A good credit score helps in better credit decisions and creditors are more confident that you will repay your future debts as you agreed with them. A credit score of 700 or above is generally considered as good if we see the score with a range between 300-850. Whereas a score of 800 or above in the same range is considered as excellent. Mostly the credit scores fall between the range of 600 and 750.
Credit scores are used by lenders, credit card companies, banks providing mortgage loans, and car dealerships financing auto purchases. They use to make decisions about whether they should offer you credit or not and what should be the terms of the offer. There are various types of credit scores. FICO Scores and Vantage Scores are the most common types of credit scores but industry-specific scores also exist. Let’s take a look at these two credit scores.
FICO is created by the Fair Isaac Corporation. In this, a score above 670 is considered a good credit score, and above 800 is usually considered as exceptional. Here is the score range:
FICO Score Ranges:
740-799:- Very Good
Vantage score is commonly used by the lenders. The latest 3.0 model uses a range between 300-850. A score above 700 is considered a good credit score and above 750 is considered excellent.
Vantage score ranges:
300-549:- very poor
Importance of Good Credit Score
Credit scores are used by lenders, credit card companies, banks providing mortgage loans, and car dealerships financing auto purchases. They use to make decisions about whether they should offer you credit or not and what should be the terms of the offer.
Having a good credit score is important because it helps to determine whether you should give credit or not. Think of your credit scores like a report card in which you get a review at the end of a school term. But instead of only grades, your activities and subjects are included and the final report is given. But in this according to the credit scoring model, your score is generated each time a lender requests it.
However, credit scores are not the only things the lenders will look at. The credit report contains some details which could be taken into consideration. The details can be the total amount of debt you have, the types of credit, the time duration of credit accounts you had, and derogatory marks if any.
Factors That Affect Your Credit Scores
Credit scores are generally affected by these components in your credit report such as:
- Total debt
- Payment history for loans and credit cards, including the number and severity of late payments
- Credit utilization rate
- Number of inquiries for your credit report
- Type, number, and age of credit accounts
- Public records such as bankruptcy, civil judgments, tax liens, etc
- How many new credit accounts you have recently opened
Components of a Credit Scores
Many factors are involved when it comes to finding out a good credit score. it is important to know the significance of these components has in credit reports. They are as follows:
The Significance of Late Payments:-if you notice a lengthy list of late and miss payments then it automatically gives a negative impact on your credit scores. It is because while determining your score, each scoring model will take a closer look at your activities of missing payments or late payments and give results accordingly.
Too Many Credit Inquiries:- Few people know that hard inquiries affect the credit score. Having too many hard inquiries in the short span of time can negatively affect your credit score, and you may be penalized for multiple hard inquiries
Debt-to-Income Ratio:- to have a good credit score, your debt-income ratio should be lower. A high ratio makes the lender think that you won’t able to repay the debt. You are considered a higher credit risk for them.
How to Improve Your Credit Scores
To ensure that your credit score should be good in the long-term, pick one credit score, and monitor your progress over-time. It also helps to pay attention to the risk factors, for example, you have high debt or more numbers of inquiries in a credit report. Most models are based on the same five categories:
- Payment History(accounts for 35% of most scores)
- Credit Utilization(accounts for 30% of most scores)
- Length of Credit History(accounts for 15% of most scores)
- A mix of Accounts(accounts for 10% of most scores)
- New Credit Inquiries(accounts for 10% of most scores)
So, to build a good credit score, you should make all of your loan payments on time, keep the amount of debt below at least 30% and ideally 10% of your total credit limits, maintain credit accounts as you have the capacity, add a mix of accounts over time and manage how often you apply for new credit in a short timeframe.