When you’re trying to improve your credit score, it’s important to know how credit scores are categorized by lenders. That way you can determine where yours should be in order to achieve your financial goals. It’s great to bump your score up by 100 points, but if you’re still in the “bad” category, you still won’t have much luck trying to get approved for a loan, credit card, or mortgage.
So how are credit scores ranked? The categories might vary by lender, but scores typically fall as follows:
780 and above: Excellent credit. You’re most likely to get approved for a loan or credit card, plus you’ll receive access to the very best interest rates and terms. The highest score you can have is 850.
720 – 779: Very good credit. You’ll still get some of the best rates when you apply for credit. In fact, some lenders consider 720 as the threshold for the lowest interest rates so it may not even matter if your score is any higher than that.
680 – 719: Good credit. The average American’s credit score is 695, which falls into the “good” category. You probably don’t have many major negative items listed on your credit report, but there’s room for improvement to make sure you get the best financing terms.
620 – 679: Average credit. Your rates in this category definitely won’t be the best available, which could end up costing you thousands of dollars, if not more, the next time you take out a loan or carry a balance on your credit card.
580 – 629: Poor credit. You definitely have some negative items and might have trouble getting approved for credit, whether it be a new card or a loan. If you do get approved, your rates will be extremely high.
300 – 579: Bad credit. The good news is, there’s plenty of room for improvement in the category. The bad news is that you’ll probably need that improvement to get approved for a loan at all. For example, the bare minimum score for an FHA home loan is a 580 so if you definitely won’t be eligible if your credit is in this category.
You probably know where you fall into these credit categories, but how about everyone else in the country? At 54.7%, just over half the population has a score of 700 or above. About 23% of people have a score between 600 and 699, and 22% of people have a score of less than 600. That means nearly a quarter of Americans either have bad credit or are on the border of dipping below the 579 threshold.
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Why Good Credit Matters
It’s important to get your credit score as high as possible because the higher your interest rate, the more money you’ll pay over time. That can really add up for high-value loans like cars or mortgages.
Let’s look at a quick example. If you have excellent credit and take out a mortgage for $100,000 over 30 years and your interest rate is a low 3.92%, you’ll end up paying an additional $70,000 in interest payments.
If you think that’s a lot of money, wait until you see the next set of numbers. Bump that interest rate up to 5.92% for someone with a lower credit score, and they’ll end up paying over $113,000 in interest. That’s more than the loan itself! And it’s $43,000 more than the first person paid with a better interest rate.
Even if you’re not planning on buying a home anytime soon, the same principles apply to credit cards, car loans, student loans, and other personal loans. The lower your credit score, the more money you’ll have to pay. Plus, landlords and even some employers now do credit checks as part of their application processes.
With a bad credit score, you might have difficulty finding a home or even a job. And if you have a financial emergency, you might be stuck with high-fee options like payday loans or title loans, which can add up fast and even cost you your car.
If you fall into one of the lower credit rankings, it’s time to start evaluating your credit report. That way you can find out how you can improve that score and keep your financial opportunities wide open.
Industry Specific Credit Scores
Now that you know what a good credit score is, it’s time to get more specific. While traditional FICO credit scores from the popular scoring company Fair Isaac Corporation range from 300 to 850, there are actually several different models that lenders might use when judging your creditworthiness. These vary depending on what type of credit you’re applying for.
A few examples include versions specifically for mortgages, car loans, credit cards, and student loans. Each one will look at slightly different information that is more relevant to the exact type of credit you want. So the model for credit cards more heavily weighs your revolving credit payment history, while the auto version is going to pay more attention to your past car payments.
There are a couple of tricky parts that come with these alternative scoring models. The first is that you probably won’t know which scoring model your lender is going to use, unless you ask.
Additionally, the score ranges are different from the traditional FICO model. Instead of ranging between 300 and 850, the industry-specific scores range between 250 and 900. On the auto credit range, for example, you’ll want at least a 750 to get the best interest rates. So you can see how the numbers vary slightly for each different model.
While FICO scores are the most popular ones used by lenders today, there are other companies competing in this space. The other major model is called VantageScore, which was actually created by the three credit bureaus.
VantageScore 2.0, which is still used by some lenders, calculates credit anywhere between 501 and 990. The latest version, VantageScore 3.0, uses the same range as FICO to reduce confusion, 300-850. Just like FICO, the higher score you have on both types of VantageScore models, the better your credit is viewed by a lender.
What Else Do Lenders Look at Besides Credit Score?
Clearly, your credit score is a huge component of any financial application process. If you don’t meet certain minimums, there’s no way you’ll get approved or access the very best rates. That being said, lenders look at a lot of additional information beyond your credit score and credit report.
They also analyze your income level to make sure you can afford the loan amount you’ve requested. Even if you earn six figures, if you have too much debt or the loan amount is too high, the lender might question your ability to make your payment each month.
They also look at your employment history. No matter how great your credit is, or how much money you make, most lenders want to see that you’ve been in the same job (or at least the same industry) for the past two years. They even check your tax statements and pay stubs to confirm your earnings and often require proof of employment.
A lender might also want to know how much in cash reserves you have on hand. They’ll likely want to see bank statements because the more savings you have, the more cushion you have to repay the loan even if you have a financial emergency, like medical bills or a lost job.
How to Get the Best Credit Score
As we mentioned earlier, the one good thing about having a bad credit score is that there is plenty of room to improve it. Start off by consistently paying all of your bills on time and in full. This is the best thing you can do for your credit score because it accounts for 35% — the biggest factor considered!
You should also order a free copy of your credit report to get an idea of what exactly is bogging down your score. Is there anything on there that’s incorrect or out of date? You might be able to dispute it and have it removed.
In the event you have multiple negative items, you could greatly benefit from talking to a credit repair company to help you clean up your credit report. Most companies, like Lexington Law Firm, offer a free consultation so you can ask questions about your specific situation and find out exactly what they can help you with.
Knowledge is power, and finding out your credit score and learning what range you fall in can help you plan the next steps in your financial future. And never assume the worst case scenario; there’s no such thing as a lost cause. Everyone, no matter how bad their credit score is, has the potential to improve their financial situation.
It might take a little time and effort, but it’s always doable. Professional credit repair companies that have been in the business for a long time have truly seen it all. Don’t be afraid to give one a call today and find out what you can do to increase your credit score.