A good credit score opens doors to lower interest rates and more favorable financing arrangements. It may also qualify you for top-tier credit card offers and allow you to obtain large loans such as mortgages. As you’re pondering what is a good credit score, you may wonder whether yours falls in that category—and if not, what you need to do to reach it. Let’s take a look at what a good credit score is—and how you can achieve this financial milestone.
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What is a good credit score?
A good credit score is the result of years of on-time payments while maintaining a low balance of credit usage across your available accounts. Most lenders and credit card companies use one of two scoring models, either FICO or VantageScore, which are used by the three major credit bureaus: Experian, Equifax, and TransUnion. FICO defines a good credit score as 670 or above, while VantageScore sets the bar a bit higher at 700. Some lenders, such as auto lenders, might opt to use their own models–but generally, most lenders and credit card companies stand by the FICO or VantageScore brand.
How are credit scores measured?
Your credit score measures your track record of paying lenders and credit card companies while providing potential lenders insight into your level of risk as a borrower. Your credit score is a three-digit number ranging from 300 to 850. Basically, if you are approved for a loan with a score below 600, you would likely pay a higher interest rate than someone with what is a good credit score, such as 720. While the credit scoring companies do not disclose the exact formulas they use to determine a score, they generally weigh the following factors:
Payment history — Lenders will evaluate your history of making on-time payments as well as whether you have any late or missed payments on your credit report.
Credit utilization — This describes the amount of credit you’re using in proportion to the total amount of credit you’re using. For a good credit score, you’ll need to maintain a low credit utilization, typically 30% or less at any given time.
Length of credit history — The “age” of your credit accounts is another key ingredient in the credit score calculation. The longer you can manage to keep accounts open, the more your credit score will rise.
New activity — When a potential lender pulls your credit report to decide whether to extend credit to you, that may register as a “hard inquiry” on your credit report. Your credit score may drop a few points as a result, particularly if multiple hard inquiries show up on your report.
Credit mix — Lenders like to see that you have managed a variety of types of credit, including credit cards, installment loans, auto loans, and more. Although this factor is less important than the others, it nonetheless plays a role.
Negative history — Late or missed payments can have a serious lasting impact on your credit score, generally for up to two years. Bankruptcies and collection activity can damage your credit score even further.
How can I improve my credit score?
Learning what is a good credit score is the first step to achieving that goal. The single most important ingredient in a good credit score is a record of on-time regular payments. That means you must pay your credit card and loan payments on time every month.
You can also improve your score by maintaining a low credit utilization across all of your accounts. Aim to charge 30% or less of the total credit limit at any given time. Paying down debt on your credit cards—and then keeping those accounts open—will free up some of the available credit and will gradually lift your score. As you maintain certain accounts over time, your credit score will also benefit from the longer, positive credit history.
