What is a Credit Score?
If you’re new to the world of credit, you need to understand what a good credit score is. This can be a crucial first step toward financial independence. In simple terms, a credit score is an indicator of your creditworthiness, reflecting how reliable you are in managing debt and credit. Lenders use this score to evaluate the risk of lending you money. This helps to determine whether you qualify for loans, mortgages, or credit cards, and at what interest rates.
To understand what constitutes a good credit score, you must grasp how one calculates these scores and what factors impact them. Whether you’re looking to improve your current score or want to maintain good credit standing, understanding the nuances of credit is pivotal for achieving your financial goals.
What is a credit score?
In simple terms your credit score is an overall score that summarizes your borrowing and repayment history. This influences your ability to access credit and the terms you can receive. A credit score is a financial metric that lenders use to determine your credit worthiness. This meaning lenders look at your credit score when you need things like credit cards, cars, or houses. The credit score is not the only thing that lenders look at. However, depending what your score is, it can determine how much money the lender will give you, interest rate, and how many loans you can have at once.
There are many things that determine your credit score. Such as your credit history, mix of credits you have, your willingness and capacity to pay back your loans, and other metrics.
What makes up a credit score?
To understand what a credit score is, its important to understand what makes a credit score. This is a variety of criteria, including your payment history, new and mix of credits, length of time, and how much credit you already have/owe.
Payment History:
Your payment history makes up 35% of your overall FICO credit score. Payment history shows how you have paid back your debt. This is inclusive of late and/or missed payments on credit cards, mortgages, or any other debt you make payments on.
Accounts Owed:
Accounts owed makes up 30% of your credit score. Amounts owed refers to the amount of debt you have in total. This is important as it takes into account your level of debt. Generally the higher amount of debt you have, the higher risk you are.
Length of Credit History:
Your length of credit history is exactly what it sounds like – how long you have had credit. This metric looks at the age of your oldest and newest account, as well as the average age of all your credits. This makes up 15% of your FICO credit score.
New and Mix of Credit:
Your new credit and the mix of your credit are the final two metrics that make up your credit score. Both metrics each making up 10% of your credit score.
New credit refers to the credit inquiries that have been made on your credit report for the previous 12 months. Inquiries are made by lenders when applying for new loans or credits. The mix of credit takes into account how many different types of credits you have. How many different credit cards, loans, or any other type of credit/debt you have.
You know what makes up a credit score, its important to understand what a good credit score is.
What is a good credit score?
Now that you understand what a credit score is, let’s talk about what a good credit score is. Credit scores range from 300-850, the higher your credit score, the less risk there is to lenders. In other terms, the higher your credit score, the better.
Please note that specific numbers in this post is referring to the FICO credit score. The most widely used credit score in the U.S. in lending decisions for consumers.
| Score | Rating | Description |
| < 600 | Poor | This credit score is below the U.S. average of 717, according to FICO. This score presents a high risk to lenders and one will likely have a difficult time getting approved for any loans with a score in this range. |
| 601 – 657 | Fair | This credit score is below the U.S. average. While one may be able to get approved for a loan with a score in this range, it will present a high risk to lenders. If lenders are able to approve a loan with a score in this range, the interest rate is likely to be higher due to the higher risk. |
| 658 – 719 | Good | This is near the average score within the U.S. Many lenders would consider this to be a good score, and you should not have problems getting approved for a loan having a score within this range. |
| 720 – 780 | Very Good | A credit score in this range is great! If you have a score here, you are considered low risk and will have no problems getting approved for new credit cards or loans. |
| 781 – 850 | Excellent | This is the best score you can have as an individual. Lenders will love talking to you and you will likely get the most competitive rate as you are the lowest risk client there is. |
Understanding what is a credit score is fundamental in managing your financial health. By being conscious the factors that influence your score and what makes a good credit score, you can make better and informed decisions to improve and maintain your creditworthiness. Your credit score is a reflection of your financial habits and responsibility. Whether you’re aiming to qualify for a mortgage, secure a loan, or simply build a solid credit history, monitoring and managing your credit score effectively is an important step in achieving your financial goals.
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