Your credit score is a three-digit number that plays a significant role in your financial life. A good credit score isn’t just for bragging rights; it can open the door to better loan terms, lower interest rates, higher credit limits and even jobs and housing. So what is a good credit score, and how can you get one?
Put simply, your credit score is a numerical representation of your creditworthiness and reflects how responsible you are with your finances and how likely you are to pay back the money you borrow. Credit scores typically range from 300 to 850; a score of 670 to 739 from FICO, the most popular credit-scoring model, is considered good, while anything over 740 is considered very good to excellent.
Improving your credit score isn’t as complex as it may seem, but it takes time and discipline. A good credit score requires responsible financial habits, like paying your bills on time and not borrowing more than you can afford to pay back.
We’ll show you how your credit score is calculated, the factors that affect your score, how to improve your score and how to debunk common credit score myths.
Understanding credit scores
The purpose of a credit score is twofold. First, it’s used to help lenders make fast and informed decisions on who they loan money to. It’s also meant to help borrowers have fair access to credit by standardizing lending criteria.
Consumers don’t have a single credit score; everyone has several scores from different credit credit-scoring companies, and lenders can use any of them when considering you for a product. To complicate matters further, lenders may have their own proprietary scoring systems. But all credit scores are based on the same information on your credit reports.
The two most well-known are FICO and VantageScore, with the FICO score being the most widely used by lenders. While numerous credit-scoring models exist, each of these companies uses its own formula to calculate credit scores based on consumer data from the three major credit reporting bureaus: Experian, Equifax and TransUnion. They both generally use a scale from 300 to 850 to do so, with 850 being the highest credit score possible.
Within that range, specific credit score categories help you make sense of what your score really means. For example, FICO considers a score between 670 and 739 to be “good” and a score of 800+ to be “exceptional,” with 850 being a perfect credit score. For context, the average FICO score in the US was 714 in 2022, according to Experian.
The good news is that you don’t need a perfect credit score to qualify for the best loan terms. Once your scores reach the upper 700s, you can generally expect to unlock those terms, according to FICO. Also, you can positively impact your scores by paying your bills on time, not accruing too much debt and making other wise credit decisions.
Factors that affect credit scores
Five factors, each carrying its own weight, are considered when calculating your FICO score, which is the most popular credit-scoring model.
Understanding how these factors affect your credit score is crucial for anyone looking to build a strong credit profile that will lead to better financial opportunities.
Payment history (35%)
First and most important is your payment history. Late and missed payments will have a lasting, negative impact on your score. That’s why paying your bills on time is essential. It shows lenders that you can manage your credit responsibly.
Amounts owed (30%)
Amounts owed reflects the amount of credit you’re currently using compared to your total available credit. This is sometimes called your credit utilization ratio.
Length of credit history (15%)
A lengthier credit history generally translates to a higher credit score, assuming you’ve managed your credit responsibly. That’s why it’s helpful to maintain your oldest credit card accounts, even if you aren’t actively using them.
Credit mix (10%)
The fourth factor is your mix of credit types: credit cards, mortgages, student loans and other credit accounts. Having a combination of these types of accounts demonstrates your ability to manage different types of credit, which can translate into healthier credit scores.
New credit (10%)
Having lots of new accounts or recent hard inquiries on your report can negatively affect your scores. A hard inquiry (also known as a “hard pull” or “hard credit check ”) occurs when you apply for new credit and the creditor accesses your credit score and reports to make a lending decision. A soft inquiry, on the other hand, is a credit check that doesn’t affect your scores.
Importance of having a good credit score
A good credit score is an asset that can positively impact your entire financial journey.
Consider significant financial milestones, like buying a car or a house, pursuing higher education or financing a new business. A good credit score makes it easier to get a loan and secure better loan terms. A few interest rate percentage points can translate into considerable savings over the life of a loan.
A good credit score will not only save you money but also give you better access to credit cards that offer perks like cash back and travel rewards. And guess what? Employers and landlords might look at a pared-down version of your credit history to assess your responsibility, too.
What is a good credit score?
FICO and VantageScore each typically use a credit score range of 300 to 850. They also each use five subcategories to define your credit rating, with the ranges varying between companies.
What is a good FICO score?
Within the FICO scoring model, a score between 670 and 739 is considered “good.” The five FICO score ratings and corresponding score ranges are as follows:
- Poor: 579 and below
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Exceptional: 800+
What is a good VantageScore?
VantageScore defines a score between 661 and 780 as “good.” The five VantageScore credit ratings and corresponding scores are:
- Very poor: 300 to 499
- Poor: 500 to 600
- Fair: 601 to 660
- Good: 661 to 780
- Excellent: 781 to 850
How to improve your credit score
If your credit scores need some work, don’t worry. You can improve them by concentrating on the fundamental factors that impact your score.
To start, make sure to pay your bills on time. Your payment history is the most critical factor in your score, and late payments will have a significant negative impact.
It’s also wise to periodically check your credit reports for errors, such as incorrect balances and payment history or credit lines you didn’t open. If you find any inaccurate information, you can file a dispute with the credit reporting agency to have it removed. Checking your credit reports doesn’t affect your scores.
Next, monitor your credit utilization ratio, which is how much credit you use in relation to your total available credit. Keeping your credit utilization ratio lower than 30% will signal to lenders that you’re a responsible borrower. The lower the percentage of available credit you use, the better. Constantly maxing out your cards can hurt your score.
In addition to these tips, be conservative about opening new accounts. Opening too many new lines of credit in a short period of time can be a red flag to lenders, so only apply for and open new accounts as needed. Opening a new account just to improve your credit mix, for example, likely won’t raise your scores.
Improving your credit scores isn’t something that happens overnight but something you must work toward. By paying your bills on time and using your credit responsibly, you’ll be well on your way to a better credit score.
Common myths about credit scores
Several common misconceptions can cause confusion when you try to understand your credit scores. With the correct information, you can make more informed financial decisions and work toward improving your credit score. So, let’s set the record straight.
Myth 1: Checking your credit hurts your score
This is one of the most persistent myths about credit scores. The idea that checking your credit reports or credit score can harm them couldn’t be further from the truth. Checking your credit is typically a “soft inquiry” and doesn’t impact your score. In fact, it’s a responsible habit to review your credit report for errors regularly.
You can request a free copy of your credit reports from each of the three major credit bureaus at annualcreditreport.com. By law, you’re allowed a free credit report from Equifax, Experian and TransUnion annually. You can request a credit report from each bureau as often as once a week, though you likely don’t need to check your reports that often.
Myth 2: Closing credit cards boosts your score
In reality, closing credit accounts might have the opposite effect. That’s because when you close an account, you reduce your available credit, which can lead to a higher credit utilization ratio.
A better approach is to keep your oldest accounts open, as they can positively impact the length of your credit history. However, if you want to close an old card because of its annual fee, don’t be afraid to cancel it. The negative credit impact should diminish over time.
Myth 3: A higher income means a higher score
Your income has no bearing on your credit scores. A lower income paired with responsible credit management will lead to stronger credit scores than a higher income paired with irresponsible behavior. While a higher income may make it easier to pay your bills, your credit scores are based on how well you handle your credit.
Frequently asked questions (FAQs)
There are five factors used to calculate your FICO credit score: payment history, length of credit history, credit utilization, credit mix and the number of recent credit inquiries. Each of these factors is weighed together to generate your three-digit score, which gives lenders an indication of your creditworthiness.
Yes, opening a new credit card can cause a temporary dip in your credit score. But responsibly managing your new line of credit can contribute positively to your credit score and history.
The new account will add to your total available credit. And by making on-time payments and keeping your balance low, you can improve your scores.
The timeline to build a good credit score can vary. If you are starting from scratch, it will take at least six months to establish a FICO score. If you have a history of poor credit, it will likely take longer to prove to credit issuers that you can manage your credit responsibly. Maintaining low balances, paying your bills on time and keeping a good mix of credit types can help gradually improve your score.
Yes, paying off debt can improve your credit scores. Paying off your debt reduces your amounts owed, which is a key factor in calculating your credit scores. Paying off debt may also lead to a small decrease in your credit scores, since it can reduce the variety in your credit mix and increase your credit utilization ratio, for example.
Yes, your credit score is the primary factor lenders use to determine if you’re eligible for a loan and what interest rate you’ll get. The higher your credit scores, the greater the likelihood of being approved for a loan with better terms.
