A high credit score can help you qualify for the best interest rates and terms on loans and credit cards. But what scores are considered “good enough”? Here we break down what scores fall into that range, and how you can build your credit.
Why do they matter anyway? How can you get a good score and how do you build one?
Before we get started on the nuts and bolts, though, let me just reiterate something I have said before in this column. In fact, I have been saying this ever since my first book, “Credit Repair Kit for Dummies,” was published in 2006. Even though the range of credit scores goes all the way up to 850, there is little value in chasing that “perfect score.”
What matters most is to have “good enough” credit that will enable you to get what you want. As I pointed out in a recent column about mortgages, in the mortgage game, a score of 760 will get you all the same benefits as a score of 780 or even 800. So keep that in mind as we dive in.
For those of my readers who like a number to hang their hat on, here are some ranges they may find useful: Any score below 579 is not where you want to be. From 580 to 669 is considered a fair score, but you’ll get better rates with a higher score. Scores in the range of 670 to 739 are good scores and may be good enough for most people. Scores over 740 will get you top rates. And while over 800 is an exceptional score, it won’t get you much more.
See related: The definitive guide to debunking credit score myths
Why credit scores matter
The first thing I want you to understand is what a credit score does. Yes, it helps determine your availability of credit and the rate you’ll pay to access it. But what it really measures is your statistically proven likelihood of defaulting on your next loan. The greater the risk, the lower your score and the more you’ll pay to access credit – if you can access any credit at all.
How to build credit
I’m often asked “how can I build up my credit?” Some 40 to 50 million people in the United States come back from credit inquiries to the major bureaus as no-hits or thin files (files with too little data to score).
Some easy ways to establish a credit history include:
- Get a secured credit card. You put up a deposit and the issuer gives you a credit line based on your deposit. The issuer reports to all three credit bureaus – Equifax, Experian and TransUnion.
- Open a passbook savings account and then taking out a passbook installment loan (see below)
- Open a store brand retail or gas credit card. These are much easier to qualify for than a general-purpose credit card, but they tend to have higher APRs.
- Use non-bureau reporting information such as utility payments or bank account history with a program like Experian Boost or UltraFICO to supplement the data in your file.
Credit score factors
Next, I want you to know what makes up your credit score and what you need to do it make the best it can be. Knowing what is most important – and why – can start you on the journey to the score that is just right, or good enough, to get you what you want at a great rate.
There are five components that make up a FICO score. While each factor is given a percentage ranking, this ranking is not absolute. People who are new to credit or have a limited reported credit history (a thin file) will find that the impact of the factors varies considerably.
In a nutshell, the credit scoring algorithm will use what limited data it has to create a score. As a result, those factors available for scoring purposes will have a more dramatic effect, both positive and negative, on a thin file than a longer or fatter credit file.
The big Kahuna of scoring is your payment history. You know my mantra – pay your bills on time and as agreed, every single time. If you can do this, you are well on your way to a good score. That’s because payment history makes up 35% of your total FICO score.
To earn the best score your goal should be to make 100% in this category, and there is really no good reason why you can’t make that happen, starting today. I recommend paying bills before they are due. This will allow for mail and other delays and positively impact credit utilization.
If making your payments ever becomes challenging, remember you are not in this alone. Your creditors have an interest in keeping you as a paying customer. Often terms can be modified to help you avoid a default. But you have to call them and ask for help.
Up next is your credit utilization, or how much of your available credit you are using. This makes up 30% of your score. Here’s how it works: If you have a $5,000 credit limit and charge $1,000, you have used 20% of your credit and have a credit utilization of 20%. As soon as you pay your statement, your credit utilization will drop. Those with the best scores are in the single-digit percentage points in this category. For most of us, something in the range of 20-25% will keep your score in good shape.
Length of credit history
The remaining three pieces are not weighted as heavily, but they are still important. At 15% is credit history, which is not to be confused with your payment history. This measures the length of your oldest credit line and the average age of your accounts, so try to keep your oldest accounts open if possible.
New credit and credit mix
Finally, coming in at 10% each are new credit and credit mix. Just like closing old accounts, you want to be careful about opening new ones. Opening new accounts creates uncertainty and can signal increased risk to lenders, which will bring your score down, at least in the short term.
My advice is to only take out new credit when you need it or there is a heavy incentive to do so. Be very careful about opening new accounts if you are planning on applying for a loan or mortgage in the near future, as credit inquiries can lower your score just when you want it to be at its best.
As for credit mix, this is an area that is often overlooked by those who are seeking to increase their scores. A fistful of credit cards does not count as much as having one or two credit cards and a car payment, strange as that may seem. That’s because the scoring models are looking at your ability to handle both fixed payments, like a car note or a mortgage, and flexible payments, like a credit card.
You can also help your credit mix with a passbook loan from your bank or credit union, which uses your own money to help with your credit mix. I like this option because it helps your score without putting you further in debt. That’s a win-win in my book.
See related: 13 bad credit habits you need to break now
Why do you need a good credit score?
It’s important to remember that your score is by and large a reflection of what is in your credit file. A good score means a good credit report. Not only will a good score get you the best credit card rates and card offers, but scores are used to qualify you for insurance and car purchases (unless you pay cash).
The underlying credit report is used for a growing number of things including employment, promotional opportunities, apartment rentals, getting utilities, checking accounts and more. Putting your best credit foot forward can certainly help you in these instances; bad or poor credit will likely work against you.
The future is yours, so remember to keep track of your score!