What Is A Good Credit Score?
Published 8/10/09 (Modified 3/8/11)
As a long time apartment renter for many years, I'm finally on the verge on purchasing my very first home. As such, I've been super keen on tracking my credit reports and credit scores closely in recent months to boost my attributes as a prospective mortgage loan seeker. For a while now, I've been spending a tremendous amount of time learning everything I can about home mortgages and figuring out how to position myself to ultimately qualify for the very best rate on a home mortgage���� loan. One of the most crucial pre-requisites I've discovered about interest rates for mortgages and personal loans in general - is the shear importance of having a clean credit report and a good credit score. Banks, credit unions, mortgage brokers, and even credit card issuers utilize credit reports and credit scores to ascertain the credit worthiness of loan applicants - mulling over everything from the number of timely on-time credit payments and the severity of late payments, to the age and number of active credit accounts. Such historical data is compiled and reviewed by the lender to determine the appropriate interest rate the lender must charge the loan applicant to compensate the lender for the level of credit risk that it must expend. Those applicants with banged up credit histories and low credit scores tend to get slapped with higher interest rate fees on their loan offers than those with stellar credit histories. Individuals who have decent credit reports with good credit scores to match almost invariably enjoy much greater access to the best mortgage rates and the best credit card offers than those without.
Credit scores are important because they are basically summary reflections of what's found on your credit reports, and are one of the primary quick and easy short cut tools that lenders use to predict how likely you are to make your future credit payments on time. Thus the revealing nature of your numerical credit score has a direct impact on what type of mortgage loan rates, credit card offers, balance transfer deals, and auto insurance rates you can qualify for. Clearly, having a good credit score makes your financial life a lot easier and helps you save money in the form of lower interest charges whenever you need to apply for a loan or tap into credit based products.
The Definition Of A Good Credit Score Depends On What You Intend To Do With It
For starters, it's important to understand that the importance of your credit score is relative and contingent on what you intend to with the score. Its utility also depends on which particular credit score you are talking about. While it's always a great idea to monitor your routine credit score changes if you're one of those like myself who occasionally depend on 0% balance transfer credit cards and balance transfer alternatives for emergency fund purposes, only if you're planning on seeking credit or a loan within the next year would I recommend that you place so much immediate attention on your score. If you are not in the market at the present time for a mortgage or aren't planning on applying for a P2P personal loan or credit card within the next 12 months, your credit score is certainly not something you ought to overly fuss over. While one's credit score has far reaching effects beyond just loan applications and approvals (impacting prospects such as employment screenings and housing background checks), its primary purpose still revolves around its importance in helping you secure the very best interest rates and terms when you need access to immediate credit. If you're thinking of getting a mortgage loan for example, knowing your credit score is important because it may let you know if you need to take immediate action to improve your score so that you can push yourself into a higher credit score tier and thereby increase your chances of qualifying for a lower interest rate on your loan application.
A Good Credit Score Also Depends On What Credit Scoring Formula and Range You're Using
Other than the purpose of what you intend to use it for, another important factor of what constitutes a "good credit score" is also determined by what credit scoring methodology you are using. While all of the different credit scores out there are calculated by information contained in your credit reports, including payment history and ratio of actual credit usage to total available credit, the various scores out there differ in their numerical scoring ranges. Currently, the most popular and widely used scoring system is the FICO credit score formula (the myFICO.com score) developed by the Fair Isaac Corporation. Take a look at my article about FICO credit scores if you want a good background overview on how the scores are calculated and determined. FICO scores range from 300 to 850, with average FICO scores ranging between 680-700 depending on which of the 3 major credit bureaus' data (Experian, Equifax, or TransUnion) you're using. Presently in the United States, the median FICO credit score is 723.
While there is no current standardization on what exactly a good FICO credit score is, generally a good number is regarded as FICOs that are at least above average or above the median score (anything above 700). If your FICO score is at least 720 or higher, I would say that you are in pretty good shape as far as your credit rating goes in terms of your chances of securing top interest rates for your loan requests. In the past, most mortgage lenders and banks have traditionally lumped those with FICO credit scores of 720 or higher with those in the 800's - deeming both groups to be very low default risk borrowers - equally qualified for the best interest rates.
Good Credit Score Standards Have Increased In Recent Years
However, one thing to bear in mind is that credit scoring standards have increased substantially during the last few years. Particularly as a result of the recent credit crisis and subprime mortgage debacle, lenders and creditors have grown more strict in what they demand out of borrowers for the lowest interest rate offers. The definition of what's considered a good credit score has definitely gone up the last few years. Not too long ago in 2006 for example, a FICO credit score of around 620-650 would have been regarded as a "good credit score" and more than sufficient to qualify for the cheapest mortgage rates. Those days are long gone and lenders today now demand scores in excess of 750 or more for the top mortgage rates, along with high down payment percentages of 20% or more for home loans. While FICO credit scores of 720 or higher may still be regarded as the baseline standard of constitutes a good credit score, to truly snag the best interest rate offers, you'll likely need premium FICO's of 750 or higher.
The Effect Of Good FICO Credit Scores On Interest Rate Qualification
As noted above, the numerical range of what constitutes a good credit score is relative, and depends on what you want to do with it. Different types of lenders implement different credit scoring ranges in their categorization of prospective borrowers in terms of credit risk. Take a look at the two FICO score tables below (one for mortgages and the other for auto loans) to get an idea of how scoring ranges relate to the interest rates each range would generally command from lenders. As you'll note, mortgage lenders tend to demand stricter FICO credit score standards than say - credit card issuers and even car loan lenders.
Example: 30 Year Fixed Mortgage Rates For A $300,000 Mortgage Loan
Looking at the above sample interest rates on a hypothetical $300,000 home mortgage application as provided by the myFICO.com website, it's clear that the best interest rates on home loans are available to those with FICO scores in excess of 760 or greater. Of course, it's also important to remember that such rates are rarely exclusively determined by FICO scores alone. Mortgage lenders also rely heavily on the applicant's documentation of income sources and available assets when determining appropriate interest rates. Let's look at auto loans:
Example: 36 Month Auto Loan Rates For A $25,000 Car Loan
As you'll note from the table above, the best auto loan rates can generally be qualified by individuals with FICO credit scores in excess of 720 or greater. It's an over simplification, but it sort of gives you a broad view of what constitutes a good credit score in terms of qualifying for the best rates.
If you don't know where your official FICO credit score currently stands or what's on your triple credit reports as compiled by the three major credit bureaus of Equifax, Experian, and TransUnion, I recommend finding out sooner than later. You might not need to tap into your credit rating at the present moment, but it's always good to know where you roughly stand. Here are a few ways to get your FICO scores and credit reports for free.