score:

  • 35% - Payment History
  • 30% - Amount Owed
  • 15% - Length of Credit History
  • 10% - New Credit
  • 10% - Types of Credit Used

It’s worth noting that 35%, the largest part of the score, is based on paying your payments on time. If you want to improve your score this is the best way to do it.  The next best way to improve your score is to avoid borrowing more than 30% of your available credit limit.

Why you should care about your FICO score

Many people don’t realize how much the FICO score is used today.  FICO scores are now widely used by insurance and utility companies, cable/satellite/mobile phone providers, landlords or rental management companies, and many others.  Those with lower FICO scores pay more for the services they seek, have to put a large deposit down to be approved, and have a greater chance of being turned down. 

In some jobs such as financial institutions and jobs that require a security clearance, a credit check is mandatory and will be grounds for dismissal or rejection for employment.  

The average FICO score in America is 695.  Of course, this is an average, which means there are a bunch of people with much lower scores.  This means higher rates and higher costs for those that can afford it the least.

It’s time to become more aware of your credit score, not so you can borrow more, so you can save more. To learn more you can go to myFICO.com.  Additionally, get a copy of your credit reports at least once per year by going to www.annualcreditreport.com and aggressively correct any errors.

Most Credit Card companies and banks offer free credit scores now, so don't pay for it.  You can also use Credit Karma, an app for iPhone and Android that will keep you aware of your score and even help you understand how you can improve it.

One more thing, the FICO score is not your identity.  It’s a measure of creditworthiness.  It’s not a badge of honor to wear nor is it an accurate measure of who you are if your score happens to be low right now.  The FICO score is just a tool that’s part of a system which our country’s financial institutions use.  Be wise.  Learn all you can about it so you can make it work for you and not against you, but stop shy of letting it dictate who you are.