Anyone who has attempted to get a loan, credit card, or mortgage will know how important having a good credit score is to their chances of a successful application.
However, what does a good score look like, and exactly what is a credit score?
Your credit score is one of the essential considerations lenders make when deciding whether or not to offer a loan.
A credit score is a 3-digit figure estimate using data from a credit report and often falls between 300 and 850.
Credit scores are one of the factors credit card companies and lenders consider not only whether to loan the money but decide the loan amounts and interest rate.
Based on the credit history, the score can significantly affect how much a borrower has to pay on loans or credit they may have.
Interest rates may be lower if a person lives in a state that permits auto and home insurance providers to consider the credit rating.
Credit Score Ranges
A credit score measures a person’s propensity to repay debt, ranging from 300 to 850, and is a numerical rating.
A borrower with a higher score is considered less risky, more financially responsible, and more likely to pay back the credit.
Lenders use credit ratings to estimate a person’s chances of paying back debts (including loans, mortgages, and credit cards), rent, and utility bills.
What is the Average Credit Score and What is a Good Credit Score
But what credit score do people commonly regard to be average?
This question could be challenging to answer where the line between good and poor credit depends on the expert, the credit bureau, and the loan officer.
One loan company may view the score as poor, while another may view it as acceptable.
Higher scores may assure creditors that the borrower will pay off future debts per the agreement.
However, when assessing applicants for loans and credit cards, creditors may include their own, additional standards for what makes excellent or bad credit scores.
It partly depends on the types of borrowers they want to attract and some creditors may consider how recent events affect a consumer’s credit score and modify their requirements accordingly.
The two most widely used credit scoring models are those created by FICO and VantageScore; however other lenders construct their own unique custom credit scoring programs.
Different Types of Credit Scores
In the credit market, FICO is not the only scoring model used, the other primary scoring system is VantageScore, which is currently on its third version and is known as VantageScore 3.0.
1.) Bad Credit Score Range
Lenders reject credit applications with credit scores below 550. A bad score ranges between 300 and 549. If the score is in this area, the borrower needs to put some effort into improving it.
A bankruptcy filing may reduce a score to this mark. According to statistics, borrowers with this low rating default on their loans about 75% of the time.
However, the rating should increase if the borrower keeps making payments on schedule.
With a score at this level, obtaining some loans, such as home loans, might be challenging, but there are still ways to get a mortgage, even with poor credit.
1. Poor Credit Score Range
A poor credit score ranges between 550 and 619. Due to high credit risk, credit agencies classify consumers with credit delinquencies, account denials, and minimal credit history as subprime borrowers.
Though it is likely to get credit, the terms are sometimes quite unfavorable, with substantially higher interest rates and penalty costs.
Before asking for credit, the borrower should start working on any specific credit issues to boost the credit ratings. 50% of the time, subprime borrowers default on their loans.
2. Fair Credit Score Range
A fair credit score ranges between 620 and 679. Individuals with scores over 620 are considered less risky and are more likely to be approved for credit.
Consumers start to qualify as prime borrowers in the mid-600s range. As a result, individuals might be eligible for larger loans, credit limits, and down payments, as well as having better negotiation power when negotiating loan and credit card terms – only 15% to 30% of borrowers in this group default on their loans.
3. Good Credit Score
Scores of 700 are usually the cutoff for “good” credit, but good scores can range between 680 and 739. Borrowers in this range will normally secure loans at lower interest rates.
3. Excellent Credit Score
Excellent credit ranges between 740 and 850; individuals with scores in this range are more likely to be approved for credit and receive the lowest interest rates.
A delinquency rate of about 2% applies to consumers with excellent credit history.
Extra credit points don’t significantly help loan terms at this high level of credit scoring.
A score of 760 would be equivalent to an 800 for most lenders. However, a higher score can be a cushion if there are negative events in the report.
For instance, the damage that results from maxing out a credit card (which results in a 30–50 point loss) won’t cause the individual to fall into a lower tier.
Different lenders have different standards, and a borrower’s experience may vary. Even if the score is good, a bad public record on the credit report could make it more difficult for a borrower to receive a loan.
Additionally, lenders will consider the income even while credit scores do not. No matter how high the credit score, a lender won’t approve if they believe there are risks, such as the possibility that the borrower won’t be able to repay the loan.
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