What is a Good Credit Score and Why Does It Matter?

If you've ever even considered applying for a credit card or a car loan, you'll know that the phrase "credit score" gets tossed around a lot. It's something a potential lender wants to know about you, whether they're a bank, a credit union, or a credit card issuer.

I don’t think I knew a thing about credit scores when I headed off to college, but within a few years, I started to realize how important they can be. I’ve been building my credit ever since and am certain it’s helped me meet loan requirements and qualify for credit cards.

But what is a good credit score, and how does it affect you? A FICO score of 670 or higher is considered a good credit score (and VantageScore starts its “good” rating at 661), but there’s a lot more to unpack about that. Let’s dive into credit scores, why your credit matters, and what you can do to monitor and improve your credit score.

What is a good FICO score?

A good FICO score ranges between 670 and 739, while “Very Good” is 740 to 799. The highest FICO scores are between 800 to 850 and are considered “Excellent” or “Exceptional.” The higher you go, the better your chances of qualifying for low interest rates or for getting credit at all.

Credit score basics: What is a credit score?

In case you’re brand-new to the topic, your credit score is a three-digit number that tells lenders how much risk you pose as a borrower. It’s based on a number of factors related to whether you borrow money and how you handle debt.

Basically, if you have a low credit score, lenders like banks and credit unions consider you more of a credit risk. If you have a higher score, lenders consider you to be more trustworthy (meaning they’re more confident that you’ll pay back what you borrow).

You need to monitor several different aspects of your credit in order to have the best shot at a good or excellent credit score. I didn’t take much of a proactive approach to building credit when I got my first credit card, so I could have gotten off to a better start.

In general, if you handle credit responsibly, your credit should be decent, but it’s more than simply paying bills on time. Credit reporting bureaus keep track of things like how old your oldest credit line is, how much you owe, your payment history, and more.

Plus, you can have more than one credit score, and not all lenders use the same credit reporting agency to decide if they'll lend to you or not.

The first automated credit scoring model appeared in the 1950s, but it wasn't until Congress passed the Fair Credit Reporting Act in 1970 that the process was regulated. The Fair Credit Reporting Act specifies which information the credit bureaus can collect and use as part of your credit score.

Even with the regulations, there are three major credit bureaus (TransUnion, Experian, and Equifax). Each has slightly different scoring standards, so you could realistically have at least three different scores.

What credit score do you start with?

While it's not possible to have a credit score of 0, you can have no credit score. This may also be referred to as having a "thin credit file." If you have never opened up a credit card or taken out a loan, or your credit history is shorter than six months, you won't have a score at all.

Once you start to build credit, your score is based on how responsibly you've used your credit to date. You could start with a very high credit score or a lower score, depending on your first six months of credit history.

What’s the best credit score you can get?

Credit score ranges vary depending on the credit scoring agency. With FICO and VantageScore, the maximum score is 850. It’s not easy to earn a perfect credit score, but it is technically possible.

What’s the worst credit score you can get?

For FICO and VantageScore, the two main credit scoring models, begin at 300. (Note that under FICO, anything under 580 is considered a poor credit score, so you can imagine how bad it would look to lenders if your score was in the 300s.)

Why credit scores matter

Your credit score may not directly affect your daily life, but when it does matter, it matters big-time. Having a high credit score has undoubtedly helped me, especially when it came to applying for a mortgage or a car loan.

Lenders often impose a minimum credit score requirement when you apply for personal loans, home loans, auto loans, student loans, and credit cards. If you have a higher credit score, creditors see you as less likely to default on your debt, so the lender is more willing to give you lower interest rates and better loan terms.

If you’ve destroyed your credit score, that’ll typically cost you over time because you may not qualify for the best interest rates or fees from a lender. In some cases, you may not qualify for financing at all.

Your credit score doesn't just affect your ability to borrow money. Other things your credit score can affect include insurance premiums, cable and internet accounts, cell phone purchases, and your ability to rent an apartment. Some employers even ask to look at your credit history before making a hiring decision.

Your credit score is only part of your financial picture. Your credit report — which lenders also look at — offers a more complete view of your payment history and determines your credit score. Make sure to check this at least once or twice per year to catch and dispute credit report errors, like charges you never made or credit accounts you never opened.

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Types of credit scores

The two major types of credit scores are FICO and VantageScore. However, some lenders have created their own credit scoring systems. Some lenders even use FICO or VantageScore as a jumping-off point and then put that information into their own systems to get their own credit scores. But in most cases, you just need to be familiar with FICO score vs. VantageScore:

• FICO: The Fair Isaac Corporation provides FICO scores. It's the most popular credit score measurement and is customizable by industry and client needs. The FICO scoring model was introduced in 1989.
• VantageScore: The VantageScore uses data from Equifax, Experian, and TransUnion. VantageScore 1.0 launched in 2006. The latest version is VantageScore 4.0.

Factors that determine your credit score

While you may have slightly different credit scores depending on which reporting agency you look at, they all use the same basic information to determine your credit score.

How FICO calculates your credit score:

• Payment history (35%): This is the record of whether you’ve paid your credit accounts on time. Missed or late payments will lower your score.
• Amounts owed/credit utilization rate (30%): According to FICO, this is “Amounts Owed” but it also incorporates your credit utilization ratio, or the percentage of total available credit you are using (including loans and credit card balances). The amount you owe in different types of credit is also considered.
• Length of credit history (15%): This considers the age of your oldest and newest credit accounts, the average age of credit accounts, and even how long it’s been since you last used certain accounts.
• Credit mix (10%): FICO looks at types of credit you possess. For example, credit cards, installment loans, and mortgages are different types of credit.
• New credit (10%): FICO factors in the number of new credit inquiries in the recent past. Opening up a large number of new loans in a short period of time tends to result in a lower credit score.

How VantageScore calculates your credit score:

• Payment history: 41%
• Depth of credit: 20%
• Credit Utilization: 20%
• Balances: 11%
• Recent credit: 6%
• Available credit: 2%

These figures are for VantageScore 4.0, so if a lender is using version 3.0, the numbers are slightly different. One key difference here is that with VantageScore, payment history is weighted 6% higher than with FICO. Recent credit isn’t given as much weight in VantageScore.

But overall, these are fairly similar ranges, which means that practically, you can focus on the same things when trying to get and maintain good credit. Make payments on time and avoid using too much of your available credit.

FICO score ranges

FICO credit scores range from 300 to 850. Jumping up or down as little as 50 to 60 points can put you in a different score range completely. Here’s what it can mean:

• Poor (300-579): You may not qualify for credit or be required to utilize a prepaid debit or secured credit card.
• Fair (580-669): Those with scores in this category may be approved at higher interest rates or fees.
• Good (670-739): Applicants in this range are less likely to become delinquent on future payments and may qualify for most types of credit.
• Very good (740-799): Borrowers with scores in this range qualify for better interest rates and lower fees.
• Excellent/Exceptional (800 to 850): Borrowers with scores in the highest range are typically eligible for the best interest rates and higher borrowing limits.

What is a good VantageScore?

VantageScore is similar to FICO, with slightly different credit ranges. The best credit scores on a VantageScore scale are between 750 and 850, but in general if you have at least a 661, you can be considered in the “good” range.

VantageScore ranges

A VantageScore can range from 300 to 850. The terminology is a bit different, though you can see that the lowest scores equal “very poor” and the highest are “excellent”.

• Subprime (300-600): Applicants aren't likely to be approved for credit in this range.
• Near prime (601-660): Borrowers with these scores may qualify for credit approval but often have higher interest rates or larger deposit requirements.
• Prime (661-780): Applicants are likely to be approved for most credit options but may have higher interest rates.
• Superprime (781-850): Borrowers with scores in this range qualify for most credit options and are likely to access better interest rates and higher loan limits.

Which credit score is more important?

It depends. VantageScore is better for people with a shorter credit history as it begins monitoring your credit in as little as one month, whereas a FICO score requires at least six months of credit history.

The FICO score has been around longer. First introduced in 1989, about 90% of lenders use the FICO score. In contrast, VantageScore was first introduced in 2006 and is not used by as many companies. If you're planning a major purchase, odds are your FICO score will be more heavily weighted by your lender.

You can definitely monitor both of these. For example, I have Capital One accounts and others that provide a VantageScore, but I also look up my FICO score through one of the credit monitoring bureaus.

How to check your credit score for free

It's a common misconception that you have to pay to access your credit score. Several credit monitoring services, like CreditWise from Capital One, Experian, and myFICO, provide your credit scores for free.

Many credit card companies also offer free credit score access. It's worth noting that these scores can be different than your FICO score, but they can give you a close approximation of what the major scoring agencies are saying. (If you noticed your VantageScore dropped by 40 points all of a sudden, it’d be a good reminder to check your FICO score as well!)

You are also entitled to one free copy of your credit report each week from each of the three credit bureaus. This is required by federal law, and you can request these reports by going to AnnualCreditReport.com. Note that your free credit report doesn't include your credit score.

Finally, if you've applied for a mortgage or other loan and are turned down, the lender is required to send you a notice explaining why they've declined to loan you money and your credit score information.

How to improve your credit score

I have a purpose in sharing all this information about what makes up credit scores: Knowledge is power. Knowing how credit scores work means you know what you need to do to improve yours.

Raising your credit score may be tough, especially if you've struggled to pay off debt, missed payments, or had bills sent to collections. It may take months (or even years in some cases), but there are also things you can do to potentially improve your credit score in as little as 30 days.

The most important things you can focus on to increase your credit score include making all of your debt payments on time and reducing overall credit card debt. As these two factors are major players in the credit-scoring formulas, they will have the largest impact over time.

Here are a few other tips for improving your credit score:

• Avoid closing old credit accounts as long as there’s no annual fee (cut them up if needed so you won’t be tempted to use them)
• Be mindful about opening new credit accounts
• Fix credit report errors promptly
• Ask credit card companies for an increased credit limit (this lowers your utilization)

Finally, you may want to work on learning more about how to manage your money so that once you work your way up to excellent credit, you know how to maintain it. Unfortunately, though it’s great that you can raise your credit score, the reverse is also true, and reverting to bad credit habits will damage your credit again.

FAQs about credit score basics

Bottom line

Having a good consumer credit score means using credit responsibly and accessing a variety of credit accounts. Making on-time payments and avoiding using too much of your available credit can go a long way toward building a good credit score.

If you have poor credit, I don’t want you to feel like all is lost (it’s not). You can improve your credit by paying off debt and being strategic about how much additional debt you take on. It will take some effort though, including developing a budget and possibly starting a side hustle to bring in extra funds.

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