The modern economy is based on credit. If you want a mortgage for a home or a student loan to pay for education, or if you want to to buy something you want on a credit card, you'll need a lender to grant you a line of credit.
You must also be deserving of this line of credit. Your three-digit credit score defines your creditworthiness and is the key to your financial life. Good credit might be the deciding factor in obtaining a mortgage, automobile loan, or school loan. Bad credit, on the other hand, makes it harder to obtain a credit card with a low interest rate and makes borrowing money for any purpose more expensive.
Even if you are not seeking a loan, having good credit can have a significant influence. Credit information is routinely used by landlords, insurance, and employers as a litmus test to determine whether a person is dependable and accountable. Bad credit can indicate that you are a dangerous investment.
Technically, your credit report reveals only the particulars of your debt management, but some will extrapolate the features from your financial life to other scenarios. Good credit can indicate that your financial status and life as a whole are on the correct track. This means that your credit score can impact your insurance premiums, housing approval, and possibly even your employment prospects.
However, what constitutes a good credit score? Understanding why particularly good credit is important and how to create a good credit score will enable you to reap the benefits of excellent credit, so let's take a closer look at what you need to do to reach the "good credit" range.
Benefits of Good Credit
There are numerous advantages to having excellent credit. For instance, landlords are more willing to rent you an apartment. As part of the recruiting process, an employer may investigate your credit history if you are job-seeking. However, the greatest benefits of good credit are monetary. Here are three ways that having good credit can make your life more convenient and economical.
Better credit approval odds
Your credit applications are more likely to be approved if you have an excellent credit score. This implies that when you apply for credit cards, loans, or mortgages, you will have a greater chance of being accepted and may spend less time awaiting a response.
Reduced interest rates
In addition to having a higher rate of credit acceptance, those with strong credit typically receive cheaper interest rates. In the long run, paying less interest on your debt can save you a substantial amount of money, so improving your credit score is one of the most prudent financial actions you can do.
Loan conditions that are more favorable
People with good credit typically receive more favorable loan terms than those with poor credit. You may earn a bigger credit card limit or be eligible for a low fixed-rate mortgage, for instance.
So what is a good credit score?
What is a credit score that is considered to be good? According to the FICO methodology of credit scoring, there are five separate categories in which credit ratings can be placed:
Bad: 300 to 579
Fair: 580 to 669
Good: 670 to 739
Very Good: 740 to 799
Excellent: 800 to 850
The range of FICO credit scores from 670 and 739 is considered to be the range of good credit ratings. On the other hand, a large number of individuals regard a FICO score of 670 or higher to be "excellent credit." If you have flawless credit or exceptional credit, it follows that you also have good credit because of this.
If you have a credit score that is greater than 670 on the FICO scale, you not only have strong credit, but you have also graduated from the "subprime" area and into the "prime" category for your credit. It is more likely that those with good credit will profit from the prime interest rate. This indicates that you may pay less interest overall on your credit cards, mortgages, and loans if you have good credit.
How do I get a good credit score?
If you want to have a good credit score, you need to know how credit scores are calculated and how to establish credit at the same time.
Your FICO credit score is determined by the combination of five different criteria, which are as follows:
Payment history: accounting for 35 percent
Credit utilization: 30 percent
Length of credit history: 15 percent
Credit mix: 10 percent
Credit inquiries: 10 percent
If you want your credit score to be in the range of good credit scores, you will need to modify your credit practices in relation to those five elements listed above.
Payment record
Due to the fact that payment history accounts for 35 percent of your credit score, make every credit card payment on time. Missing a credit card payment can have severe negative impacts on your credit score, especially if the missing payment is not made as soon as feasible.
Credit utilization
Your credit utilization ratio indicates how much of your available credit you are utilizing at present. If you want to have good credit, you should maintain your credit utilization below 30 percent. If you have $10,000 in available credit, for instance, your total credit card balances should not exceed $3,000. If your credit card balances exceed 30 percent, you should pay them off as soon as feasible. Thus, these big sums will be less likely to negatively impact your credit score.
Credit history length
Lenders prefer to see that you can responsibly manage credit accounts over an extended period of time. It is therefore unwise to close outdated credit cards, even if they are no longer in use. Your credit report only lists current credit accounts, so when you close your oldest credit accounts, your credit history is shortened. If you wish to develop credit, keep your credit card accounts active.
Credit mix
The many forms of credit accounts in your name constitute 10% of your credit score. Your credit score may increase by a few points if you have both revolving credit (such as credit cards) and installment credit (such as a mortgage or auto loan). However, even if you only use credit cards, you can still establish and maintain a decent credit score, so don't panic if you don't have much of a credit mix yet.
Recent credit inquiries
When you apply for a new line of credit, the bank or lender performs a credit check. Applying for too much new credit at once is a dangerous financial practice that can negatively impact your credit score if you have too many recent credit inquiries on your report. Three to six months should elapse between credit card applications if you're attempting to develop credit.
It is also prudent to monitor your credit report and credit score on a frequent basis. There are inaccuracies on the credit records of millions of Americans, and these errors could be negatively impacting your credit score. Examine your Equifax, Experian, and TransUnion credit reports carefully and contest any errors you uncover.
Key Takeaways
What exactly is considered a good credit score? If your FICO score is higher than 670, this indicates that your credit is in good standing. Because having good credit has a multitude of advantages, such as the ability to obtain better credit cards and reduced interest rates, it is imperative that you have an understanding of the ways in which your credit habits may be helping or damaging your credit score.
After you have gained an understanding of how to improve your credit score, you will be in a position to take advantage of the numerous advantageous financial options that are linked with having good credit. These include access to the top credit cards available today, which offer a variety of benefits, such as cash back returns and advantages for luxury travel.
