20 May What Is Considered A Good Credit Score?

Your present credit score decides whether you will be able to get loans in future or not.  It shows how creditworthy you are to obtain a credit from traditional financial market. Remember, if your credit score is good, you are not going to face any problem in securing a loan with low interest rates from various mainstream sources. On the contrary, if you have bad credit history, you may have to take a loan at higher interest rates, or your loan application may even be starkly rejected, due to bad credit issues. Therefore, it is only your past credit history and creditworthiness, which will help you obtain loans in future.

What Is A Credit Score And How Is It Calculated?

A credit score is a numerical description of the risk factor that you bring to a lender while applying for a credit. The number is decided by analyzing your credit reports available at different credit bureaus such as Equifax, Experian, and TransUnion. If you have a high credit score, then there is the least possible risk to approve your loan, but if it is not as required and expected, you have almost zero chance to get a loan.   

Different credit reporting agencies adopt different methods to calculate your credit score. Hence, the credit score may differ marginally from agency to agency. However, most of the agencies consider certain common parameters like payment history, debt burden, credit history, credit utilization, and draw a new credit line to determine your credit score. Going by this logic, if you have secured a good credit score from a particular agency, then there is always a high possibility of getting a satisfactory score from other agencies too.

Popular Credit Scoring Models

Additionally, there are several scoring models that determine your 3-digit credit number, and a few of the widely accepted models are enumerated below:  

FICO Scoring Model:  This is one the most widely used models in the U.S. Introduced in 1989 by FICO, and earlier known as Fair, Isaac and Company, this model considers five factors of your credit report to determine a score. These factors are:

Payment History: Payment history accounts for 35% of your credit score. If you maintain a good track record of timely payments on bills, then your credit score will be impressive in this category.  However, late payments, liens, bankruptcies and foreclosure will negatively impact your score.

Credit Utilization:  This is another important factor, accounting 30% of a FICO credit score. How rationally you make use of the available credit on different accounts, will influence your score. In order to achieve a maximum score in this category, you should maintain adequate balances in different accounts. Typically a FICO model insists customers not to use more than 30% of the available credit in a particular account.  

Credit History:  Credit history counts for 15% of your FICO credit score. A longer credit history often boosts your score.  Simply said, if you use your credit card for a long period by making monthly payment on time, then it is a good sign of high score.

Credit Use:  It accounts 10% of a FICO credit score. If you have different kinds of credit such as mortgage, credit cards, home loans and auto loans, etc., your score may increase marginally provided you maintain them well.

New Credit: This category accounts for 10% of a FICO credit score. If you apply for a fresh credit, it is fine. However, if you apply for multiple loans at a particular point of time, then it will negatively impact your score.  In order to do well in this category, you need to apply for different loans at different point of times.

VantageScore Model

VantageScore is a relatively new model introduced by three major American credit reporting agencies – Experian, Equifax and TransUnion. This model relies on the common credit report information, including payment history, type of credit, credit utilization and the new credit obligations, to determine your credit score.

American Credit Bureaus: The three leading American credit bureaus – Experian, Equifax, and TransUnion have their credit scoring models. These agencies have credit records of almost all Americans.

Ranges of Different Credit Scoring Models

• VantageScore: 501 – 990
• TransUnion: 300 – 850
• Experian: 330 – 830
• Equifax: 300 – 850
• FICO: 300 – 850

Different Categories Based on Credit Score

• Bad Credit: below 600
• Excellent Credit: 750+
• Good Credit: 700-749
• Poor Credit: 600-649
• Fair Credit: 650-699

Thus, in order to keep up a good credit score, you need to develop a sound payment history, while making rational use of your existing credit and future credit.