In today’s world and market having a good credit score is what we all want. After all, with a good credit score we can borrow more money at lower interest rates right? Whether you are looking to buy a house, a car, or just open line of credit, having a good score can take you places you want to go. So what is a good credit score? And why do people given multiple numbers at one score reading. How are we to interpret these numbers?
The reason there are multiple numbers is primarily because different credit scoring companies use different scoring models (which have different ranges). For instance, FICO scores range from 300-850, while TransRisk scores fall between 100-900, and Equifax scores will be between 280 and 850. No matter what the scoring range, or what credit company is reporting the scores, the higher the number the lower to risk of lending to a person.
Scores are determined by looking at a number of different variables. These variables include items such as how much debt to income a person has. This means comparing how much money you make with how much money you already owe to lenders. Payment history is another factor. A credit company is looking to make sure you make your payments on time (paying at least the minimum amount due, on or before the date it is due). Another factor would be a person’s credit history. How long they have had credit accounts (phone, car, house, credit card etc.). If a person has been paying their bills on time but has only had a small line of credit for a short amount of time, the credit reporting company takes this into account. People with a long history of making payments on time are typically safer to lend to, whereas people with a relatively new credit history are still in question.
A higher credit score is good because it allows a person to borrow (when they have to borrow) at a lower interest rate than those with a lower score. For instance, if two people are buying a car and person A has a credit score of 650 and person B has a credit score of 720, they may both be approved for a loan but person B will likely have a lower interest rate which means they will be paying less over the life of the loan. Person A is charged more for the loan since they are seen as a greater risk. Credit scores can change very quickly however. If person B (who was given a better interest rate) starts missing or making late payments on their loan, the next time they go to get a loan (let’s say for a house, or credit card, or another car) they may be surprised that their credit score has gone down drastically and now they must pay higher interest rates for another loan. Person A could increase their score by making payments on time (every time), and if they are consistent in this trend over a long period of time their credit score should go up.
A good credit score is a score that allows you to get the loan you need at a competitive interest rate. For those just beginning in credit it may be wise to simply build credit by having a cell phone carrier, paying monthly bills on time. Maybe over time getting a small line of credit on a credit card, but only using it on items you can pay off immediately. Never keeping a balance above what you can pay. Over time these practices can raise your score so that you can take out bigger loans, like for a car for instance. Attaining a good credit score takes diligence of making payments on time and not over-borrowing based on income. Good habits in managing your own personal finances can help you reach your goals of having better credit.
What is a good credit score range?
- A good credit score falls between 781 and 850. Any score within this range is considered excellent credit by lenders. This means that a person with a high score in this range has a credit history (they have borrowed money in the past) and has been faithful in paying the money back on-time or early. The next range of credit is between 661 and 780. This is considered a good credit score. Having good credit may mean that you are trustworthy paying back money borrowed either early or on time, however you may have not been doing so for as long as someone with excellent credit. It may also mean that you are trustworthy in paying on time or early, but that you may be reaching a point where monthly payments to lenders is reaching a higher percent of your monthly income, therefore there is more risk in lending more.
- Fair credit ranges from 601 to 660. Fair credit is not bad, but it is not good either. Fair credit may be people who have a very short credit history but are responsible in paying monthly bills on time or early. It may be someone who had good credit, but began making payments a little late (out of forgetfulness or financial strain). Keep in mind that it takes time to build credit, but credit scores can drop quickly in a short amount of time if payments are being made late. A person can quickly go from good credit to fair credit or even bad credit in a few short months. However, it can sometimes take years to increase credit to the next highest level.
- Poor credit is a score ranging in the area of 501 to 600. It can be very difficult for someone with poor credit to get a loan at all, and if someone with poor credit is approved for a loan they will be charged very high interest rates (which means paying more money over the life of the loan). In order to increase poor credit it is vital that individuals pay what they already owe on time, all the time. Over a long period of time the persons score can increase if they are faithful in their payments. It is similar to working out. You will not see huge results right away. It will take long term consistency for a person to see the results they want.
- Bad credit is any score lower than a 500. Having such a score can majorly prevent a person from being able to get any money lent to them. Having bad credit usually signifies that a person went upside down on a loan (could no longer pay on it), they may have been sent to collections or filed for bankruptcy. It is not impossible to come back from bad credit, but it is very difficult and takes years of being diligent in one’s financial decisions. It may be wise for someone with bad credit to meet with a financial advisor who may be able to give them direction in a way to handle their finances to improve their credit. Having bad credit can affect many areas of your life. It can even affect a person’s ability to get some jobs. The police force, for example, looks into a person’s credit history before hiring an individual. Often people relate credit responsibility to the rest of a person’s life. The thought being that people who are responsible with their credit are also diligent and responsible in others. People who have bad credit may be more willing to be dishonest in a job or steal because of financial hardship. Having bad credit can be very difficult to overcome.
Exploring a good credit score
Having a good credit score means that a person is set up for financial success. The reason being is that they are able to get loans at competitive interest rates which means they can save hundreds or even thousands of dollars a year in interest charges. A good credit score is usually anything above a 720. Some companies expect a higher number to consider a person’s credit in good standing while some will accept a number as low as 700 and still consider it good credit. Keep in mind that when a financial agency checks your credit score they will usually pull 3 numbers (from three different credit reporting companies) they will typically take the middle number presented and determine interest rates based of that. Therefore, if you are purchasing a car and need a loan and the dealer pulls up 2 numbers in the 680 to 690 range and one number over 700, they will stick with the middle number. This can be frustrating for people who see that number above 700 and would like to have interest rates offered to people in the seven hundred range than to fall into the upper six hundred range. This is the way that it always works, however, they will typically take the middle number.
- A good credit score usually falls in the 700-750 range.
- Very good credit is a 750-800 score.
- An excellent credit score is anything above 800.
Lenders don’t usually have any problem lending money to a person with good credit (be it for a car, mortgage or credit card) however, people with good credit will probably not see the best interest rates. In order to see the very best interest rates (usually the ones that are advertised) a person would need to have excellent credit. Good credit allows a person to get what they need at a reasonable cost, and does not hinder such life events as getting hired or buying a car or home.
One thing to keep in mind is that having food credit puts you in a position to either go up or down (sometimes rather quickly). A person with good credit who is able to purchase bigger items (such as a home or car) can increase their credit by paying these items on time, all the time! Or, a person with good credit who gets in over their head can watch their credit score decline rapidly if they begin to make a few late payment. In some ways it makes a person with good credit much more vulnerable than a person with very good or excellent credit. They are in a position where they can use their good credit to increase their score, or they could make financial choices because of their good credit that can cause it to be too much to keep up with. It is vital that people know where their finances stand before making large financial decisions. In almost every case it may even be wise to meet with a financial advisor to plan out how and where to spend one’s money, how much to borrow, and how much to budget a month.
Keeping a spreadsheet, or having a computer program to keep track of every cent that comes in and out of your possession is one of the wisest ways to budget. Make sure that bills (including all food, gas, clothing, medical, dental, utilities, loans, insurance etc.) are all accounted for and add up to less than one’s monthly income. Many financial advisors also suggest to keep a minimum of 1000.00 in savings at all times for a back-up in case of emergencies such as car repair or unexpected medical costs. More secure individuals have a cash savings of 6 months’ worth of expenses in case of a large emergency such as job loss etc. Having such back-up plans can protect one’s credit from being affected in case of a hard month. Without the back-up money in savings a person may make a late payment in a pinch, which can negatively affect a credit score. Multiple late payments can affect a credit score quickly and then take a much longer period of time to make up for the points lost.
Getting a mortgage with a good credit score
When it comes to taking out a mortgage it is important to keep in mind interest rates, taxes, insurance rates, and down payments in addition to the actual cost of the home. Often, calculators on real estate pages do not take into account all the factors, and people may think that they can afford homes which are actually out of their price range. Mortgage companies will also approve loans for more than most people would can actually afford to pay each month. Determine the amount you can afford a month on a house payment, then meet with a mortgage broker to determine what price range you would be looking at in your area (based on your credit score, interest rate, insurance rates and taxes in the area as well). Mortgage lenders can give you a much more accurate picture of what a payment would be on a mortgage than a calculator on a website.
With a good credit score of between 700-750 it is possible to be approved for a mortgage depending on your employment and employment history as well. As stated before, people with good credit will not be offered interest rates as low as people with very good or excellent credit. Some individuals save money in addition to their down payment to “buy points.” This means that they can pay interest up front when you purchase the home. A point is 1% of the cost of the house, so if the home you were purchasing was $100,000 it would cost $1,000 to purchase a point. So if your mortgage interest rate was supposed to be 4% and you bought a point for 1,000, you would then have an interest rate of 3% for the duration of the mortgage. It is a way of paying more up front in order to have a lower monthly payment for the life of the loan.
Average credit score by age
There is a lot of research that shows that age and credit score do correlate. As one goes up, typically the other goes up as well, but not always. Sometimes young people can have inflated numbers that make it look like they have good credit, when in fact it is simply because they have hardly any credit history as well. Lenders are sometimes wary of that in younger folks. Some credit companies show people between the ages of 18-24 having a slightly higher average than those 25-29. This is primarily because the people in the 18-24 bracket do not yet have a history of good or bad credit. People ages 25-29 have had the opportunity to try and have probably stumbled a bit (or may have lots of student loans). All of these factors pay into an average credit score by age. Average credit scores by age tend to rise in people who are in their 30’s and continue to climb through retirement. Again, however, these are averages. A person who mismanages their credit will have a bad score whether they are 25 or 55, whereas a person who manages their finances and credit wisely can have a good score at any age.
The following numbers are different credit score averages based on different credit reporting sites. Credit Karma shows a graph of credit averages by age, Freescore.com gives a list of age ranges and average scores in America.
According to Credit Karma:
- People between the ages of 18-24 have an average credit score of: 630
- People between the ages of 25-34 have an average credit score of: 628
- People between the ages of 35-44 have an average credit score of: 629
- People between the ages of 45-54 have an average credit score of: 646
- People between the ages of 55+ have an average credit score of: 696
According to FreeScore.com:
- People between the ages of 18-29 have an average credit score of: 637
- People between the ages of 30-39 have an average credit score of: 654
- People between the ages of 40-49 have an average credit score of: 675
- People between the ages of 50-59 have an average credit score of: 697
- People between the ages of 60-69 have an average credit score of: 722
- People between the ages of 70+ have an average credit score of: 747
As you can see there is some difference between the 2 credit reporting sites on the averages. This has to do with how different credit reporting companies figure credit. This is also why when a lending agency pulls credit they will get different number. Somewhere in the range of the numbers lies a median number which is how credit is truly figured. An average of the numbers reported.
Keep in mind that having an average score in line with the ages listed above does not mean you are in the clear and have good credit, in fact it is almost the contrary. Much of the country has credit that is below the good credit standard because they have over borrowed and are behind on payments or have even been sent to collections. The national averages are not good, and in fact some people argue that it is a reflection of what our government is doing. The government is frequently spending/borrowing much more money than it is taking in through tax revenue, and the American people are following suit in their own personal finances. This is a recipe for disaster, especially on a personal level for the many Americans who are struggling to keep up with monthly payments.
In order to keep your finances in a manageable place and to not end up with poor credit, it is usually best to borrow (or spend on a line of credit) less than your income. This way you should be able to make payments on time and not end up with a deficit. Therefore, national average credit scores by age should not be a score to aim for, but rather should indicate where one does not want to end up. Keeping these items in mind from the beginning can help prevent disaster in the future, but it is never too late to start taking charge of your financial position and begin taking the steps to increase your credit score.