A person’s overall financial health is often evaluated using a single criterion: whether they have a good credit score.
Your credit score comes into play when you buy or rent a home, finance a car, apply for a credit card, or even sign up for cell phone service. But what is a good credit score during a pandemic, and how do you go about getting one? We asked experts to weigh in on how lenders evaluate your credit and what’s a good credit score to aim for.
Credit Score Basics
Your credit score is a numerical score that lenders use to evaluate your creditworthiness — how likely you are to pay back your debts, and consequently, whether they want to lend to you. Your credit score is calculated using information from your credit report compiled by one of the three major credit bureaus: Experian, Equifax, and TransUnion. The most common scoring models are FICO and VantageScore. However, it’s also possible a lender will use its own scoring system. Because of this, you may find that you have different credit scores depending on where you check.
What Affects Your Credit Score
The five factors that go into your credit score calculation are:
- Payment history. Your payment history accounts for the biggest portion of your credit score calculation, at 35%. Payments more than 30 days late will hurt your credit score significantly and stay on your credit report for seven years.
- Balances owed. Balances owed account for 30% of your credit score. This is where your credit utilization ratio — your total debt divided by total credit available — comes into play. For the best credit score, try to keep your credit utilization ratio under 30%.
- Age of credit history. The age of your credit history accounts for 15% of your credit score. Assuming you haven’t had any negative marks, your credit score will generally be better the longer you’ve had credit accounts open.
- Credit mix. Lenders want to see that you can responsibly handle different types of credit, so credit mix accounts for 10% of your credit score. Generally, having a varied credit mix that includes installment credit, revolving credit, and open credit will help you get a better score.
- Recent activity. Recent activity accounts for the final 10% of your credit score calculation. Hard credit inquiries — which lenders will pull when you apply for a loan, mortgage, or credit card — can ding your credit score and stay on your credit report for up to two years. It’s best to avoid opening too many new credit accounts in a short period of time.
What Is a Good FICO Score?
The FICO scale is divided into five different ranges from “Very Poor” to “Exceptional,” so you can quickly gauge your credit health by seeing which range your score falls into. On the FICO scale, a “Good” credit rating starts at 670 and goes up to 739. But despite its name, this range isn’t what experts refer to when they use the term “good credit score.” In reality, scores in this range are typically considered average at best and are unlikely to get you the best rates on loans. If this is the case, then what is a good FICO score exactly?
“While FICO’s score matters, their score labels are irrelevant,” says Todd Christensen, education manager at Money Fit by DRS, a nonprofit debt relief organization. While those score ranges serve an educational purpose, lenders will ultimately set their own standards for what they consider a good credit score. “The only definition of a good score that matters,” says Christensen, “is whatever score will qualify you for the best interest rates and repayment terms a given lender has to offer.”
For most lenders, the best terms are offered to those with credit scores starting in the mid-700s.
The long-term financial effects following COVID-19, however, may change how lenders evaluate credit scores. As of the second quarter of 2020, 39% of banks in the United States had already tightened restrictions on consumer loans and credit card applications, a trend most experts believe will continue. Lenders may require higher credit scores than usual and could even ask for additional documentation, such as proof of stable income — a factor not included in your credit score. Those who do manage to get approved for new lines of credit will likely see lower limits than normal.
Now is a better time than ever to pay close attention to your credit score.
Credit Score Ranges
|Credit Score||Credit Rating|
What Is a Good VantageScore?
VantageScore pulls from many of the same factors as FICO to determine your credit score, like payment history and credit mix, but uses its own formula for how influential those factors are in your score. When it comes to determining a “good” or “bad” score, VantageScore’s ranges are also similar to FICO. Previous versions used a different range (501-990), but the latest VantageScore models fall under the same 300-850 range as FICO, with slight differences in what scores fall within each range. But again, because each lender’s standards are different, these ranges matter less than the actual score you’re assigned.
Here are the ranges for VantageScore credit ratings:
|Credit Score||Credit Rating|
Why Are There Different Credit Scores?
Your credit score (and the information in your credit report) is ultimately how a lender determines whether or not to take on the risk of lending money to you. But these factors, and lenders’ decisions, are constantly evolving.
When you check your credit score with Experian and it differs from the score you receive from your bank, it could be because your bank pulls your score from TransUnion or Equifax — each bureau is constantly receiving new information for your file at different times, which can cause your score to differ. If you have errors in your credit report, your credit score can also be affected.
Differing scores can also be the result of different scoring models. FICO and VantageScore often update their models to reflect changes in technology or consumer behavior, according to Experian, and lenders and reporting agencies don’t transition to using these new models all at once. For example, FICO released its UltraFICO Score in 2018, which incorporates non-traditional data like banking information to help people without much credit history access financial products. And some lenders may use industry-specific scores; specific older versions of FICO scores are standard within the mortgage industry.
Despite these differences, credit scores are largely dependent upon how well you use and maintain credit over time. If you practice good credit habits and monitor your score regularly, it’ll be reflected in your score no matter the scoring system used.
What Is the Average Credit Score?
The average FICO credit score in the U.S. in 2020 was 711, according to data from Experian. The median credit score in the U.S. is 722, according to credit.org. However, the breakdown varies based on other factors like location and age group. In general, those who are older tend to have higher credit scores than younger generations, both because they’re more experienced with practicing good credit habits and because they’ve had time to build their credit history.
Average Credit Score by Age Group in 2020
|Age Range||Average FICO Credit Score|
While looking at average credit scores can give you a gauge of where you stand in relation to the rest of the country, the only score that ultimately matters is your own. Is it high enough to qualify you for the loans you want and help you achieve your financial goals? If it is, make sure to maintain it by practicing good credit habits. If it isn’t, look at steps you can take to improve it.
How to Improve Your Credit Score
The best way to build a good credit score is to always pay off your balance on time and in full, but that’s not the only action you should be taking to keep your score high. Turn the following steps into habits, and before long, you’ll see your score start to climb.
- Pay on time, every time. Payment history accounts for 35% of your FICO credit score. Late payments go on your credit report after 30 days and stay there for seven years. The later they become, the worse of a hit your score will take. Paying off your bill in full every month is ideal, but make sure you’re at least making the minimum payment required by your lender. If you think you’ll have difficulty making a payment, reach out to your lender immediately, suggests Miriam Mitchell, senior vice president of lending at Addition Financial. The lender might offer relief options like loan deferments or modifications to help you avoid delinquency.
- Don’t use all the credit you have. Keep an eye on your credit utilization ratio or the ratio of your outstanding balances to the available limit. Run your balances up above 30% of your available credit, and you’ll see points start to fall off.
- Keep old accounts open and active. The length of your credit history affects your overall credit score, so the longer you keep accounts like credit cards open and in good standing, the more you’ll benefit. You can keep old accounts you don’t use anymore active by making one small purchase every month and paying it off immediately.
- Ask for better terms. If you’ve been a good customer for a long time, many lenders will be more than happy to reward you with better terms, such as lower interest rates and higher limits on credit cards. You’ll never know until you call your bank and ask.
- Be selective about opening new accounts. Every time you apply for a new loan or line of credit, a hard inquiry stays on your credit report for two years and can lower your score by a few points. Opening too many new accounts in a short period of time is a red flag to lenders, so only apply for new lines of credit you need. Be especially mindful if you’re preparing for a major purchase like a mortgage, where any red flags on your credit report could negatively affect the terms of your loan.
- Use different types of credit. Having various types of accounts, known as a credit mix, is a good sign to lenders as it shows you can handle different types of debt responsibly. There are three main types of credit: installment credit, revolving credit, and open credit. Try to have a mix of all three — as long as you’re using them responsibly.
- Monitor your credit. Normally, you can request a free copy of your credit report with each of the three credit bureaus (Experian, Equifax, and TransUnion) once every year. But now through April 2022, credit reports can be pulled for free once per week. The faster you identify and respond to errors or unauthorized activity, the easier it is to prevent your score from taking a hit.
Why Having a Good Credit Score is Important
Your credit score is one of the most important factors lenders look at when determining your creditworthiness, but your credit score can affect you in ways beyond taking out loans. Here are some reasons why having a good credit score is important:
- It can affect whether you qualify for a loan. Whether you’re applying for a home loan, auto loan, personal loan, or credit card, most lenders will look at your credit score to determine whether to approve you. The higher your credit score, the better your chances of getting approved.
- It can affect what interest rates and terms you get. Even if you’re approved for a loan, you may not qualify for the lowest interest rates if you have a bad credit score. The more lenders feel you’re a credit risk, the more they’re likely to charge you to lend to you. Having a bad credit score can also limit the loan amount or the length of the loan you qualify for.
- It can affect your insurance premiums. Although not the primary factor, your credit score can affect your insurance premiums. According to credit.org, people with excellent credit scores (740-850) have 24% lower premiums than those with median scores.
- It can affect how employers see you. Even if your job has nothing to do with lending or finance, some employers may look at your credit score as part of a background check. Employers may see a good credit score as a sign of high personal responsibility and evaluate you accordingly.