Calculated with a formula based on five variables—payment history, amounts owed, length of credit history, credit mix, and new credit—your credit score may affect the interest rate you pay to a lender and even make the difference between a loan being approved or declined. Here are a few credit score basics and what various ranges of credit scores mean for your borrowing future.

Key Takeaways

  • Credit scores are computed using a formula that considers factors such as payment history, overall debt levels, and the number of credit accounts the individual has open.
  • Scores can determine the interest paid on loans and also be a deciding factor on whether a request for credit is approved or declined.
  • A score between 740 and 850 suggests the individual has been consistently responsible, while scores between 700 to 750 are considered above average.
  • Individuals with low credit scores, below 600, can take steps to improve them such as making payments on time, cutting down debt levels, and maintaining a zero balance on unused credit accounts.
  • If you have not yet established credit, you might want to talk to lenders about requirements for opening accounts and then establish a positive payment history.

Credit Score Basics 

Your credit score is a number that represents the risk a lender takes when you borrow money. A FICO score is a well-known measure created by the Fair Isaac Corporation and used by credit agencies to indicate a borrower’s risk. Another credit score is the VantageScore, which was developed via a partnership among the top three credit reporting agencies: Equifax, TransUnion, and Experian.

Your credit score calculation represents your credit risk at a moment in time based on information found on your credit report. Both FICO and VantageScore range from 300 to 850, although the ways in which each parses its scores into different classifications vary.  However, in both cases the higher the credit score, the lower the risk to the lender. FICO scores will be used for the purposes of this article.

Exceptional Credit Score: 800 to 850

Consumers with a credit score in the range of 740 to 850 are considered consistently responsible when it comes to managing their borrowing and are prime candidates to qualify for the lowest interest rates. However, the best scores are in the range of 800 to 850.

People with this score have a long history of no late payments, as well as low balances on credit cards. Consumers with excellent credit scores may receive lower interest rates on mortgages, credit cards, loans, and lines of credit, because they are deemed to be at low risk for defaulting on their agreements. Having an excellent credit score is particularly useful for qualifying for a personal loan, as it typically more than makes up for a lack of collateral.

Very Good Credit Score: 740 to 799

A credit score between 740 and 799 indicates a consumer is generally financially responsible when it comes to money and credit management. Most of their payments, including loans, credit cards, utilities, and rental payments, are made on time. Credit card balances are relatively low compared with their credit account limits.

Good Credit Score: 670 to 739

Having a credit score between 670 and 739 places a borrower near or slightly above the average of U.S. consumers, as the national average FICO score is 711 as of October 2020.  While they may still earn competitive interest rates, they are unlikely to command the ideal rates of those in the two higher categories, and it may be harder for them to qualify for some types of credit. For instance, if a borrower is looking for an unsecured loan with this score, it’s vital that they shop around in order to find the options that best suit their needs with the fewest drawbacks.

Fair Credit Score: 580 to 669

Borrowers with credit scores ranging from 580 to 669 are thought to be in the “fair” category. They may have some dings on their credit history, but there are no major delinquencies. They are still likely to be extended credit by lenders but not at very competitive rates. Even if their options are limited, borrows in need of financing can still find solid options for personal loans.

Poor Credit Score: Under 580

An individual with a score between 300 and 579 has a significantly damaged credit history. This may be the result of multiple defaults on different credit products from several different lenders. However, a poor score may also be the result of a bankruptcy, which will remain on a credit record for seven years for Chapter 13 and 10 years for Chapter 11.

Borrowers with credit scores that fall in this range have very little chance of obtaining new credit. If your score falls in it, talk to a financial professional about steps to take to repair your credit. Additionally, so long as you can afford to pay a monthly fee, one of the best credit repair companies may be able to get the negative marks on your credit score removed for you. If you attempt to obtain an unsecured loan with this score, be sure to compare every lender you’re considering in order to determine the least risky options.

Doing things such as paying down debt, making timely payments, and maintaining a zero balance on credit accounts can help improve your score over time.

No Credit

Everyone has to start somewhere. If you have a very low credit score (say, under 350), chances are you haven’t yet established any accounts and don’t have a credit history. Talk to your local lender about its borrowing requirements. When you’re approved for your first loan or credit card, set up a responsible repayment pattern immediately to establish a good credit record.

The Bottom Line

Your credit score is based on a variety of factors and can be used to determine whether you will qualify to borrow money as well as the terms, including the interest rate of the loan. Consistently paying your bills on time and in full will help prevent damage to your credit score in the future. Given the importance of having a good credit score, it could be worth it to invest in one of the best credit monitoring services to better protect your information.