Calculated with a formula based on variables including payment history, the number of accounts and the amounts owed, 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 scores within a variety of ranges may mean for your borrowing future.
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 between 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 the latest VantageScore range from 300 to 850, although the way each parses its scores into different classifications is different. However, in both cases the higher the credit score, the lower the risk to the lender. FICO scores are used for the purposes of this article.
Exceptional Credit Score: 800 to 850
Consumers with a credit score in the range of 720 to 850 are considered consistently responsible when it comes to managing their borrowing and are prime candidates to qualify for the lowest interest rates. Best of all is 800 plus. 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, loans and credit lines because they are deemed to be at low risk for defaulting on their credit agreements.
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 to 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 704 as of 2018. While they may still get 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.
Fair Credit Score: 580 to 669
Borrowers with credit scores ranging from 580 to 669 are thought to be in the “fair” or “average” 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.
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 up to 10 years. Borrowers with credit scores that fall in this range have very little chance of getting new credit. If your score falls in this range, talk to a financial professional about steps to take to repair your credit.
Everyone has to start somewhere. If you have a very low credit score (say, under 350) chances are you haven’t yet established a credit score 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 interest rate) of the loan. Consistently paying your bills on time and in full will help you prevent damage to your credit score.