A credit score plays an important role for people who apply for a loan. A good credit score increases your chances of getting approved for a loan available at better rates and with flexible payment terms. However, whether or not your credit score is good is something that’s hard to state. That’s because each lender follows unique criteria for evaluating the candidate’s repayment potential. Of course, a credit score is not the only thing a lender considers when reviewing your loan application, but it is one of the important factors to determine the borrower’s repayment potential.
Generally, lenders do not tell their credit score evaluation threshold to the public, which is why it is hard to predict whether or not your credit score is acceptable. So, what is considered a good credit score? It depends on the type of loan you are applying for and the particular lender. Thanks to the popular credit scoring models like FICO. The FICO credit score model is on the 300-850 scale. You must have a FICO score of 670 to 739 to be considered an eligible candidate for loans.
Credit Score Ranges
There are mainly two credit scoring models – FICO and its competitor VantageScore. Both systems use the same credit range, which is 300-850. This means the borrower’s creditworthiness and reliability can be determined by their credit score. The higher the credit score, the higher the chances the customer is eligible for the loan.
Whether or not your credit score is good for the loan depends on the credit range system your lender uses. For example, FICO has mentioned that a credit score between 670 and 739 is considered good. Those who have a credit score between 740 and 799 are highly likely to qualify for just about any kind of loan since it is considered “very good”.
Anything that goes above 800 is considered “excellent” or the best credit score. The average credit score of a vast majority of borrowers is 715, which is considered good. Now, FICO collects customers’ data from the three main credit bureaus (Equifax, TransUnion, and Experian) before assigning a credit score to the individual.
Good Vantage Score
VantageScore is a competitor of FICO. It also uses the same scale for calculating the credit score of the individual. They also use the credit reports data from the same bureaus. The only difference between VantageScore and FICO is their grading system. You must have a credit score between 661 and 780 to be included in the company “prime” category.
A score above 780 is considered superprime. If your credit score lies between 601 and 660, you will be considered a “near-prime” candidate. Any credit score below 600 is considered sub-prime.
Why Do You Need a Good Credit Score?
While the above credit score scaling systems can help determine your previous credit records, lenders often have their unique evaluation system. It may differ from lender to lender. The factors they consider to determine your creditworthiness are often different. For instance, just because you have a fair or good credit score doesn’t mean a home mortgage lender will consider you a good candidate for the home loan. They may have their unique evaluation criteria for determining good vs bad credit scores.
A good credit score doesn’t only decide whether or not you are eligible for the loan, but it also shows how much interest you have to pay to secure the loan. It is obvious that people with a good credit score can find a low-interest loan that comes with a better repayment plan. In addition, a good credit score gives you access to the following:
- A car loan at a decent interest
- A credit card (unsecured) at good rates
- A mortgage
- The opportunity to get new credit in the case of emergency fund requirements if your current card is insufficient
Your credit score is also used by the insurance providers. For example, in some states, the insurance providers charge a low premium for car insurance to those with a good credit score. Landlords may also check your credit score to screen you as a tenant. That’s why a good credit score is necessary for everyone – regardless of whether you apply for a loan or not.
How to Improve Your Credit Score?
You need to embrace good credit habits to improve your credit score. Here are a few things that can help build your credit rankings. Let’s take a look:
- Pay Your Utility Bills on Time: Late and missed bill payments can do a lot of damage to your credit score. This damage will remain on your report for 7 years. That’s why you should make a habit of paying your bills on time.
- Keep Your Credit Utilization Ratio Low: The credit utilization ratio is calculated from the credit limit usage of the borrower. Suppose your credit limit is $20,000 and you use $10,000. Your credit utilization will be 50% since you are using half of your credit limit. You should aim to keep this figure below 30% or lower.
- Check Credit Reports Regularly: Monitor your credit reports to see if there is any error or missing information. These things can bring your credit score down. The mistakes are not uncommon in credit reports, so check your credit reports from time to time. You can get your credit report from any or all of the three credit bureaus.
- Do not Apply for Different Cards at Once: The credit company will evaluate your credit score to decide if they should accept your credit application. This is called the hard inquiry, which can have a tremendous impact on your credit score. Every time someone requests a hard inquiry for a credit score, a few points from their scores will be deducted. So, do not make multiple credit application requests at the same time.
These were a few things that affect your credit score. Monitor your credit reports regularly or at least once every year and keep working on your credit payments to build a good credit score.